What Is The Sales Comparison Approach?
Erica Gellerman3-Minute Read
January 26, 2021
Curious to know how much your home is worth? Or not sure how a real estate agent comes up with your estimated value? Most likely you’ll need to use the sales comparison approach to get a good estimate of what your home could be worth.
We cover the basics of the sales comparison approach as well as some of the limitations, so you’ll understand just how to use it for any of your future real estate transactions.
Sales Comparison Approach, Defined
The sales comparison approach (SCA) is a real estate valuation method that compares one property to nearby properties with similar characteristics to determine its overall value. This method takes into account the impact that individual home features have on total property value.
Real estate agents and appraisers will use this method to help determine the approximate value of a home. For example, if a real estate agent is selling a home, they will use the sales comparison approach to determine the appropriate list price for a home and set the seller’s expectations of what their home is worth. You might hear them refer to this as evaluating comparables or “comps.” The results of the sales comparison approach is not an appraisal.
This is not the only approach for estimating the value of a home. Two other popular approaches are the cost approach and income approach.
The cost approach looks at the cost of the land and the buildings, including any improvements to the building and depreciation. It’s a valuation approach that is generally used when there aren’t many comparables to use.
The income approach is used to value income-producing investment properties, where the buyer is interested in the rate of return the purchase is expected to get.
How Does The Sales Comparison Approach Work?
The sales comparison approach is part of a comparative market analysis used by real estate agents. An agent will work to find recently sold similar properties.
Sales Comparison Approach: Common Attributes
To get a good estimate of the value of a property, a comparable home should generally have these similar attributes:
- Location: Homes within the same general neighborhood or subdivision should be compared, taking special consideration of different school districts or features that would increase or decrease the value of a home.
- Age and condition: If a home is significantly newer or older than another home, the sales comparison approach won’t be as accurate. Looking for similar homes in the same age range is important.
- Number of bedrooms and bathrooms: Finding homes with similar number of bedrooms and bathrooms will yield the best results. It’s difficult to compare the price of a five-bedroom home with a three-bedroom home.
- Square footage: Home size is important to consider when comparing homes. With a sales comparison approach, try to find the same general home size.
- Lot size: When one home has a large lot or another has a lot that is unusable (for example, a steeply sloped yard), that can throw off the sales comparison. Finding homes with similarly sized lots that have similar characteristics is important.
- Recently sold area listings: Depending on how much activity is seen in the market, recently sold homes are usually more valuable than those sold too far in the past. Sales dates as recent as possible will help get the most accurate value.
Things To Consider About The Sales Comparison Approach
The Sales Comparison Approach is going to be 100% accurate — there is still subjectivity involved as no two homes are exactly the same. Even similarly built homes will have differences in their lot or other home features.
The Sales Comparison Approach also relies on recent home sales data. Without this data, the approach isn’t as effective. It also might be less effective in an extremely hot market where prices are skyrocketing. Using data that is a few months old might result in an estimated value that is lower than actual.
If you’re getting a loan from a bank, you’ll still need to get an official appraisal. A sales comparison analysis isn’t enough to secure a mortgage. An appraisal looks at recent comparables but it also takes into account the specific details of the home (usually done through an inspection).
The Bottom Line
A sales comparison approach to valuing a property is helpful for agents, sellers, buyers, and appraisers. But it’s not the only approach for valuing a home. Potential home sellers and buyers should research comparative market analysis to learn more about valuation methods. And be sure to consult the Rocket Homes® Property Report to get a property value estimate.
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