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.
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. Some of the factors agents and appraisers will look at when determining whether a property is a comparable include:
Lot sizeSquare footageNumber of bedroomsNumber of bathroomsHome styleHome ageQuality of constructionAmenities
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. 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.
