Appraisal by Comparison

Real Estate Basics: Appraisal by Comparison Fundamentals

Definition

Appraisal by Comparison, also known as the Sales Comparison Approach, is a real estate valuation method that estimates a property’s value based on the sale prices of similar properties, also referred to as “comps” or “comparables,” in the nearby area. This approach is grounded in the principle of substitution, suggesting that a rational buyer will not pay more for a property than the cost of acquiring a similar one with the same utility.

Examples

Single-family Home: To appraise the value of a single-family home, an appraiser looks at recently sold similar homes in the same neighborhood that share comparable characteristics like size, style, age, and condition.
Condominium: An appraiser visits a condo in an urban area, reviewing sales data for similar units in the same building or nearby buildings that have similar amenities and square footage.
Commercial Property: For a retail store in a downtown district, an appraiser compares it to other retail spaces that have sold recently, considering factors such as location, size, condition, and access.

Frequently Asked Questions (FAQs)

Q: What factors are considered when choosing comparables?

A: Factors include the property’s location, size, condition, age, and the time frame of the comparison (usually sales within the last six months).

Q: How many comparables are typically used?

A: Usually, three to five comparables are used to form a reliable estimate of the property’s value.

Q: Can Appraisal by Comparison be used for all types of properties?

A: While it is commonly used for residential properties, it can also be applied to commercial and land appraisals, although it may be less frequently applied to unique or specialized properties.

Q: What if no suitable comparables are found?

A: If no suitable comparables are available, the appraiser may need to adjust their strategy, weighting the significance of less similar properties or opting for an alternative valuation method.

Q: How is proximity determined in the comparison approach?

A: Proximity is usually determined by geographical boundaries like neighborhoods or city zones. Economic and market conditions within those boundaries play a critical role.

Market Value: The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and seller.
Comparative Market Analysis (CMA): An evaluation tool often used by real estate agents to determine an asking price or offer value, leveraging the Sales Comparison Approach.
Appraisal Value: The professional estimate of a property’s market value at a given point in time.
Comparable Property (Comp): Recently sold property similar to the subject property being appraised.
Adjusted Sales Price: The final sales price of a comparable after adjustments have been made for differences between it and the subject property.

Online Resources

References

The Appraisal of Real Estate, 14th Edition. Appraisal Institute.
Valuation by Comparison: Residential Analysis and Logic, by Mark Rattermann.

Suggested Books for Further Studies

“The Appraisal of Real Estate” by Appraisal Institute.
“Real Estate Principles: A Value Approach” by David Ling and Wayne Archer.
“Valuation by Comparison: Residential Analysis and Logic” by Mark Rattermann.

Real Estate Basics: Appraisal by Comparison Fundamentals Quiz

### Does Appraisal by Comparison rely on the principle of substitution? - [x] Yes, it relies on the principle that a rational buyer will not pay more for a property than the cost of acquiring a similar one. - [ ] No, it uses the principle of market demand. - [ ] It uses the principle of intrinsic value. - [ ] Appraisal by Comparison does not rely on any particular real estate principle. > **Explanation:** The principle of substitution states that the value of a property is set by the cost of an equally desirable substitute property. Appraisal by Comparison is grounded in this principle. ### What key factor is essential when selecting comparables in the Appraisal by Comparison method? - [x] Location and similar characteristics - [ ] Market trends from a different region - [ ] Historical data from five years ago - [ ] The opinion of a single agent > **Explanation:** Comparables must share similar characteristics and be located in the same area to ensure an accurate and relevant appraisal. ### How many comparables are typically used in an Appraisal by Comparison? - [x] Three to five - [ ] Only one reliable comparable - [ ] Six to ten - [ ] More than ten > **Explanation:** Typically, three to five comparables are used to provide a balanced and reasonable estimate of the subject property's value. ### Can Appraisal by Comparison be used for commercial properties? - [x] Yes, although it is often less frequently used compared to residential properties. - [ ] No, it is exclusive to residential properties. - [ ] Only for industrial properties. - [ ] It's exclusively for luxury homes. > **Explanation:** While most commonly used for residential properties, the Sales Comparison Approach is also applicable to commercial properties. ### What happens if no suitable comparables are found during an appraisal? - [ ] The property is left unappraised. - [x] Appraisers may adjust their approach or use less similar properties with adjusted factors. - [ ] The appraisal process is halted. - [ ] The property value is maximized. > **Explanation:** If no suitable comparable properties are found, appraisers may adjust their approach based on less similar properties, making necessary adjustments for differences. ### What aspect heavily determines proximity in the Sales Comparison Approach? - [x] Geographic boundaries with similar market values. - [ ] Distance in miles regardless of region. - [ ] Personal opinions of the appraiser. - [ ] The age of the properties. > **Explanation:** Proximity is typically determined by geographic boundaries like neighborhoods or city zones to maintain consistency in market conditions. ### The adjustment process in appraisals primarily accounts for which of the following? - [x] Differences between the comparable properties and the subject property. - [ ] Market fluctuations over the years. - [ ] The appraiser's personal preferences. - [ ] The internals of different neighborhoods. > **Explanation:** Adjustments are made to account for differences between the comparable and the subject property, such as size, condition, age, and other tangible factors. ### What term describes a professional estimate of a property's market value? - [ ] Market Fever - [x] Appraisal Value - [ ] Property Sensation - [ ] Broker's Value > **Explanation:** Appraisal Value is the professional estimate of a property's market value at a given point in time. ### What is the usual time frame for selecting relevant comparables? - [x] Sales within the last six months. - [ ] Sales data from over a year ago. - [ ] Future property listings. - [ ] The assessment timeframe isn't crucial. > **Explanation:** Relevant comparables are typically chosen from sales that have occurred within the last six months to ensure currency and relevance in the appraisal. ### Who benefits from a Comparative Market Analysis? - [ ] Only sellers - [x] Both buyers and sellers - [ ] Only real estate agents - [ ] Investors only > **Explanation:** Both buyers and sellers benefit from a Comparative Market Analysis as it helps in making informed decisions regarding pricing and offers.