Sales Comparison Approach: Assessing Real Estate Comps

The average cost to buy a house is constantly fluctuating based on demand, but have you ever wondered exactly what determines sale prices? A few different methods are used to determine how much a property is worth in the real estate industry. Most commonly, real estate professionals utilize the sales comparison approach when setting or evaluating home prices.

Real estate agents, appraisers, and investors alike use the sales comparison approach to evaluate a property’s potential and provide buyers and sellers with a great starting point for price negotiations. Sales comparison approaches takes comparable home prices into account, making it one of the most reliable ways to determine a property’s value.

In this article, Fortune Builders explores sales comparison approach steps, its importance within real estate deliberations, and how to work through the sales comparison approach to apply this method to your real estate needs.

What Is The Sales Comparison Approach?

The sales comparison approach (SCA) is a property valuation method that relies on recently sold comparable properties to set a current listing price. This method aims to use recent market data to estimate how much a home would sell for. This approach is frequently used by listing agents to set home prices and buyer’s agents when they run a comparative market analysis (CMA).

The sales comparison approach looks at properties, referred to as comparables or “comps,” that are as close as possible to the one being evaluated. For this approach to be accurate, real estate professionals need to gather information on homes with similar features, these include:

  • Property square footage

  • Property location

  • Lot size

  • Number of bathrooms and bedrooms

In many cases, this means pulling data on houses in the same neighborhood or even on the same street as the home being evaluated. In a scenario when a property is not near a comparable property that would not be fair for comparison, they must widen their distance to find similar properties.

Sales Comparison Approach vs. Cost Approach

The sales comparison approach is not the only method used to evaluate home prices, there are numerous ways to evaluate the real estate market to determine pricing factors. Real estate professionals can also rely on the cost approach or an income-based approach, especially if there are no decent comparables. A cost approach is another valuation method that calculates the price a buyer should pay for a property based on the amount it would cost to build a property of equal value. Real estate professionals analyse the value of the cost of land as well as construction costs involved, keeping depreciation in mind. For new properties nearby, this can be a highly effective valuation method. However, the SCA remains the most common method for determining home prices, especially when a property is listed.

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sales comparison approach vs cost approach

How Does The Sales Comparison Approach Work?

The sales comparison approach works by evaluating similar properties to determine the value of one home. It is crucial to pay attention to any details or features that could impact the value of a home. This involves taking time to compare multiple properties before deciding which ones to use, adjusting prices based on differences, and taking averages when determining value. This diligence is because buyers do not want to pay more for a property when a similar one is listed for less.

Comparative Market Analysis (CMA)

The sales comparison approach can be used at several points in a real estate transaction, but it is most notably used as the basis of a comparative market analysis (CMA). A CMA is performed by real estate agents when setting listing prices and submitting offers. These analyses rely on the sales comparison approach by pulling data from recently sold homes or current listings. Real estate agents will run a CMA to provide sellers or buyers with more information on market conditions before setting a list price or making an offer.

The purpose is to provide more context for market conditions by looking at other properties. Especially for neighborhoods where many renovations have taken place, it’s helpful to have an updated basis for comparison when evaluating a property’s value. You can expect to see a CMA whenever you buy or sell a property with the help of a real estate agent, though investors frequently rely on this research as well.

Property Characteristics Used In An SCA

The property characteristics used in an SCA are crucial to get the sale price right. Here are some of the most common factors considered in the sales comparison approach:

  • Location: Not only are comparable properties required to be in the same area, but in most cases, the approach works best with homes in the same neighborhood or on the same street. There are simply too many variables associated with location to get an accurate analysis using homes farther away.

  • Price Per Square Foot: It is rare for multiple properties to have the exact same square footage, which is why calculating price per square foot has become an industry norm when running an SCA. It is common practice to take the price per square footage of several comparable properties and calculate an average during the SCA.

  • Construction Year: The year a property was built can impact both its features and its overall condition. It is important to compare construction years during an SCA to get the most accurate valuation.

  • Room Features: Look at how many bedrooms and bathrooms are in each home nearby before deciding on which comparables to use. Also consider basements, garages, and other rooms that could impact the overall price of the home. The number of rooms should be as similar as possible to avoid price adjustments when running the numbers.

  • Lot Size: The size of the lot is another important consideration to make. Buyers want to know how much land they can get in a given area when buying a home. Pay close attention to the overall lot size when pulling comparable homes.

