The Sales Comparison Approach to Property Valuation

Instructor: Ian Lord

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

Residential real estate listing prices are often determined using the comparative sales approach. In this lesson, we will define and describe that method.

The Comparative Sales Approach Method Defined

Every homeowner has given some thought as to what their home is worth. But how do they know with any certainty if they want to sell? The seller might have an overly optimistic idea of value. On the other hand, the seller might think the house is worth far less than it actually is. You might have heard of a real estate agent 'pulling comps' on a house. A comparative sales approach method of property valuation can help estimate a realistic fair market value.

The comparative sales approach looks at a selection of similar recently sold properties near the subject property. The property being appraised is the subject property. Similar homes are called comparables. These comparables are ideally as similar as possible houses that have been sold very recently. Comparables have to be actual sales. People can ask any price they want for a house, but actual sale prices are factual and provide a true benchmark for comparison. If a long time has passed since the sale, the estimate of value will not be as precise. The same is true if there are many major differences between the properties.

Real estate agents , as mentioned above, use the comparable sales approach a research method to help sellers determine a reasonable listing price. An agent could also estimate comparables for a buyer to make sure they aren't overpaying for a house.

The Comparative Sales Approach Method in Practice

Let's say the appraiser found three comparables for the subject property. The homes are in the same neighborhood and have identical floor plans. They have the same numbers of bedrooms and bathrooms and similarly sized yards. The subject property has an old roof that will probably need to be replaced soon. One of the comparables has a new shingle roof, and the others have metal roofs.

The appraiser can thenadjust the values of the comparables to the subject. Adjustment considers how the subject property would be valued if it had identical features to the comparables. An appraiser can also consider factors like scenic views or the exact location for making adjustments.

Looking back at our example it is clear that the roof condition devalues the subject property relative to the comparables. The appraiser estimates that replacing an old shingle roof with a new one like the comparable would cost $8000. If the comparable sold for $100,000, the value of the subject property would drop to $92,000.

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