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. 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.
Alternative name: Comparative Market AnalysisAcronym: 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. 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
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.
