The sales comparison approach to value would be most important when estimating the value of

Another approach is the cost approach.  How much would a property cost to replace, that is, rebuild, minus "accrued depreciation," that is, depreciation that has occurred since the property actually was built?  The cost approach includes concepts like "economic life" and "effective age" that are mostly of use in determining the value of special use properties, special purpose properties or properties where subsequent structural improvements greatly impact value.

The third approach to value is called the income approach.  Some properties generate income for their owners -- the most obvious examples being rental properties such as apartment buildings, non owner-occupied houses and duplexes and the like.  The rental income an owner might reasonably expect from a property is part of its value.  For a purely owner-occupied residential property, this may not be applicable, but it can be important if the property is to be rented out or used otherwise to generate income, such as a storage facility, cell tower rental and office building.

When you’re selling a home, your real estate agent will use a valuation method to determine what your home is worth in the current market. This step happens before your home is officially listed for sale and helps ensure it’s listed for the right amount. Later in the buying and selling process, lenders require appraisals to verify the home is actually worth the amount they’re basing the mortgage on.

There are several methods that agents and appraisers can use to determine the value of a home. One of the most common is the sales comparison approach, which compares the home in question to similar homes that have recently sold.

Learn more about what the sales comparison approach is and the steps your agent or appraiser will take when using it to find the value of your home.

Key Takeaways

• The sales comparison approach is a valuation technique real estate agents and appraisers frequently use to find a home’s value based on recent comparable sales.
• The first step in the sales comparison approach is finding comparable homes that have recently sold, are currently under contract, or are listed on the market.
• To more accurately value a home, it’s important to make adjustments based on differences between the home being valued and the comparables.
• A weighted analysis allows agents and appraisers to determine a home’s value based on a weighted average of the comparable homes.

What Is the Sales Comparison Approach?

The sales comparison approach is a home valuation method that relies on comparable home sales to determine what a home is worth. When completing this valuation, an agent or appraiser will analyze other homes that have recently sold in the area, as well as those that are currently under contract or listed on the market.

By considering the characteristics of each home and identifying key differences, the agent or appraiser will price or appraise the home accordingly. Some features may cause the home to be valued higher than its comparables, while other features may cause it to be valued lower.

The sales comparison approach relies heavily on the current housing market. Supply and demand have a significant impact on the market value of homes. The value of a home using the sales comparison approach in 2019 would be very different from the same home’s value in 2022.

Find Real Estate for Comparables

The first step of the sales comparison approach is finding comparable homes in the area. To do this, an agent or appraiser would look for recently sold homes, homes currently under contract, and homes currently on the market to find those that are comparable to the home being valued. To get an accurate valuation, three to five comparables are a standard number.

Note

It’s important to find homes in the immediate area for the sales comparison approach. Because the neighborhood, school district, and other location factors can have such a significant impact on home values, choosing homes that aren’t in the same location could make the comparison inaccurate.

Some of the factors agents and appraisers will look at when determining whether a property is a comparable include:

• Lot size
• Square footage
• Number of bedrooms
• Number of bathrooms
• Home style
• Home age
• Quality of construction
• Amenities

The date of the sale is another important factor when determining whether a home is truly comparable. The more recently the home was sold, the more comparable it will be.

When it comes to actually finding comparables, your agent or appraiser can look to the local assessor’s office, municipalities, online databases, local newspapers, and other agents.

Make Adjustments to Comparables

Finding comparables is an important first step in the sales comparison approach. However, no two homes are exactly alike, meaning that even a very similar home isn’t likely to have exactly the same value. For that reason, adjustments must be made.

When making adjustments, an agent or appraiser will adjust the prices of the comparables based on certain features that may be different from the home being valued. For example, if one comparable had a kitchen that had been more recently updated, its price might be adjusted higher to account for that. On the other hand, if another comparable had a smaller yard than the home being valued, its price might be adjusted lower.

Note

When making adjustments based on different characteristics, it’s important to make those adjustments to the comparable homes, not to the home being valued.

To analyze the differences between homes and make adjustments, agents and appraisers use what is called a sales comparison grid. Factors included in the grid might include the land or lot value, the neighborhood, improvements that have been made to the home, the quality of the materials or construction, and livable square footage.

Use Weighted Analysis To Estimate Property Value

When determining a final valuation based on comparable sales, an agent or appraiser must weigh adjustments based on their importance in valuing the home. Generally speaking, properties that are most similar to the home being valued—meaning those that need the fewest adjustments—are given the most weight.

As a final step, the agent or appraiser will calculate the weighted average of the comparable sales. That average is the value that will be assigned to the home in question.

The Bottom Line

The sales comparison approach is the most common valuation method that real estate agents choose to determine the value of a home.

This method helps ensure your home is fairly priced on the market. If it’s priced too high compared to similar homes in the area, it may not sell as quickly. On the other hand, if it’s priced too low compared to similar homes, you won’t walk away with as much money as you could have.

It’s also important to remember that different professionals will use different valuation methods. For example, just because a real estate agent uses the sales comparison approach doesn’t necessarily mean an appraiser or assessor will do the same.

Frequently Asked Questions (FAQs)

When should you use the sales comparison approach?

The sales comparison approach is most commonly used when determining the market value of the home. Real estate agents use this method when pricing a home to sell. This approach is also most suitable if there are plenty of comparables in the area. If there is a lack of similar homes under contract or recently sold, the sales comparison approach may not be accurate.

What is the difference between the sales comparison approach and the cost approach?

The cost approach to home valuation looks at the price to replace the home. This approach is most accurate for unique homes or those that may not have close comparables. It looks at the replacement and reproduction cost of the home with the land value, minus any depreciation.

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