The Sales Comparison Approach to estimating Value

Once the sales comparison is complete, and depending on the type of property, the appraiser may apply other approaches to value (e.g., cost and income).

If more than one approach is applied, the appraiser will then reconcile (weigh the merits of each approach and rely more heavily on one or equally on all approaches applied) to estimate the final value.

The Principle of Substitution

The sales comparison approach relies on the value principle of substitution, which says that the value of a property is equal to the value of an equivalent substitute property. However, since every property is different, appraisers follow a process of adjustment to comparable properties (the substitutes) when estimating the value of a subject property. Think of it as a way to compare apples to apples when you're starting out with Granny Smith, Honeycrisp, and Gala apples.

Bracketing

Lenders like to see the subject property "bracketed" in several ways. Bracketing is a process in which an appraiser determines a probable range of values for a property by comparing a group of comparable sales to the subject. The appraiser attempts to include both superior and inferior units of comparison such as age, transaction price, etc. For example, comparables that are five and 15 years old bracket a subject that is 10 years old.

The Process

The appraiser follows these steps when conducting the sales comparison approach: Analyze the subject property to identify its characteristics, particularly those that are in demand in the current market. Identify comparable properties that have been recently sold.

Some Questions That Test Comparability

The appraiser selects comparable properties that are as similar as possible to the subject property by evaluating certain characteristics. Is the subject property held in fee simple interest? Will the transaction be for the fee simple estate? Are the comparables also fee simple? Is the subject property or comparable sale subject to easements (e.g., ingress/egress access) or encroachments (e.g., a neighbor's fence overlaps the property boundary)? Are there any deed, easement, or leasehold restrictions?

Applying Elements of Comparison

To be able to make valid computations of adjustments, the elements of comparison must be applied in this order: 1. Financing terms and cash equivalency: This is often offered by builders for new construction or as seller concessions in resale transactions. 2. Conditions of sale: Was it an arm's length transaction? Were personal items included, or fixtures excluded? 3. Market conditions at time of contract and closing. 4. Location: Underwriters assume appraisers understand the local marketplace, and will accept comparables that exceed distance, time, or other guidelines, if the appraiser supports the decision with written, detailed explanation that demonstrates that local expertise. Physical characteristics: This includes the site, view, construction quality, amenities, size, etc. The Importance of the "Drive-By" Appraisers must at least drive by comparables, partially to uncover information not found in the records (such as MLS history) that will necessitate adjustment to the comparables. A drive-by can identify a new circular drive, evidence of foundation shifting, a worn-out roof, superior or inferior view, and traffic or other nuisances such as airport noise. Adjustments must be made to comparables for items like these. Another reason for driving by potentially comparable properties (after the subject site visit) is that it gives the appraiser the chance to place the subject property and comparables within the context of the neighborhood and the larger market. Often, a drive-by causes the appraiser to redefine subject neighborhood boundaries to capture properties more similar to the subject, or to choose more suitable comparables.

Units of comparison

allow the comparison to be standardized. Units may be price per square foot, per apartment unit, per acre, etc.

Elements of comparison

analyze comparables' locational/physical property characteristics and transaction differences. They explain why different prices are paid for comparables.

The Sales Comparison Approach to Value

uses a process of comparison with similar properties that have a known sale price to determine a subject property's market value. This is the most reliable of the three approaches when appraising single-family homes for market value.