What is the correct order of adjustments that are made in the sales comparison approach?

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 properties that 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 an analysis of the prices of recently sold properties that 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 a value for 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, and how close they are to 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.

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.

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.

But 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 certain facts, figures, and other considerations.

In this article, we will be presenting and providing a quick and easy method of property valuation called the Direct Comparison Approach. This can be said to be one of the easiest and convenient methods of valuation for a specific property. However, some background knowledge is also very important to establish a value as accurate as possible.

Nội dung chính

• What is first in the order of adjustments when utilizing the sales comparison approach?
• What is the first step in the sales comparison approach process?
• How are adjustments made in the sales comparison approach?
• How do you use the sales comparison approach?

As the name suggests, the Direct Comparison Approach is based primarily on the Principle of Substitution, where the purchaser would be unwilling to pay more for a specific property than the cost of obtaining a comparable, competitive property with the same utility, on the open market, provided there is no delay in making the acquisition.

Perhaps this might still sound a bit confusing and if so, to put it simply, this method provides the market value of a specific property by “comparing” it to values obtained in the open market of similar properties.

The valuation process follows three basic steps in arriving at the value of the property in question: identifying the highest and best use of the property in question; the identification of similar properties that have previously sold and finally, adjusting the value of the comparable sales.

The best results from this approach are obtained when good and truly comparable properties are used as a gauge. The best comparables are those which require the least amount of adjustment. The best comparison can be made when the selling price is reduced to a proper unit of comparison.

Adjustments are then made to the sale price per unit. It is always best to make any necessary time adjustments first, then apply the total of all other adjustments to the time adjusted price per unit to arrive at a fully adjusted price per unit from each comparable.

The 3 steps of the Direct Comparison Approach

The first step, the identification of the highest and best use of the property. This is so as to ensure the optimal value of the property based on intrinsic and extrinsic characteristics of the said property (which includes its physical conditions, legal permissibility, financially feasible as well as maximum production).

The second step requires the valuer to identify the comparable sales. To be considered a comparable sale to the said property, the previously sold properties must have the same (or at least very similar) highest and best use (as if comparing apples to apples).  It is optimal to ensure that they can be found in the same geographical area, have a sales track record in the past as well as share similar amenities. The more similar these comparables are the better.

The final step is the adjusting of the comparable sales values to reflect their superior and inferior characteristics to the subject property.  There are many factors to be considered in making adjustments – for instance, the size, shape, topography, available amenities and locational attributes of the comparable sales.

An example of a Direct Comparison Approach

In order to provide a better image of how this approach can be made, the following is an example:

A 4-bedroom HDB flat was recently sold for $400,000.  A valuer is being asked to appraise the house next to it for mortgage financing.  The homeowner feels that, as the property next door (3 room flat) sold for $400,000, his home should be worth more has more privacy due to being a corner flat.  As such, the valuer, while using the recently sold house next door as a comparable property, must also use two other properties that are similar to the subject and have recently been sold.

In this case, the valuer will determine the characteristics of the comparable property and compare them to the subject property and adjust the value of the comparable property to make it more like the subject property.  Once this has been completed, the adjusted value of the comparable property should be approximately equal to the market value of the subject property.

The following chart provides an example as to how this calculation is completed.  In the left column are the characteristics of the properties.  The columns to the right the comparable property and lists the adjustments to the value necessary to make the comparable property more like the subject property.

• If the comparable characteristic is superior to the subject, subtract from the comparable property’s value
• If the comparable characteristic is inferior to the subject, add to the comparable property’s value

Although this is just a simple example between two properties for illustration sake, it is important to note that to compare characteristics the appraiser must obtain information from several sources on both the subject and comparable properties.

In calculating the adjusted value the appraiser will add the total adjustments and either add or subtract them from the sale price of the comparable property.  In this example the adjustments amount to an added value of 10% and hence and that amount is therefore added from the comparable sale price of $400,000, resulting in an adjusted value of $440,000 for the said property.

All in all, this is a quick and easy way to utilise the Direct Comparison Approach for the property. We hope we have provided a simple yet useful explanation for this property valuation approach, and that it will prove to be beneficial for you in the future!

This is the first part of our 3-part series on property valuation. To find out more, read our articles on the income method and residual method!

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What is first in the order of adjustments when utilizing the sales comparison approach?

Appraisers go through a sequential adjustment process. It is important that adjustment are made in the proper order. First come transactional adjustments, followed by market condition adjustments, location adjustments and finally physical elements of comparison.

What is the first step in the sales comparison approach process?

There are five steps in the adjustment process. Step 1 – Identify all elements of comparison affecting the market value of the subject property. Step 2 – Compare the amenities of each comparable with those of the subject, quantifying the difference between the comps and the subject property.

How are adjustments made in the sales comparison approach?

Adjustments are made to the comparables in the form of a value deduction or a value addition. Adding or deducting value. If the comparable is better than the subject in some characteristic, an amount is deducted from the sale price of the comparable.

How do you use the sales comparison approach?

How to do a sales comparison approach.

Identify comparables in the market. ... .

Determine the common attributes of the comparables and the primary home. ... .

Make adjustments to comparables' values. ... .

Combine all factors and adjustments for a final price estimate..

What are the steps in a sales comparison approach?

What is the basis of the sales comparison approach?

When completing the sales comparison approach which is considered first in the sequence of adjustments?

What are the 3 approaches to value?