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Using Sales Comparison Approach for Real Estate Appraisal
Tuesday, June 5, 2018

Real estate transactions can be a long and exhaustive process. With multiple factors being evaluated and intermediaries involved, it gets quite a lot for a person to deal with. One of the most important components of the transaction is the real estate appraisal. The real estate appraisal is the overall estimation of the value of the property.

The evaluation determines the kind of financing the estate shall require and how much should the buyer spend from their own pockets. Property appraisals depend on a systematic compilation of data that includes details like demographics of the neighborhood and property costs. There are three major types of appraisal approaches commonly used, one of which is the ‘Sales Comparison Approach’.

Sales Comparison Approach

The sales comparison is usually executed in arrangement with the other types of assessments namely, cost and income based appraisals. It is normally performed for appraising single-family homes. The appraisal uses a market approach for data collection and evaluation. This means that the appraisal basically compares the price per unit of the concerned property with other identical properties in the neighborhood. The identical properties are called comparables.

For example, a buyer would be presented with a complete set of information of all the similar properties in the neighborhood. This information would include similar characteristics in terms of selling price and overall appraisal value. Since there is no timeline as to when a potential buyer might be interested in a particular neighborhood, therefore all price differences are averaged to generate a fair value. The sale comparison approach is generally considered as the most precise and correct appraisal method because it accounts the most current market values of the similar properties.

Comparables

Construction costs and depreciation are the most important factors undertaken when evaluating real estate through the cost-based approach. Similarly, in the sales comparison approach, the most significant aspect is the comparables. The comparables are the other properties in a particular area that are characteristically similar to the real estate being bought. But there are certain conditions that need to be met before any home qualifies as a comparable, such as:
  • Age of the property including its overall condition.
  • Any special terms and conditions under which the said property was sold, such as a discounted price offered to the buyer, if they had close relations with the seller.
  • The property should also have been sold with one year of the appraisal.
  • The comparable property should be in close radius of the other estate.
  • Physical characteristics such as landscape, construction quality, number of rooms, upgrades, renovations etc
For a property to be accurately evaluated an average four to five comparables should be studied in the process with higher emphasis on size and similar features like location and lot size. Since property appraisals are generally complicated and consume a longer time, it is suggested that potential buyers seek the help of their nearest professional real estate appraisal firms.


 
 
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