How to Use the Sales Comparison Approach to Determine Property Value

The sales comparison approach, sometimes called the market data approach, is a key real estate valuation method that appraisers often rely on to estimate a property’s market value. By comparing the sales of similar properties, the sales comparison approach helps determine what a property would sell for on the open market.

This valuation approach is useful for appraising single-family homes, condos, duplexes apartment buildings commercial buildings, vacant land, and other real estate. Lenders frequently require an appraisal using the sales comparison approach before approving a mortgage.

Below is a step-by-step guide on how to do the sales comparison approach to value real estate property.

Step 1: Research Sales of Similar Properties

The first step is gathering data on recent sales of comparable properties in the same neighborhood and local real estate market. The more similar the properties, the better.

Ideally, look for at least three to five comparable sales within the past six months. More sales data always improves the accuracy and reliability of the valuation.

Where can you find comparable sales data? Here are some good sources

• MLS listings – Search the local Multiple Listing Service (MLS) for recently sold homes with similarities. MLS listings provide in-depth property details.

• Public records – County assessor’s offices track property sales. You can look up deed transfers and sales prices.

• Appraisal districts – Many counties have property appraisal districts that compile sales data.

• Zillow, Redfin, Realtor.com – Real estate sites provide sales histories and market trends.

• Personal contacts – Realtors and appraisers may share proprietary comparable sales from their databases.

The comparable properties should be located close to the subject property, preferably within the same neighborhood. Size, age, bedroom/bath count, lot size, and other features should also be similar. The more alike the comparables, the better comparison you can make.

Step 2: Verify Sales Data

With your comparable sales data compiled, the next step is verifying the details. Double check the following on each comparable property:

• Sales date – Should be within the past 6 months.

• Sales price – Confirm via MLS or public records.

• Property address – Validate you have the correct property.

• Home specifications – Bedrooms, bathrooms, square footage, lot size, etc.

• Property condition – Renovated, original, etc.

Call the listing/selling agents to fill in any unknown specs or confirm suspicious details. Drive by each comparable sale for visual inspection when possible.

Accurate data is crucial for a reliable valuation, so take time to validate all comparable property specifics.

Step 3: Compare to the Subject Property

With verified comparable sales data in hand, you can now compare to the subject property. The goal is to determine how much the subject property would likely sell for on the open market.

Make side-by-side comparisons between each comparable and the subject property:

• Locations – Are they truly comparable neighborhoods?

• Sale date – Are the comparables current enough?

• Specs – How similar are size, age, upgrades, condition, amenities?

• Site – Compare lot size, views, frontage, layout.

Look at the comparable sales prices. What is the price range? Where does the subject property fit based on its features and specifics?

Step 4: Consider Value Factors and Make Adjustments

No two properties are exactly the same. While your comparables may be similar, you’ll need to account for differences that affect value. This involves making adjustments up or down to the comparable sales prices before applying to the subject property.

Some key factors to consider:

Location – A better location commands higher value. Adjust sales prices up for comparables in superior locations and down for inferior areas.

Size – Larger homes often sell for more per square foot. Adjust pricing based on differences in square footage.

Condition – Comparables in better condition warrant upward adjustments, and vice versa.

Bedrooms/bathrooms – More beds and baths typically add value. Adjust for differences.

Amenities – Things like pools, views, garages, fireplaces, etc. influence price. Make appropriate adjustments.

Date of sale – Appreciation or depreciation since the comparable sales may alter pricing.

Financing terms – Seller concessions affect sale price. Account for differences.

Non-realty items – Furniture, appliances, etc. included in a sale should be adjusted out.

By applying multiple adjustments, you can refine the comparable sales prices to align with the subject property. This helps establish an accurate value range.

Step 5: Calculate the Final Value Opinion

In the final step, calculate a value opinion for the subject property based on the adjusted comparable sales.

There are a few options for determining the final indicated value:

• Average – Add the adjusted sales prices and divide by the number of comparables.

• Median – Order the comparables from low to high. The middle figure is the median.

• Range of value – The adjusted low to high indicates the value range.

• Most comparable – Put most emphasis on the 1-2 best comparables.

• Professional judgement – An appraiser’s experience and expertise also guides their value opinion.

The result is your conclusion of value for the subject property using the sales comparison approach. Provide support by summarizing the comparable properties, adjustments made, and how you arrived at the final value opinion.

Key Benefits of the Sales Comparison Approach

The sales comparison approach offers several benefits for real estate valuation:

• Relies on actual sales data from the open market.

• Helps establish market value and trends.

• Allows for adjustments between varying properties.

• Provides an evidence-based value range.

• Utilizes appraiser experience and interpretation.

• Appeals to lenders for mortgage lending purposes.

By following the proper steps, the sales comparison approach provides a reliable method for valuing residential and commercial real estate. It continues to be one of the most commonly used and trusted valuation techniques.