What is the number one rule of adjusting properties when using the sales comparison approach value?

What Is a Sales Comparison Approach (SCA)?

The term sales comparison approach refers to a real estate appraisal method that compares one property to comparables or other recently sold properties in the area with similar characteristics. Real estate agents and appraisers may use the sales comparison approach when evaluating properties to sell. This method accounts for the effect that individual features have on the overall property value. In other words, the total value of a property is the sum of the values of all of its features.

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• What Is a Sales Comparison Approach (SCA)?
• Key Takeaways
• Understanding the Sales Comparison Approach (SCA)
• Special Considerations
• What is the Sales Comparison Approach?
• How the Sales Comparison Approach Works
• Example of the Sales Comparison Approach
• Other Common Ways to Value Real Estate
• What is the number one rule of adjusting properties when using the sales comparison approach?
• Which principle is the value of adjustments done for the sales comparison approach?
• What are the four elements of comparison used in the sales comparison approach?
• What type of property can be valued by the sales comparison approach?

Key Takeaways

• A sales comparison approach is a valuation method used in the real estate industry that compares one property to similar ones recently sold in the area.
• The SCA is used as the backbone for the comparative market analysis which considers prices of recently sold properties that are similar and within the same geographic area.
• Some of the common characteristics that make up the SCA include location, recently sold listings, features, age and condition, and average price per square foot.

Understanding the Sales Comparison Approach (SCA)

The sales comparison approach helps real estate professionals and buyers determine if the price of a home is fair and comparable to the current market. Professionals use similar properties that were recently sold within a short distance of the subject property—usually in the same neighborhood—that share similar characteristics as a comparison.

The SCA is used as the backbone for the comparative market analysis (CMA). This is an analysis of the prices of recently sold properties that are similar and within the same geographic area. In other words, the approach often entails looking at local properties to see what they have in common. From there, appraisers can determine a value for a property based on its features.

Although there are many steps that a real estate appraiser can take in evaluating a property's value, the following are some of the most common characteristics used in an SCA:

• Location and neighborhood: Geography may directly impact the value of real estate. It's important to compare homes in the same neighborhood rather than those found in another part of town. Factors considered include proximity to schools, nearby bodies of water, parks, and how close they are to highways and overpasses, as well as pollution levels.
• Recently sold listings: These properties can provide a starting point for the value of homes in the area. Although features and the market factor into the sale price, reviewing property values and recent sales are good baseline numbers.
• Features: A home should be compared with properties with the same number of bedrooms, garages, and bathrooms. The comparison should include homes of about the same square footage on parcels of land that are about the same size.
• Age and condition: It's important to compare homes of similar age as well as soundness. A home's condition significantly influences an appraisal. For example, there may be two similar homes in the same neighborhood. But if one is in need of repair, it can seriously affect its value.
• Average price per square foot: Once similar homes are compiled, take each of their sale prices and divide them by their square footage. The result yields the cost per square foot based on the homes in the sales comparison analysis. Take the average cost per square foot for all comparable homes and multiply that number by the square footage of the home being appraised.

Special Considerations

There are many other features that may increase the value of a home. However, a sales comparison analysis is not an exact science since the value of a home is somewhat subjective, meaning one family may find more value in it than another, thereby increasing their offer. As stated earlier, outside factors such as the overall state of the economy, the job market, and the state of the real estate market all play heavily into how much a home is sold for or how long it sits on the market.

Since the sales comparison approach isn't an official appraisal, owners may need to hire an appraiser for unique properties and those that are hard to value.

But remember, the sales comparison approach used in real estate valuation is not an official appraisal. In cases where a unique property is to be valued or one whose value is difficult to determine, a formal appraisal may be required. This means hiring an appraiser—an independent and unbiased professional who determines the property's fair value by using certain facts, figures, and other considerations.

Last updated on January 28, 2022

There are three main approaches to valuation that appraisers and real estate investors use to determine the fair market price of a property: cost approach, income approach, and sales approach. In this article, we’ll explore the sales comparison approach to valuation.

Although the sales comparison method is typically used by people buying a primary residence, real estate investors also use the sales comparison approach to determine a fair offer price, even if the home is currently being used as a rental and generating income.

Key Takeaways

• Three approaches to valuing real estate are the cost, income, and sales approach.
• Sales approach compares a subject property to similar comparable properties that have recently sold.
• Also known as the SCA, the sales comparison approach takes into account property characteristics such as location, square footage, age, condition, lot size, and sale date.

What is the Sales Comparison Approach?

The American Society of Appraisers (ASA) defines the sales comparison approach to valuing property as:

A procedure to conclude an opinion of value for a property by comparing it with similar properties that have been sold or are for sale in the relevant marketplace by making adjustments to prices based on marketplace conditions and the properties’ characteristics of value.

The sales comparison approach (SCA) is frequently used by single-family rental home buyers and sellers to help determine if the property is priced at a fair market value.

How the Sales Comparison Approach Works

While individual appraisers may employ different methods in the SCA, there are several steps that every sales comparison approach takes into account:

1. Select property comparables

A good comparable property should have similar characteristics to the subject property being valued:

Location: Comparable properties should be as close to the subject property as possible, ideally in the same neighborhood. Neighborhood ratings and quality of school districts are two factors that can affect the value of a house from one area to another.

Square Footage: Size of a home is another important factor when selecting a comp. Although single-family rental home investors value a property based on the potential income generated, buyers generally should not pay more for a property than the fair market value per square foot.

