THE SALES COMPARISON APPROACH

THE SALES COMPARISON APPROACH

This approach, formerly known as the market data comparison approach, is most generally adaptable for use by
real estate brokers and salespersons. It lends itself well to the appraisal of land, residences and other types of
improvements which exhibit a high degree of similarity, and for which a ready market exists. The principle of
substitution is the basis of this approach. The buyer should not pay more for a property than the cost of
acquiring a comparable substitute property. An analysis of market data is necessary in all three approaches to
value.

The mechanics of the sales comparison approach involve the use of sales and market data of all kinds in order to
compare closely the property being appraised with other similar properties which have recently been sold or are
offered for sale as to time of the sales, location of the sales and physical characteristics of the improvements.
The sources used for determining value include actual sales prices, listings, offers, rents and leases, as well as
an analysis of economic factors affecting marketability.

Sources of Data

Sales or market data are obtained from many sources including:

Appraiser’s own files. Information gathered on previous assignments might provide information for the present
appraisal.

Public records. The county assessor’s office keeps a record of all sales transactions recorded within the
county. The date of recording of any deed may be obtained from the recorder’s office. The exact legal
description as well as legal seller and buyer can be obtained from an inspection of the deed (or facsimile). The
documentary transfer tax applies on all transfers of real property located in the county. Notice of payment is
entered on the face of the deed or on a separate paper filed with the deed. Tax is computed at the rate of 55
cents for each $500 of consideration or fraction thereof. If a portion of the total price paid for the property is
exempt because a lien or encumbrance remains on the property, this fact must be stated on the deed or on a
separate paper filed with the deed.

Multiple listing offices, fellow appraisers or brokers. Information on listings, offerings, and sales may
frequently be obtained from real estate multiple listing facilities, real estate offices or by appraisers familiar
with the area.

Legal property owner, sellers or buyers. When viewing comparable sales and other pertinent data in an area,
additional information is solicited by interviewing property owners living in the neighborhood. The appraiser
should try to confirm the sales price and circumstances of the sale with buyer, seller and/or broker. If informed
of the appraiser’s purpose, parties will usually verify and explain the sale.

Classified ads and listings. Ads are a source of information on properties currently being offered for sale. If
possible, the appraiser’s name should be on the mailing list of banks, savings and loan, and other institutions
selling properties.

Listing prices may often indicate the probable top market value of a specific property while bid prices may
normally indicate the lowest probable value. Both are subject to variation based on motivation, but a reasonable
number of properties falling into this category will provide a bracket within which a current fair value may be
found. Offers are likely to approach market value more closely than are listings. However, an offer to purchase
is not usually a matter of common knowledge.

The Procedure

The procedure used in the sales comparison approach method is to systematically assemble data concerning
comparable properties. Appraisers consider the principle of substitution, seeking comparables that are as
similar to the subject as possible in regard to: neighborhood; location; site; improvement size; bedrooms and
baths; age; architectural style; financing terms and general price range. The greater the number of good
comparable data used, the better the result, provided a proper analysis is made. The approach is based on the
assumption that property is worth what it will sell for in the absence of undue stress, and if reasonable time is
given to find a buyer. For this reason, the appraiser should look behind sales and transfers to ascertain what
influences may have affected sales prices, particularly if only a few comparisons are available.

Proper comparisons between like properties are ideally based on an actual inspection. Inspections should
determine: the condition of improvements at time of sale, not as of date of inspection; room arrangement and
room count so that the utility of the data may be compared to the subject property; yard improvements and their
influence upon the sales price; the sales price (from buyer, seller or broker), to determine if the sale was an
arm’s length or open market transaction; size and topography of the lot. For nearly comparable properties,
negative (downward) adjustments should be made to the comparable for the subject’s poor repair, poor design,
existing nuisances, etc. Conversely, positive adjustments should be made to the comparables for the subject’s
superior design, view, special features, better condition, higher quality of materials, landscaping, and the like.

Unless the sales being compared are of recent date, consideration must also be given to adjusting values in
keeping with the economic trend of the district and the worth of the dollar. Financing terms receive value
adjustment considerations, e.g., for favorable existing assumable financing, or perhaps seller-assisted financing.

Units and elements of comparison. The common units of comparison used by appraisers in the sales
comparison approach are property components that can readily be used for comparison purposes: site size;
square footage; number of rooms; and number of units. Elements of comparison are characteristics in either the
property or the transaction itself that cause prices to vary. These principal elements of comparison are financing
terms, time (the market conditions at the time of the sale), sale conditions (no pressures/arm’s length), location,
physical characteristics, and income (if any) from the property.

Using the appropriate units and elements of comparison for the subject and each comparable, the appraiser
assigns an estimated adjusted amount (dollar or percentage) for each difference found in the items of
comparison (number of bathrooms, view, square footage, financing, forced sale). An adjusted price is thus
established for each comparable property that should realistically reflect what the subject would sell for in the
current market. The less comparable properties are then eliminated from consideration and greatest weight is
given to the comparable sales most similar to the property being appraised. Through this judgment or
reconciliation process, the appraiser arrives at the final opinion of value for the subject property.

Advantages. Some advantages of using the sales comparison approach are:

l. It is the most easily understood method of valuation and in most common practice among real estate
brokers and salespersons.

2. Many times it is the most efficient method of determining the market value of a property due to the
availability of transactions involving willing buyers and sellers.

3. It is particularly applicable for appraisal purposes involving the sale of single family residences and loan
arrangements therewith. These make up the great bulk of real estate transactions.

Disadvantages. Some disadvantages of the comparison approach method are:

1. Locating enough “nearly alike” properties which have recently sold or been listed.

2. Adjusting amenities to make them comparable to the subject property. The greater the amount of
adjustment or number of adjustments, the less reliable the comparable becomes.

3. Dated sales become less reliable in a changing market.

4. Occasional difficulty confirming transaction details.

5. Limitations in rapidly changing economic conditions and periods of high inflation and interest rates, when
property appreciation rates may cause value opinions that are lower than the sale prices. (This is because
appraisers are required to rely heavily on confirmed closed sales).

Application of the Procedure - Residential Sales

Like properties are always compared. The more current the data the better. The suggested order for making unit
and element comparisons is in this sequence:

1. finance terms

2. time (market conditions)

3. sale conditions

4. location

5. physical characteristics

6. other (e.g., special considerations for income property)

The steps.

1. Research the market for bona fide “like-kind” recent market data. Select data. Verify.

2. Select the appropriate units and elements of comparison. Adjust the sales price of each comparable (or
eliminate it from consideration). The adjustment is always made to the comparable, not to the subject
property.

3. Each comparable will have its own value indication. Eliminate the less comparable properties. Set out
comparison results in chart or grid form. Using judgment and experience, reconcile or correlate the adjusted
sales prices of the comparables and, by giving greatest weight to the sale that is most compatible to the
subject property, assign a value opinion to the subject. Do not average the adjusted sales prices of the
comparables. Reconciliation is a judgment process. It is not mechanical.

Example. Assume that the house to be appraised is a 2,400 square foot, 5-year old, single-family tract home
located two blocks from the beach, with a fair view, stucco, 10 rooms, 4 bedrooms, 3 baths, 3 car garage. It is in
good condition.

Prices have been increasing at 1% a month. The appraiser has selected from the neighborhood comparables
which are equal in most of their financing and physical characteristics, except as shown on the rating chart. The
value or sales price for the subject property is determined as shown on the chart below.