As the name suggests, the sales comparison approach is a method that helps the real estate professionals and customers to determine if the pricing of their home is fair and at par with the current market price.
This method compares the real estate with other properties with similar characteristics and that have been sold very recently. It takes into consideration the effect that a particular feature has on the value of the overall property. In other words, the price of real estate is the total of all its features. This method is used by real estate agents when they have to evaluate the property to sell.
This approach is considered as the backbone for competitive marketing analysis in which the prices of recently sold properties are another used with other properties in the same area. By examining the other features in the same location, this method avoids, use of less compatible and reliable methods.
Since the method is based entirely on comparison with other properties, the comparison must be made apple to apple. Many factors are taken into consideration while comparing, but all the factors must be kept as close to the property in question as possible. Factors like the area of the property, facilities of the property, location, nearby amenities, all of them are required to be evaluated and compared with the property so that the comparison is balanced.
Four steps in the Sales Comparison Approach
There are usually different ways in which the size comparison approach can be used. Following are three basic steps which are necessary for the sales comparison approach:
1. Identify the real estate comparable
Before you decide on the potential real estate investment that you are going to make, you have to determine if it’s genuinely as per its selling price. To do this, you have to search for similar properties sold in the market and identify the compatible to make a proper deduction of the value of the real estate. There are two primary adjustments that you should make when identifying the comparables in the neighbourhood and the investment property itself.
Neighbourhood
Even if you are searching for real estate in the same city, the market conditions could be different from one neighbourhood. You have to start your search by defining the geographical perimeter. For example, instead of searching for apartments in your city, you have to search for the homes which are sold with the help of a ZIP Code.
There could be different characteristics of the same sections in the same town, which will affect the final value of the property. Following are a few factors which can affect the value of real estate based on its location:
Proximity to Schools and freeways, WalkScore, Presence of Parks, Cafe’s, airports, and industrial buildings.
Different factors affect the price of the property differently. For example, a school or a park near the property will increase the amount, but an industrial area or airport will decrease the price of the property. Having a shopping mall or a metro station dramatically increases the rate of the property.
Different people will have different needs, and they will require different properties to be evaluated. Some people might require a quiet neighbourhood, even if it’s far from the metro station and shopping mall, while others require the opposite.
Property characteristics
Once you have narrowed down on the available options to choose your property, then you have to find how your property has the highest similarity with other similar properties. The following are certain things that you have to look at:
- Sales date:
Check the selling date of the property to ensure that the real estate market conditions were similar to what the trends are right now.
- Features of the property:
Number of bedrooms, floors, number of bathrooms, and the presence of any other value-added feature should be noted. You have to include properties only with minimum differences in their physical attributes.
- Condition of Property
The age of the property and its condition play a significant role in making the decision. The property which has a similar number of bedrooms as compared to the other property could have variable pricing because it may require a major renovation.
If the condition of the home was taken into account, then a big adjustment may have been missed. Even if the real estate company has many features, these improvements should be taken into consideration, and the property should be valued accordingly.
2. Making the required Adjustments
Since it is impossible to find a replica of your investment, property adjustments have to be made. The ultimate goal is to adjust the real estate in such a way that it resembles your property.
It will depend on many characteristics, and you have to make either addition or decision to the comparable property. If the real estate compensation is better than the subject investment property, then you can reduce the price from Comp’s sales price.
3. Weighing of the Comparable
Once you adjust your property to more similar properties, then it is time to conduct a weighted analysis. No specific approach of sales comparison formula is used to determine which comparable is the closest representation of the property.
Here experience and judgment or combined to use so that you can choose the best available option. There are a couple of guidelines that beginner real estate investors could follow when it comes to choosing. They are as follows:
The total adjustments that were made
The total value of every adjustment that was made
The total cost of the total adjustments made.
4. Average price per sq. Ft.
Once you have the home with similar features, geographies then you have to take the selling price of each house and divide them with the square foot. The result will be the cost per square foot, which will be based on the home in comparative analysis. Take the average of all such houses which are similar to the property in question and multiply that by Sq. Ft. of the home that is being appraised.
For example,
$500,000 for 5500 Sq. Ft area. So the price per Sq Ft is $90.90
$532,000 for 5100 Sq. Ft area. So the price per Sq Ft is $104.3
$498,000 for 5800 Sq. Ft area. So the price per Sq Ft is $85.86
So the average price per Sq Ft is:
90.90 + 104.30 + 85.86 = 281.06
281.06/3 = $93.68
This home has an appraisal at the rate at the square foot of 5200, and when this is multiplied by the average square foot price of compatible houses, then we arrive at the amount which is appraised. This amount is $93.68 x 5200 = $ 4,87,136
Although this is the price calculated by considering the prices of other houses, there may be an increase or decrease in the price depending on the other features which are present in the property. This is why the sales comparison analysis is somewhat subjective and not an exact science.
Appraisal adjustment factors
There are certain appraisal factors which are to be adjusted. They are as follows:
1. Comparable Qualities
The property that is being taken into consideration should be similar to the comparable property. This will reduce the need for adjustments significantly. The changes usually come up from the differences which are witnessed from the subject property.
2. Ownership Interest
The value of the property can be adjusted in the downloads for ports. This will depend entirely on the interest of ownership of the property. For example, simple interest is usually valued in a different way than the fee interest for the property, which is under the lease. This is why the ownership interest is often a rigorous issue in property valuation.
3. Market conditions
Many other determinants are present in the market which determine the cost during adjustment. Real estate prices may drop or increase depending on market trends.
The sellers may lower their prices so that they can get a better chance of acquisition, which will depend on the competition at that particular time. The market sometimes changes drastically within days.
4. Location
The other determinant is the location of the property. Many times the locations near the property may influence the price of the property. Depending on the location of the property and the amenities such as airport, Cafe, parks, schools, shopping malls, etc., the valuation of property is done.