What Is a Sales Comparison Approach (SCA)?
The term sales comparison approach refers to a real estate appraisal method that compares one property to comparables, or other recently sold properties in the area with similar characteristics. Real estate agents and appraisers may use the sales comparison approach when evaluating properties to sell. This method accounts for the effect that individual features have on the overall property value. In other words, the total value of a property is the sum of the values of all of its features.
Key Takeaways
- A sales comparison approach is a valuation method used in the real estate industry that compares one property to similar ones recently sold in the area.
- The SCA is used as the backbone for the comparative market analysis which considers prices of recently sold propertiesthat are similar and within the same geographic area.
- Some of the common characteristics that make up the SCA include location, recently sold listings, features, age and condition, and average price per square foot.
Understanding the Sales Comparison Approach (SCA)
The sales comparison approach helps real estate professionals and buyers determine if the price of a home is fair and comparable to the current market. Professionals use similar properties that were recently sold within a short distance of the subject property—usually in the same neighborhood—that share similar characteristics as a comparison.
The SCA is used as the backbone for the comparative market analysis (CMA). This is ananalysis of the prices of recently sold propertiesthat are similar and within the same geographic area. In other words, the approach often entails looking at local properties to see what they have in common. From there, appraisers can determine the value of a property based on its features.
Although there are many steps that a real estate appraiser can take in evaluating a property's value, the following are some of the most common characteristics used in an SCA:
- Location and neighborhood: Geography may directly impact the value of real estate. It's important to compare homes in the same neighborhood rather than those found in another part of town. Factors considered include proximity to schools, nearby bodies of water, parks, highways and overpasses, as well as pollution levels.
- Recently sold listings: These properties can provide a starting point for the value of homes in the area. Although features and the market factor into the sale price, reviewing property values and recent sales are good baseline numbers.
- Features: A home should be compared with properties with the same number of bedrooms, garages, and bathrooms. The comparison should include homes of about the same square footage on parcels of land that are about the same size.
- Age and condition: It's important to compare homes of similar age as well as soundness. A home's condition significantly influences an appraisal. For example, there may be two similar homes in the same neighborhood. But if one is in need of repair, it can seriously affect its value.
- Average price per square foot: Once similar homes are compiled, take each of their sale prices and divide them by their square footage. The result yields the cost per square foot based on the homes in the sales comparison analysis. Take the average cost per square foot for all comparable homes and multiply that number by the square footage of the home being appraised.
Note that the IRS lists the market or sales approach as an acceptable method of analyzing an asset's valuation for tax purposes.
Performing Appraisals Using the Sales Comparison Approach
For a somewhat simple appraisal method, SCA actually involves a number of steps. These steps are outlined below, and though the process may seem different for different markets or types of properties, these steps are usually taken across most types of properties.
Step 1: Identify Property
Begin by clearly identifying the subject property that you're appraising. Gather detailed information about its physical attributes, location, and any unique features. This step establishes the starting point for comparing it to other properties. So, even though it may feel straightforward, it is among the most important steps.
Step 2: Select Comparables
Carefully select comparable properties that have recently sold and that share similarities with the subject property. Consider the factors discussed in the previous section when selecting similar properties. The goal is to find properties that potential buyers would consider comparable to the subject property.
Step 3: Collect Data
Thoroughly collect data for both the subject property and the chosen comparables. This includes obtaining accurate property details, sale prices, transaction dates, square footage, lot size, room counts, and any significant features. The accuracy and completeness of this data are crucial for making informed comparisons and performing data analysis. Take note of variances or major differences worth adjusting for.
Step 4: Perform Adjustments
Examine the differences between the comparables and the subject property. Identify attributes where variations exist such as larger square footage or superior amenities in a comparable. It may be somewhat subjective, but determine how much these differences would influence a buyer's perception of value.
Step 5: Perform Portfolio Reconciliation
After making adjustments, you may have a range of adjusted sale prices for the comparables. Consider the relative relevance and reliability of each comparable. Weight the impact of each comparable based on factors like similarity to the subject property, recency of sale, and market conditions. Using this new lens, you should reconcile the adjusted values to arrive at a more accurate value range for the subject property.
Step 6: Determine Final Estimate
From the reconciled range of adjusted values, calculate a final estimated value for the subject property. This can be done by averaging the adjusted sale prices of the comparables within the range or applying other appropriate statistical methods. The goal is to arrive at a single estimated value that reflects the property's market value based on the comparables' data.
