The sales comparison approach to appraisals involves looking at nearby, similar homes and using their valuations to come up with a market value for a home that is currently for sale. Referred to as “comps,” the homes that recently sold in the area are comparable in features, land area, quality of construction, number of bedrooms and bathrooms, etc.
This approach to home valuation, also known as SCA, can be used to set one’s list price, in which a real estate agent analyzes the market and determines a smart price.
The sales comparison approach can also be used by professional appraisers who are working for lenders. Their analysis is not focused on how much someone might possibly pay but rather how safe an investment this home is for the lender who will be offering the loan.
Definition and Example of the Sales Comparison Approach to Appraisals
The sales comparison approach involves locating recently sold homes or current listings that are close matches for the home being assessed. They should be similar in terms of the number of rooms, age, amenities, and location in order to provide an accurate comparison, or “comp,” for the house in question. Recently sold homes hold more weight, since there was a definite buyer willing to pay that price.
Real estate agents and appraisers use these comps as the basis from which they determine the listing price and the valuation for the lender.
If you are selling your home, your agent will first talk to you about whether you are open to setting a price that is somewhat higher then patiently wait for an offer. You may also wish to be conservative in your pricing, or even low, to sell quickly or receive multiple offers. The agent will help you set a price based on what similar houses are selling for in the area, as well as your own priorities.
On the other hand, a residential real estate appraiser is specifically trained to assess a property objectively, without consideration of the list price or price under contract. Instead, an appraiser uses sales comps to get as close as possible to the true value of the home. They want multiple points of evidence to indicate what the lender could potentially sell the home for if they were forced to foreclose on the mortgage loan if it went into default.
An appraiser’s understanding of a home’s value helps them fill out standardized forms that are standard to the appraisal industry and required by most lenders.
- Alternative name: Comparative Market Analysis
- Acronym: SCA
How Does the Sales Comparison Approach to Appraisals Work?
For a real estate agent, a sales comparison approach would begin by looking at a list of recent sales in the area that are similar in the number of bedrooms and bathrooms, size of the lot, age of home, desirable features, and location in the approximate neighborhood. They would then average three to four of the most similar properties’ sales prices.
If the home’s past-sales comps yielded a potential list price of $200,000 but every similar home currently listed is at least $230,000, the real estate agent might advocate for a slightly higher list price, say $210,000, to take advantage of being the “bargain” in the neighborhood.
Real estate agents, like appraisers, commit to using responsible valuation practices to help clients understand the reality of a home’s value. They may also recognize if an in-demand type of home might potentially warrant a higher asking price.
For an independent appraiser working for a lender, the motivation is different even though much of the data they use is similar. If a buyer is under contract for a property that will create a mortgage loan of $200,000, the lender wants enough evidence that should the buyer default on the loan, the lender could sell the home for that price or higher given the current market conditions.
If a buyer agreed to that price because of a bidding war, and the appraiser only finds comparable properties that sold for $180,000 in the area, that poses a challenge for the lender. The seller may agree to lower the sales price by $10,000, but may ask the buyer to pay $10,000 to cover the difference.
Agent Sales Comparison Approach vs. Appraiser Sales Comparison Approach
|Agent’s Sales Comparison Approach||Appraiser’s Sales Comparison Approach|
|Agent wants to understand the micro-environment in which they are listing a house, i.e., both the neighborhood and the moment in time.||Appraiser wants multiple forms of evidence to demonstrate the value of the home to the lender.|
|Agent wants a price that will fetch a solid offer in the market, even if it is marginally high in that area. Their aim is a completed sale.||Appraiser is careful to adjust for potentially inflated valuation, since the lender is investing for the long term and needs a reliable valuation for that time horizon.|
What a Sales Comparison Approach Means for the Homebuyer and Home Seller
The sales comparison approach for the home seller is a way to land on a price that is based on evidence but that also takes a seller’s desires into account. For instance, if the comparative market analysis says similar homes have sold for $180,000, but the seller thinks the home’s new back patio wasn’t fully accounted for in the comps, they might be interested in listing at $185,000, or even $190,000 if they are willing to wait a little longer for an offer.
For the homebuyer, the sales comparison approach is a bit of a “reality check” if the house was overpriced to begin with or if a competitive bidding war resulted in the sales price. While it can be disappointing when the sales comparison approach yields a value lower than the listing price (this is sometimes referred to by the phrase, "The house didn’t appraise"), it can also reopen negotiations in some cases. The buyer may realize they overcommitted in some way, or that the appraiser uncovered facts about the house that made it less of a value than expected.
- The sales comparison approach to appraisals is a way of valuing a property by looking at other listings and recent sales of homes that are as similar as possible to the home in question.
- Using sales “comps” or similar houses, both real estate agents and appraisers can understand what buyers in this area are looking for and what they will pay for it.
- Appraisers and real estate agents use the same data and may even evaluate the same comparison homes. However, appraisers want a true market value to give to the lender, while the real estate agents are using the information to price as competitively as possible for the local area, occasionally inflating the value of the home.