Selling a house can be stressful (as is studying for your real estate test).
Where do you even start? It’s not like we can sell a place based on sentimental value.
Luckily, there are many ways to go about valuing a property. One of them is the sales comparison approach!
Let’s talk about what it is and how you can use it to figure out how much your property is worth!
What Is Sales Comparison Approach?
The sales comparison approach is a type of commercial real estate appraisal that finds the value of a property by comparing it to other similar recently sold properties or comparable property in the area.
It’s actually pretty simple when you think about it.
The MAIN LOGIC behind the sales comparison approach is using the features of similar properties to find the value of the subject property, i.e., the place you’re trying to price and sell.
It uses the idea that all the features intact are what give value to the property.
Basically, the sum of its parts is equal to the total value of the real estate.
The sales comparison approach will often compare the subject property based on at least three other comparable properties.
Now, let’s find out how the sales comparison approach for real estate valuation is actually made, shall we?
Using Sales Comparison Approach to Find Market Value
We’ll go over the main factors to know when using a sales comparison approach on the real estate property.
Subject Property
It is the particular property in question that you need to evaluate.
Consider all features of the real estate and compare it to similar properties in the same neighborhood.
We emphasize the same neighborhood because this affects the market value of real estate.
In fact, the sales comparison approach is used as the mainstay for the comparative market analysis of real estate in an area.
This makes sense since all of these are made to compare values of certain similar properties in the area against each other so that everyone can know how to fairly price and sell their real estate.
Determining Comparable Properties
Now that you’ve got a good grasp of what the sales comparison approach is and what it’s supposed to do, let’s go over the different factors that go into finding an appropriate comparable property.
Recently Sold Properties
Recent sales give a better starting point for property value and comparable sales.
This is where you can apply market research to find recent sales data.
Market values are always shifting. Land and property values change over time depending on the economy.
So, the current market value of a place is COMPLETELY DIFFERENT to what it was even just a week ago!
Recently sold real estate is your best bet to find comparable sales on the market.
Physical Characteristics
This may be the most obvious factor because obviously, you can’t compare apples to oranges.
So, if you’re looking to sell a house, you need to find comparable properties that are ALSO houses.
Find the physical differences and similarities of the houses. These include
- Square footage
- Number of rooms and bathrooms
- Presence of a garden, fireplace, garage, etc.
These are all physical attributes of comparable properties that will allow you to determine the price of the subject property.
Physical attributes also take into account the effective age and condition of a property.
If one house is a lot older or in need of a repair compared to the other houses around your neighborhood, that can seriously affect its value.
Price Adjustments
When making a sales comparison approach, real estate valuation IS NOT ALWAYS cut and dry.
Yes, it is pretty straightforward, but some characteristics affect the price during the adjustment process.
Property Location
Similar to why you look at recently sold listings, property location is just as important because of, say it with us, market value!
If the real estate prices in your area are averaging $100 per square foot, you can assume that your property costs that much per square foot too.
Certain property locations will be MORE EXPENSIVE than others, so consider the proximity, traffic patterns, etc.
All of these will affect the valuation of your property.
Economic Characteristics
Commercial properties will always be affected by the economy.
If market rent does not cover the net operating income of a building or a home, then that could mean it has a LOWER VALUATION than one with a higher net operating income.
Market Conditions
This is related to the first two characteristics but depending on the local economy. Sales prices may rise or drop depending on trends.
The current value of a property this week WILL NOT be the same as next week.
Terms and Conditions
As much as possible, we would like to consider the price at an arm’s length transaction, where neither party affects the other.
Although, if one or the other parties are related, then that will affect the sales comparison.
Ownership Interest
The value of the subject can be adjusted downward or upward, depending on the ownership interest of the subject property.
A fee simple interest is valued differently from a fee interest under lease, and knowing the difference will get you a CLEARER comparable sale price.
Non-Realty Components
This can include subjective considerations from the property owner, especially if it’s personal property.
These things need to be removed from the equation to accurately depict the sales comparison and sales data.
Other Appraisal Approaches
There are two other common real estate valuation methods to know:
Cost Approach
The cost approach to real estate valuation finds how much it would cost to build the property from scratch, adjusting for its current condition and accounting for replacement cost.
Income Approach
The Income Approach is often used as a valuation method in real estate investing especially, commercial real estate. It determines property value by using expected rental income and the current market average cap rate.
Conclusion
In the sales comparison approach, finding the value of a property isn’t just about the features of the property, but it’s also about location and other market data.
Remember that no two properties are the same but generating audience insight and finding the right comparable data is really going to help you find the right price for your real estate.
