How a Sales Comparison Approach Works

The sales comparison approach is a real estate appraisal system that is used to determine the estimated value of a real estate property. Appraisers using this approach perform a comparative market analysis (or CMA) in which they estimate the market value of a property by examining the comparable sales of similar properties, which are often called “comps.” Next, they adjust that estimate to account for factors like market conditions, location, and physical characteristics that differentiate the subject property from comparable properties. Homeowners looking to set a competitive and fair listing price for their property can benefit from a property valuation using the sales comparison approach.

When a home appraiser performs a CMA, they take certain variables of the subject property into consideration in comparison to similar properties. Here are some of those factors.

1. 1. Property attributes: When appraising a home, the appraiser looks at the value of comparable homes with similar physical characteristics like lot size and square footage. For example, when comparing single-family residential properties, appraisers will look at homes that match the square footage, number of bedrooms, number of bathrooms, and the lot size of the subject property.
2. 2. Time of Sale: Comparable properties should be sold as recently as possible to reflect the sales conditions of the current market.
3. 3. Location: Comparable properties to your house are ideally in the same neighborhood or area of the subject property for the most accurate estimate.

Once a real estate appraiser has researched comparable properties, they will make a series of percentage-based adjustments to account for unique factors that influence the value of the subject property. An appraiser will consider the following factors when making adjustments to reach the final value of a property:

1. 1. Real estate market conditions: If the comparable property was sold a while ago, it is likely that the market conditions will have changed. An appraiser will make an adjustment to the new property’s price to reflect a positive or negative shift in the market.
2. 2. Location: If the comparable property is in a different neighborhood than the subject property, the appraiser will adjust for the general market value of properties in a new area.
3. 3. Physical characteristics: The subject property may have different physical characteristics than comparable properties which can add or subtract value. For example, if the comparable home has marble countertops or hardwood floors and the subject property does not, the appraiser will adjust the subject value estimate to account for that.
4. 4. Conditions of sale: The conditions of sale may also impact the valuation of a subject property. For instance, if the last sale was made directly between family members and the subject property is not, adjustments should be made to account for the different circumstances.
5. 5. Cash equivalency: Homebuyers will sometimes pay a higher cash price in exchange for lower financing costs associated with home loans. In this case, the appraiser will adjust the price of the subject property downward.
6. 6. Associated costs: If there are any costs associated with a comparable property that differs from the subject property, these will require an adjustment to the home estimate. This includes differences in maintenance fees and property taxes.
7. 7. Best use: The valuation of a property should be based on the property’s best use. For example, if a residential unit is functioning as an office space that might affect the price that the buyer paid for it. If a comparable property was not being used as it was intended, an adjustment should be made.

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