What is the Sales Comparison Approach?

The Sales Comparison Approach (SCA) is a widely accepted method of determining the value of a property in real estate based on the sales of previously sold properties. This means you must compare the subject property with similar houses that have recently sold in the area. This approach is based on the theory that comparable home sales in the market affect a home’s value.

Wondering about the science behind your property’s value? In this post, we’ll discuss what is the Sales Comparison Approach is and learn about the sales comp approach in real estate.

What is the Sales Comparison Approach?

The Sales Comparison Approach reflects an estimated value of a property, based on sale prices from similar properties (or comparable or “comps”) that have recently sold in the same area. Adjustments are applied to compensate for discrepancies between the subject property and the comparable, such as square footage, condition, location, and amenities. This approach is an indication of the behavior of the market and is often used for residential premises.

Key Factors in the Sales Comparison Approach

When applying the SCA, several factors are considered to ensure an accurate valuation:

• Location: Because location has a big influence on value, properties in the same neighborhood or area are compared.
• Layout and Size: The overall layout, number of bathrooms and bedrooms, and total square footage are evaluated.
• Age and Condition: The age and condition of the property will be evaluated along with any necessary fixes or current changes.
• Features and Amenities: Extra features, including a pool, garage, or renovated kitchen, may have an impact on the property's worth.

The Sales Comparison Approach's Significance

Because it reflects what buyers and sellers do in the marketplace, the sales comparability method is very useful. Because it is based on real market data, it is a trustworthy value indicator. This strategy works especially well in marketplaces that are busy and have a large number of comparables.

The sales comparison approach is often the best strategy for residential properties. As long as there is sufficient sales data, it is also frequently used for commercial and industrial assets. The strategy could, however, work less well for unique properties with few comparable sales or in bad markets.

Problems and Optimal Techniques

The sales comparison technique is a useful tool, but it has drawbacks. Appraisers may encounter situations where the subject property is unusual or where there is a dearth of recent sales data. In these situations, appraisers need to use their discretion and imagination to provide reliable findings.

Common difficulties include the following:

• Limited Market Data: It might be difficult to locate comparable houses in areas with little sales activity. In order to account for time, appraisers may need to broaden their search geographically or take into account previous sales.
• Different Alternatives: It might be hard to locate truly comparable transactions when the subject property has distinctive features. Such variations need to be carefully assessed and adjusted for by appraisers.
• Unsupported Adjustments: Market data must serve as the foundation for any adjustments. Adjustments that lack data or are made unilaterally may damage the appraisal's trustworthiness.

In order to overcome these challenges, appraisers need to:

• Find the best comparable by doing in-depth market research.
• Analyze changes using both quantitative and qualitative methods.
• In the assessment report, precisely outline their process and justification.

Steps in the Sales Comparison Approach

• Identify Comparable Properties: Choose recently sold properties that are close in size, location, and characteristics to the subject property.
• Gather Data: Get comprehensive information on every comparable, including sale price, sale date, and property traits.
• Adjust for Differences: Modify the sale prices of comparable properties to account for discrepancies from the subject property.
• Analyze Adjusted Prices: Evaluate the adjusted prices to determine a value range for the subject property.
• Estimate Final Value: Derive a single estimated value for the subject property, often by averaging the adjusted prices or weighting them based on similarity.

Industry Standards Offer Insight

To ensure accurate findings, the Uniform Standards of Professional Appraisal Practice (USPAP) highlights the necessity to estimate all similar sales data that is available. Appraisers have to defend their decisions and offer data from the market to back them up. A popular statistical technique for assisting appraisers to make changes is paired data analysis, which compares two properties that vary only in one aspect.

The Dictionary of Real Estate Appraisal stresses how crucial it is to choose proper comparison units and adjust them in light of pertinent comparison aspects. Conveyed property rights, financing terms, selling conditions, and market circumstances at the time of sale are a few examples of these components.

Advantages of the Sales Comparison Approach

• Market-Based: It is based on actual market transactions, which gives a realistic valuation.
• Accepted by Most: Commonly used and recognized by lenders, investors, and real estate professionals.
• Applicable to Various Property Types: Primarily residential but flexible for commercial and land valuation, at least where adequate comparable data exist.

The Sales Comparison Approach is one of three valuation methods used to estimate the value of real property. It is a popular method in real estate appraisal and the most commonly used valuation method. It has its issues (especially in markets with sparse data or conforming properties), but it’s also the purest form of valuation because it literally “is where the market is” for an asset class.