Sales Comparison Approach Real Estate Evaluation Process
When writing an evaluation report, there are three main approaches that a report writer can perform to derive the value of a property. The most common of these is the sales comparison approach. This approach is performed by finding three comparable sales to a subject property.
Understanding the Sales Comparison Approach
The sales comparison approach (SCA) stands out as one of the most widely employed methods in real estate valuation due to its simplicity and effectiveness. At its core, the approach relies on comparing the subject property with similar properties that recently sold in the market.
The fundamental principle underlying the SCA is the idea that the value of a property is influenced by the prices at which similar properties have transacted. By scrutinizing recent comparable sales, real estate professionals can gain valuable insights into the market and arrive at a more accurate valuation for the subject property.
The basic principles involve assessing properties with similar characteristics in terms of size, location, condition, and amenities. During the comparison process, various factors are carefully considered, such as the date of sale, financing terms, and any unique features that might impact the property’s value. These evaluations contribute to a comprehensive understanding of the subject property’s worth within its specific market context.
Finding Comparable Sales
The most important part of writing an evaluation report is the ability to recognize and find appropriate comparable sales.
Finding similar comparables is done by performing a thorough analysis of the property through multiple levels of research, including reviewing pictures, assessment data, sales data, and site data.
Once the valuation expert is familiar with the subject property, they then need to determine and prioritize the primary traits that drive and decide the value of the property.
What Are Primary Traits?
Primary traits for residential properties include a combination of home features that help indicate the value of the property.
The valuation expert will try to match as many traits as possible and use their training and expertise to make appropriate adjustments when analyzing the comparable property.
For example, some primary traits could include:
- Property Type (ranch home)
- Property Size (3,000 square feet)
- Below Grade Qualities (1,000 square-foot finished basement)
- Lot Size (0.6 acre lot)
- Age (1995)
- Bedroom and Bathroom Count
The location of the property can change the primary value drivers. For an individual customer, if a home is located in a suburban area, then the odds of similar ranch homes being sold are higher than the same home in a rural area.
In the city, there are ample ranch homes to look at for comparable sales. But if a home is 50 miles from the nearest city and sales are few, then a valuation expert might relax the acreage adjustment to accommodate for the rural nature of the area because the land is a lot less expensive, and more acreage can be bought for the same price as that lot in the city.
This is one example of many combinations that valuation experts at Akrivis will weigh when assessing proper comparable sales.
What Makes a Good Comparable Sale?
A good comparable sale will attempt to capture the best combination of primary traits for the subject property.
It is important to remember that in most cases, identical comparables are not always available, and when they are, they might not have been sold in the proper time frame. Finding comparable sales can be challenging. However, that is where training and expertise are utilized by the valuation experts. Focusing on the primary traits and using adjustments for lesser traits can help evaluators get as close to the subject property as possible.
Rural properties can have a host of hurdles and can include dilemmas such as determining if a similar home 40 miles away is better than the next-door home. Both properties could be used in specific situations. Ultimately, it would be determined by the report writer and then explained to the reader through a dissertation within the report.
When Are Adjustments Used in Comparable Sales?
Adjustments are used to account for differences in comparable sales when they are not identical properties. Adjustments are an actual method utilized by experts to bridge the difference through a monetary change in value.
For example, a ranch home with 2,000 square feet compared to a ranch home with 3,000 square feet with similar finishes will have to be given a proper value to the difference in square footage. In a perfect market, this value would be in a reference manual. However, the market is variable, and no specific number exists. Therefore, an opinion of value will be used.
Even the Marshal and Swift appraisal manual for cost replacement value gives estimates based on market research.
Partner With Akrivis for Your Valuation Needs
When performing the sales comparison approach to find value, the valuation expert will research a property and find 3 comparable sales of similar age, square footage, location, etc. The valuation expert has discretion over the derived opinion of value based on the comparable sales chosen from their expertise.
At Akrivis, we consider as many primary traits as possible to get the most accurate value for a property. With more than 20 years of experience in valuing real estate, you can trust us with all your valuation needs. Contact us today to get started!
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