  • Sale History: Real estate markets move fast, making it crucial to only consider comparable properties that have sold recently. A property listed a year ago will not provide an accurate sales price for a property on the market today.

Sales Comparison Approach: Things To Consider

The sales comparison approach is used by various real estate professionals, but an official appraisal will still be necessary to secure a home loan. Consider the sales comparison approach to be a reference point for your offer. While these numbers will provide you with a fair estimate of the property’s value, a bank is not going to rely on your real estate agent when underwriting a loan. Keep this in mind as you shop for properties, and do not be surprised when an appraisal is still needed.

Appraisals are important for both buyers and sellers within any real estate transaction. Appraisals are a large determining factor when getting approved for a mortgage, mainly due to the property value having such a direct relationship with the loan amount. It’s also a great way for buyers to determine if a listing is overpriced to begin further negotiations. It’s also one of the easiest places to start for first-time sellers that might not understand how their home has increased or decreased in value.

For real estate investors, the sales comparison approach is one of several ways to evaluate the potential of a property or market area. This approach does have certain shortcomings, particularly in fast-moving markets. Note that the SCA does not take economic factors or population growth into account. While it can be accurate in terms of property value, it does not reveal the rent or resale potential of a property.

The Sales Comparison Approach In 3 Steps

While the sales comparison approach is used across the real estate industry to evaluate home prices, anyone can utilize this method when beginning their real estate search as either a buyer or seller. With the right practice, you can add this method to your investing toolkit. Try working through the following three step process of the sales comparison approach to gather accurate market price data:

  1. Identify Real Estate Comps

  2. Make Necessary Adjustments

  3. Weigh Real Estate Comparables

1. Identify Real Estate Comps

The best place to start when identifying comparable properties is to narrow down your location. Start by looking up the zip code your property is located in and analyze a few neighborhoods based on their proximity to community amenities. Look at the property’s neighborhood and on nearby streets. From there, you can begin to consider the number of rooms and average square footage of the homes.

The property characteristics will help you identify comps that will give you the most accurate reading. While you likely won’t find the exact same features, try to get as close as possible regarding property type and condition. The approach works best with a few comparable properties, aiming for three to five homes with similar features.

2. Make Necessary Adjustments

No matter how hard you try, adjustments will always be necessary when comparing different homes. The key here is to look closely at each comparable property and make deductions or additions as needed. By gathering a proper idea of renovation costs or potential construction fees that have increased a comp’s value, you can easily make adjustments to gather more accurate results.

For example, if you have two similar properties but one is selling with appliances included, you will need to adjust the price accordingly. A great way to handle this is by pricing out the value of the appliances and deducting it from the sales price of that home. Adjustments are a necessary component any time you use this approach. Remember that accuracy is key to settling on a final price, and you will need to evaluate the comparable properties accordingly.

3. Weigh Real Estate Comparables

A weighted comparison is the final step to the sales comparison approach. However, there is no magic formula to guide you through this process. Instead, this step requires discretion as you decide which properties make the most accurate comparisons. The goal here is to select properties deemed the most similar and to take any adjustments into account. While there isn’t a formula to make this step easier, the simplest comps tend to be the ones that make for the best comparable properties.

If you had to make several adjustments to the price of a house, that might not be the best property to use in your approach. This is because adjustments take away from the overall accuracy and may suggest that the homes are not, in fact, comparable. Select homes that have the closest condition and features to get the best results. Many professionals agree that the value of adjustments should not exceed 25 percent of the sale price.

sales comparison approach example

Better Understand the Sales Comparison Approach with FortuneBuilders

When beginning the process of buying or selling a home, it’s best to have as many tools at your disposal when determining a property’s value. Especially in the middle of a house hunt with countless property tours, it can be easy to get swept away with all of the numbers that might be thrown around during the real estate experience. This is why it’s so important to understand the sales comparison approach to get a great baseline for determining a property’s value and getting a fair price.

Real estate prices can seem intimidating, especially as markets continue to heat up. However, when you look closely, the process of evaluating home values is relatively straightforward. Methods such as the sales comparison approach are simply relying on previous home sales to set new prices. This approach is a great way to get accurate numbers before buying or selling a house by relying on comparable property sales. Consider how this method could help your real estate business, and give it a try today.

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