What is the Comparative Sales Approach?
The Comparative Sales Approach, also known as the Sales Comparison Approach, is a real estate appraisal method that estimates the value of a property by comparing it to similar properties that have recently been sold in the same area. This approach relies heavily on market data and considers factors such as location, property condition, size, and features to make adjustments and arrive at a comparable market value.
Key Steps in the Comparative Sales Approach:
- Identify Comparables: Find recently sold properties similar in location, size, and features.
- Adjust for Differences: Adjust for differences between the comparable properties and the subject property.
- Analyze Market Conditions: Consider current market trends since the time of sale of the comparables.
- Reconcile Value: Arrive at a final estimated value for the subject property based on adjusted sale prices of comparables.
Examples
- Example 1: A real estate appraiser is asked to estimate the value of a 3-bedroom house in a suburban neighborhood. The appraiser looks at three neighboring 3-bedroom houses that sold in the past six months and adjusts for differences in size, amenities, and lot size to estimate the subject property’s value.
- Example 2: An investor is looking to purchase a commercial building and uses the sales comparison approach to assess its value. The investor reviews sales data for similar commercial properties within the vicinity sold over the previous year, making necessary adjustments to account for differences in floor space and parking facilities.
Frequently Asked Questions (FAQs)
What are comparable properties?
Comparable properties, or “comps,” are similar properties in the same area that have recently been sold and can provide a market benchmark for valuing the subject property.
How many comparables are needed for the Sales Comparison Approach?
Typically, three to five comparable sales are used, but this can vary based on the available data and the appraiser’s judgment.
What types of properties can the Comparative Sales Approach be used for?
The approach is applicable to various property types, including residential, commercial, and land.
Can adjustments made to comparables increase the estimated value of a property?
Yes, adjustments account for differences between the subject property and comparables. This can either increase or decrease the estimated value depending on whether the subject property is superior or inferior to its comparables in various aspects.
Related Terms
- Appraisal: A professional assessment of property value.
- Comparable Sales: Recently sold properties similar to the subject property.
- Market Value: The estimated price a property would fetch in a competitive and open market.
- Adjustment: Modifications made to comparables’ sale prices to account for differences with the subject property.
Online Resources
- Appraisal Institute - Sales Comparison Approach
- International Right of Way Association
- Mortgage Resources by Federal Housing Finance Agency (FHFA)
References
- The Appraisal of Real Estate, 14th Edition - Appraisal Institute
- Uniform Standards of Professional Appraisal Practice (USPAP) - Appraisal Foundation
Suggested Books for Further Studies
- The Appraisal of Real Estate by The Appraisal Institute
- Real Estate Principles: A Value Approach by David C. Ling & Wayne R. Archer
- Real Estate Finance & Investments by William Brueggeman & Jeffrey Fisher
- Principles of Real Estate Practice by Stephen Mettling & David Cusic
Real Estate Basics: Comparative Sales Approach Fundamentals Quiz
### What is the comparative sales approach primarily used for?
- [ ] Mortgage appraisal.
- [x] Estimating property value by comparing with recent sales.
- [ ] Developing construction budgets.
- [ ] Planning urban infrastructure.
> **Explanation**: The comparative sales approach is primarily used to estimate a property's value by comparing it with similar, recently sold properties.
### How many comparable properties are typically needed in this approach?
- [ ] 1 to 2
- [x] 3 to 5
- [ ] 6 to 8
- [ ] At least 10
> **Explanation**: Appraisers typically use three to five comparable properties to estimate the value of a subject property accurately.
### Which is the most essential factor when selecting comparables?
- [ ] Age of property
- [x] Similarity in location, size, and features
- [ ] Previous owner’s background
- [ ] Recent renovation status
> **Explanation**: Similarity in location, size, and features is the most crucial factor when selecting comparable properties for a sales comparison approach.
### Comparables for residential properties should ideally be sold within how many months?
- [x] past six months
- [ ] past twelve months
- [ ] last three years
- [ ] last month
> **Explanation**: Ideal comparables for residential properties should be those sold within the past six months to reflect accurate market conditions.
### What is the purpose of making adjustments in the comparative sales approach?
- [ ] To correct errors in public records.
- [ ] To standardize transaction expenses.
- [x] To account for differences between the subject and comparable properties.
- [ ] To increase market demand.
> **Explanation**: Adjustments are made to account for variances in characteristics between the subject property and comparable properties.
### When making adjustments, what should be considered the most?
- [ ] Comparative property prices from 10+ years ago.
- [x] Differences such as size, location, and condition.
- [ ] Architectural style.
- [ ] Owner history.
> **Explanation**: Differences like size, location, and condition should be given the most consideration during adjustments.
### Which entity primarily governs appraisal standards, including the sales comparison approach?
- [ ] Local real estate agencies
- [x] The Appraisal Foundation (TAF)
- [ ] National banks
- [ ] Federal trade commission (FTC)
> **Explanation**: The Appraisal Foundation (TAF) primarily governs appraisal standards, including the sales comparison approach via USPAP guidelines.
### In addition to comparables, what market factor should be analyzed?
- [ ] Seasonal weather patterns.
- [x] Current market trends.
- [ ] Zoning disputes.
- [ ] Community events.
> **Explanation**: In addition to using comparables, analyzing current market trends is essential for making informed adjustments.
### Which professional is typically responsible for conducting a comparative sales approach?
- [ ] Architect
- [ ] Real estate agent
- [x] Real estate appraiser
- [ ] Property manager
> **Explanation**: A real estate appraiser is typically responsible for conducting property valuations using the comparative sales approach.
### Why is the location significant in the comparative sales approach?
- [ ] Proximity to schools can set a price standard.
- [x] Location significantly impacts property value.
- [ ] Real estate agents prefer areas with lucrative commission prospects.
- [ ] Historical sites within the location are always valued higher.
> **Explanation**: The location is significant because it profoundly impacts property value due to accessibility, neighborhood quality, and local market conditions.
