One of the most widely used methods that real estate professionals use to determine the value of a home is the sales comparison approach. A sales comparison approach, also known as the market data approach, estimates the value of a property by comparing it with similar properties that are recently sold in the same region. Think of it like this: If you want to know what your car is worth, you will see what similar cars of the same make and model recently sold. This technique helps both buyers and sellers understand the true market value of real estate.
What is the sales comparison approach?
The Sales Comparison Approach is a popular real estate valuation method that compares other data for properties similar or equivalent to the selling price to another home to determine its value. A real estate agent or appraiser will analyze the listing and selling prices of other homes in the area, reviewing the current market situation and the home itself to determine its value.
The goal of the sales comparison approach is to find the fair market value of your home. This means something that can be reasonably sold considering the current real estate market. Comparative market analysis used in this way is best done by real estate agents or appraisers because they are thick in the market and know how prices are rising.
An overview of how the sales comparison approach works
The sales comparison approach is part of the comparative market analysis used by real estate agents. Agents behave to find similar properties recently sold with as many common attributes as possible.
Real estate agents become experts who recognize the different attributes they are looking for in the market. They are also great at increasing the condition of your home and comparing it to the condition of your home that you recently sold.
Find a comparison of real estate
When using a sales comparison approach, agents look for recent sales of homes that share some or all of the following characteristics with the home they are trying to price.
Location and Neighborhood: A sales comparison approach is best done using homes within the same neighborhood or subdivision, as it accounts for various school districts and other factors that affect the local market. You can also use the Neighborhood Trends Report to learn more about the market in your area. Home Style and Features: If you are using a sales comparison approach, try finding a home that is as similar as possible, including style, number of bedrooms and bathrooms. Construction Quality: Not all homes are built the same way. It is best to find a home with similar construction quality. So you can see that you are seeing two truly comparable homes. Age and Condition: Find a home that is about the same age and condition as you. If the home is significantly newer or older than the other homes, the sales comparison approach is less accurate. Area and lot size: Home size is important when using the sales comparison approach. Try to find a home that has many homes of roughly the same size and quality, with the same size as you. Recently Sold Area List: Depending on the amount of activity you can see in the market, recently sold homes are usually more valuable than homes sold in the past. As recent sales dates as possible will help you get the most accurate value.
Adjust to be comparable
No matter how many comps you have to choose, you will not find the same home as you. As a result, even if you’re using the most comparable home, you probably need to adjust the price of the comp you find.
Here are a few factors that can be used to adjust the value of a comparable home.
Market Situation: The real estate market can change rapidly. The market may have changed since then, where a comparable home was just sold a month ago. That is, you need to adjust what is comparable to explain it. Quality and Characteristics: As we said, the two houses are not identical. Even two houses with similar characteristics, one may be more valuable. Maybe one home has recently renovated its kitchen or has a trendy style. Location Characteristics: Even two houses in the same area can have different values based on the location. One is on a busy street and the other is on a quiet cul-de-dead? Are you close to a specific amenities?
Analyze weight adjustment
Once a real estate agent completes a comparative market analysis, it uses the weighted average of comparable homes to determine the fair market value of the home. If you use a weighted approach, you will give the most weight to the house that resembles your home, but homes that require more adjustments will weigh less.
Sales comparison approach and cost approach
A sales comparison approach may be the most common way to pricing your home, especially if you live in suburban or established areas in metropolitan areas where there is a lot of recent sales data to find the market value of your home.
However, if your home is unique and sparsely populated, or purchased for investment, there may be little or no sales data available, and the sales comparison approach is less useful. In such cases, a cost approach can be used instead.
The cost approach determines the value of the home by asking how much it will cost to rebuild the home. The cost approach includes land and building costs, building improvements, and depreciation.
There are two subcategories of the cost approach. One is the replicating cost, which involves the cost of building a true replica of the original using the original material. The other is the cost of replacement, or how much a similar home will cost using modern building materials and techniques.
Conclusion
The sales comparison approach is one of the most popular ways to pricing. Whether you are preparing to buy and sell your home, or both, it is important to understand how this strategy will regenerate to the price you pay for your home, or how much you can get for your current home.
If you are ready to sell your home and need help setting a asking price, connect with a Redfin agent and see the sales approach they offer.
FAQ:
When should I use the Sales Comparison Approach?
The sales comparison approach is perfect when you live in a large neighborhood or plot where there are plenty of comparable homes. If you live in the countryside or have a unique home, the sales comparison approach may not work.
What are “equivalent” properties?
Equivalent properties are properties that have recently been sold that have similar characteristics to those evaluated properties that are found in the same or very similar market.
What is one weakness of the sales comparison approach?
The biggest weakness of the sales comparison approach is that the two houses are not identical. No matter how many similar homes you find, there are still differences that can challenge the price of your home.
Is the sales comparison approach always accurate?
It is reliable, but its accuracy depends on truly comparable sales availability and the evaluator’s expertise in making the right adjustments.
Can I use my sales comparison approach to estimate the value of my home?
While it is certainly possible to investigate recent sales data, professional appraisers have the expertise to select the most relevant comparability and make accurate and defensive adjustments.