Advantages and Disadvantages of the SCA
Pros of the Sales Comparison Approach
The SCA approach is grounded in real market transactions, making it highly relevant and reflective of current market conditions. It considers the actual prices at which properties similar to the subject property have recently sold. Therefore, it's especially effective when there is a substantial number of comparable properties available for analysis.
The concept of comparing recent sales of similar properties to the subject property is easy to understand, making it accessible to both appraisers and clients. Therefore, the SCA method is somewhat known for being transparent. The SCA method also sheds light on the historical deviations of an asset's price. Since it relies on recent sales data, this approach can capture changes in market conditions and trends over time.
When multiple comparable sales are analyzed and adjustments are made for differences, the approach provides a range of values that can serve as a validation of the estimated value. If the adjusted values are consistent across comparables, it lends credibility to the final estimate.
Last, the sales comparison approach is a widely accepted and practiced method in the real estate industry. This widespread usage enhances its credibility and acceptance among appraisers, lenders, and other stakeholders.
Cons of the Sales Comparison Approach
The quality and quantity of comparable sales data can vary significantly based on the property type, location, and market conditions. In some cases, there might not be enough recent and relevant comparable sales to accurately estimate the value of the subject property. For properties that are one-of-a-kind or have features that are difficult to find in the market, the sales comparison approach might not be suitable.
Making adjustments for differences between the subject property and comparables can be subjective and challenging. For example, determining the value of specific features like swimming pools, architectural styles, or interior upgrades can be difficult, and differing opinions among appraisers can lead to inconsistent results.
The sales comparison approach relies heavily on recent sales data, which means it might not capture rapid market fluctuations or sudden changes in supply and demand. In rapidly changing markets with volatility, using older comparable sales might not accurately reflect current property values.
Finally, selecting truly comparable properties is crucial for accurate valuation. If the chosen comparables are not truly similar to the subject property in terms of size, location, condition, and other relevant factors, the valuation results can be skewed. During analysis, it may not be evidently clear which assets are comparable and which may be red herrings that are not suitable comparisons.
Pros
Grounded in real transactions, making it particularly relevant
Has a wide applicability
Is a somewhat simple concept that can be easily followed and documented
May allow for customization (i.e. for individual property features)
May lend itself to historical analysis by tracking changes over time
Cons
May not have abundant data depending on the asset type or market
May not be suitable for unique properties
May be difficult to adjust based on available data
Will not always reflect shortest-term market fluctuations
Relies somewhat on subjective interpretation
Since the sales comparison approach isn't an official appraisal, owners may need to hire an appraiser for unique properties and those that are hard to value.
Special Considerations
There are many other features that may increase the value of a home. However, a sales comparison analysis is not an exact science since the value of a home is somewhat subjective, meaning one family may find more value in it than another, thereby increasing their offer. As stated earlier, outside factors such as the overall state of the economy, the job market, and the state of the real estate market all play heavily into how much a home is sold for or how long it sits on the market.
Remember, the sales comparison approach used in real estate valuation is not an official appraisal. In cases where a unique property is to be valued or one whose value is difficult to determine, a formal appraisal may be required. This means hiring an appraiser—an independent and unbiased professional who determines the property's fair value by using facts, figures, and other considerations.
What Are Comparable Sales in the Sales Comparison Approach?
Comparable sales, often referred to as "comps," are properties that have recently sold and are similar to the subject property in terms of relevant characteristics such as location, size, style, age, condition, and amenities. These sales are used as a basis for estimating the value of the subject property through a process of comparison and adjustment.
What Types of Properties Is the Sales Comparison Approach Suitable For?
The sales comparison approach is suitable for a wide range of property types, including residential, commercial, and vacant land. It is particularly effective when there is a significant number of comparable properties available and when the market conditions are relatively stable.
How Do Appraisers Select Comparable Properties for Analysis?
Appraisers select comparable properties based on their similarity to the subject property. They consider factors like location, size, style, condition, age, and recent sales dates. The goal is to find properties that are as similar as possible to the subject property to provide a reliable basis for comparison.
How Does the Sales Comparison Approach Account for Property Uniqueness?
While the sales comparison approach considers property uniqueness, it relies on finding comparable properties that share similar attributes with the subject property. However, truly unique features might not have direct comparables, making the adjustment process more challenging and potentially leading to less accurate valuations.
The Bottom Line
The sales comparison approach is a real estate valuation method that estimates a property's value by comparing it to recently sold properties with similar characteristics in the same market area. By analyzing these comparable sales and making adjustments for differences in features, size, condition, and location, appraisers derive an estimated value for the subject property based on actual market transactions.