Bedrooms/Bathrooms: The number of people who can live in a home also affects the potential value based on the neighborhood demographics. For example, a 2 bedroom/2 bathroom home in a neighborhood where all other homes are 3 bedroom/2 bathroom may be more difficult to rent or resell at a later date because the property isn’t the same as other nearby homes.

Age: If comparable homes are much newer or older than the subject property, the sales comparison approach can be less accurate. When possible, comparable properties should have a similar construction date to the subject property being valued.

Condition: Homes with recent updates like a new roof or swimming pool, or those with significant deferred maintenance will also make poor comparables. Comps should be in a similar condition to the property being appraised.

Lot Size: Some buyers see less value in a home on a large lot because of the additional landscaping and upkeep costs. Odd sized lots can also be problematic due to the amount of unusable space, even if they have a large amount of square footage. The best comps have lot sizes and configurations that are similar to the subject property.

Sales Date: Conditions in a real estate market can change quickly, andh recent home sales provide more value as comparables than those sold in the past. Selecting comparable properties with sales dates as recent as possible will help to yield the most accurate SCA.

2. Adjust comparable values

Every home is different, even within a brand new subdivision. For example, a comparable property might have more costly appliances than the subject home or could be located on a corner lot with more traffic and noise than a property on an interior lot.

To account for property differences, the value of the comparable needs to be adjusted by making a deduction or addition to the comp’s price to match the subject property:

• Deduct from the comparable’s value if it has a superior feature.
• Add to the comparable’s value if it has an inferior feature.

If the comparable home has a better feature than the subject property (like an extra half bathroom), the value of the comp is deducted. On the other hand, if a comparable property has an inferior feature compared to the subject property (such as an older HVAC), the price of the comparable property is adjusted upward.

3. Estimate subject property value

Once comparable values are adjusted to more closely match the subject property, the final step in an SCA is to conduct a weighted analysis. 

Comps with the fewest adjustments are generally given more weight or greater influence on the price of the subject property. That’s because the more adjustments that are made to a comp, the larger the risk that an adjustment error may skew the value of the subject property. 

When weighting each comparable, attention should be paid to:

• Dollar value of each adjustment.
• Total value change of all of the adjustments combined.
• Number of adjustments made to each comp.

Example of the Sales Comparison Approach

Now let’s look at a simple example of how to use the sales comparison approach to value a home. 

After selecting three comparable homes that are most similar to the subject property, a chart is created to list the main characteristics of each home:

Next, estimated values are assigned to each feature to increase or decrease the value of the comps compared to the subject home:

Then, the chart is revised to factor in the total adjustments to each comparable, and to adjust the sales price of each comp. If a comparable has a superior feature the value is deducted from the comp, and if the comparable has an inferior feature value is added to the comp:

Based on the adjusted sales prices of the comps, the subject property could have a fair market value between $135,500 - $157,000. 

However, Comp #2 has fewer adjustments and Comp #3 has the most recent sale date. By giving these last two comps more weighting, a more accurate valuation of the subject property could be in the $146,000 - $157,000  price range at the time the sales comparison approach was done.

Other Common Ways to Value Real Estate

In addition to the sales comparison approach, there are two other typical ways to run a real estate appraisal:

Cost Approach

The cost approach values a home based on the projected cost to build the same home from the ground up, after adjusting for the current condition of the subject property. 

According to HomeGuide, the average cost to build a house is between $100 and $155 per square foot, depending on the location, size, and design of the home. 

Based on the cost approach, our 1,500 square foot subject property is valued between $150,000 - $232,500.

Income Approach

The income approach for determining value is commonly used in commercial real estate and with income-producing residential rental property. Property value using the income approach is determined by using the current or projected net operating income (NOI) and the capitalization rate for similar homes in the same area. 

For example, assume our subject property is generating a rental income of $1,600 per month and operating expenses (excluding the mortgage payment) are running $800 per month. By subtracting the annual operating expenses of $9,600 from the annual rental income of $19,200, the calculated NOI is $9,600 per year. 

If the market cap rate for similar 1,500 square foot, 3-bedroom/2.5-bathroom single-family rental homes is 6%, the estimated value of the subject property using the income approach and cap rate formula is:

• Cap Rate = NOI / Property Value
• Property Value = NOI / Cap Rate
• $9,600 NOI / 6% Cap Rate = $160,000 value of subject property using the income approach

Combined Approach

By using all three methods of valuing real estate, an investor can more accurately determine what the subject home may be worth as a single-family rental home:

After reviewing the estimated values from all three methods, an investor may determine that the fair market value of the single-family subject property is closer to $157,000.

What is the number one rule of adjusting properties when using the sales comparison approach?

In order to ensure a realistic sales price, the comparison properties must be in line with the property that is going to be listing. This means that things like the number of bedrooms, bathrooms, lot size, and square footage of the home should be similar.

Which principle is the value of adjustments done for the sales comparison approach?

The sales comparison approach is based on the basic substitution principle. Buyers will not purchase a property priced more than its comparables in the real estate market; why pay more when a similar property in the same area was valued at less?

What are the four elements of comparison used in the sales comparison approach?

While individual appraisers may employ different methods in the SCA, there are several steps that every sales comparison approach takes into account:.

Select property comparables. ... .

Adjust comparable values. ... .

Estimate subject property value..

What type of property can be valued by the sales comparison approach?

The Sales Comparison Approach estimates value based upon the price, in the local market, necessary to acquire a property of similar location, quality, size, age, and condition.

What is the number one rule of adjusting properties when using the sales comparison approach?

What is the number one rule of adjusting properties when using the sales comparison quizlet?

How adjustments are made in the sales comparison approach?

Which principle is used with the sales comparison approach to value?