Sales Comparison Approach in Real Estate Appraisal
The Sales Comparison Approach compares recently-sold local similar properties to the subject property. Price adjustments are made for differences in the comparable and subject property.
The sales comparison approach is the foundation for the real estate professional's CMA, Comparative Market Analysis. It is a process used to determine the current market value of a property based on recent sales of comparable properties in the area. The calculation's results are used to help a home seller listing client to decide on the price at which to list their property.
Real estate professionals also use a CMA process to help buyers to determine if a home's price is fair and in line with current market activity. The agent, if being thorough will do two of them, one using recently sold properties and another using currently listed properties and using their list prices. That's because markets are constantly changing, and they want to see the currently listed comparable properties that are the competition. Based on the current inventory and demand, there could be a reason to lower or raise the listing price determined in the sold properties CMA.
The CMA Process
There is a structured process in doing a CMA, and there are some important basic requirements:
- Comparable properties selected should be as similar to the subject property as possible:
- number of bedrooms
- number of baths
- square footage size
- lot size
- The comparable properties should be as nearby as possible, in the same neighborhood or subdivision is best.
- Their sales date should be as recent as possible. If comps' (comparables') sold dates are too far in the past, they're already too old to be accurate for the current market. If there aren't enough close-by properties for comps, then moving a little farther out in distance is necessary.
So, with that in mind, let's look at an overview example of a simple CMA.
- We have our subject property, a 3 BR, 2 BA home 1900 square feet in size with a two car attached garage.
- The home is on a standard subdivision lot very similar in size to all others.
- Three comparable homes were found in the same subdivision.
- Two of the homes were very close, with the same bedrooms, baths, and garages.
- One home had an extra bedroom and half-bath. The sold price of that home was reduced by the new construction value of a bedroom and half-bath to make it similar to our subject property.
- The square footage of the homes was close but not exact. So, the three comps' prices each were divided by their respective square foot size to get a sold price per sq ft. Those were averaged to one number.
- That number was multiplied by the 1,900 sq feet of the subject property to determine its approximate value in the current market.
Now, for the seller and the real estate professional, this is usually as far as they go. However, I would suggest another market analysis to see the current competition, as I would be doing for a buyer. Another CMA is done in pretty much the same way. However, now we find three comps that are for sale and use their listing prices.
This example market has been pretty busy, and there have been more sales than new listings in the recent few weeks. The current inventory of homes for sale is lower, and the listing prices of our three comps indicate that the listing price estimate from the regular CMA can be increased. We stay on the low end of the competitive homes' prices for a sales advantage and go to market.
So, what's different in these processes and an appraisal? The appraiser uses comps as well, maybe the same comps. However, the appraiser is usually working for the lender, so their job is different. The real estate professional wants to get the highest price possible for their seller. The appraiser wants a value that covers the lender's investment but isn't inflated.