How to Identify Comparable Real Estate Sales

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In order to conduct an effective appraisal the appraiser must identify appropriate comparable sales. In this lesson we will see what kind of factors appraisers use to choose properties as comparable sales for the evaluation of a home purchase.

Comparable Sales Identification

Jane has placed an offer for a home and is waiting for Bob, the appraiser, to complete a report on the property's estimated value. If the property value is less than Jane has offered, then she might not be able to get a mortgage on the house without making a larger down payment. Bob will determine the value by comparing that specific house to similar properties in the neighborhood. Let's see what kind of general real estate market, and property specific information Bob needs to find to evaluate comparable properties and estimate the value of Jane's potential purchase.

General Market Information

A significant consideration for the worth of Jane's prospective house, isn't just the house itself, but factors in the local real estate market as well. Inventory and construction are major factors. Inventory refers to the number of homes that are available for sale. Are there lots of houses on the market and are new ones being built? If houses in that area don't come up for sale very often, prices will increase. Depending on the market, it might be cheaper to buy a newly constructed home in an outlying area instead of an older building in an established downtown center.

How's the local economy? If a major employer has left town, property values will drop if those jobs aren't replaced. High crime areas also don't encourage strong property values. If buyers in the market tend to pay all in cash instead of financing with mortgages, the sale prices tend to drop. Together these factors tend to influence the average prices of homes in a given market. However, specific information is needed for similar properties that will be used for comps. The comps or comparison sales are similar properties which have sold in the last six months.

Property Specific Information

When looking at the house Jane wants to buy, Bob also considers specific details about the house. The most accurate comps have similar factors such as bathrooms, bedrooms, square footage, and construction quality. But, the appraiser can still adjust the value to compensate for differences. More recent sales are given more consideration than older sales.

Are there any property rights issues such as easements that allow the utility company to maintain a power line? An easement grants that company the right to access a part of the property to build and maintain a line even though it falls on the owner's property. Any other encumbrances that restrict the owner's use of the property such as train tracks, driveways, or trees that overhang from the neighboring lot, make the property less valuable. Is the property in need of serious maintenance such as a new roof or siding? If it's obvious Jane will have to spend a significant amount of money to make the house livable or keep it from falling apart, it will decrease the property value.

Among similar houses, location is another factor in figuring out the value. Is the house in the middle of a quiet street, or is there a bus stop on one side and train tracks on the other? Is the house near a major interstate or within walking distance from a variety of shops? The more desirable the location, the higher the property value in comparison to other properties.

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