Mastering Real Estate Evaluation: The Comprehensive Guide to Appraisal by Comparison
The appraisal by comparison, also known as the sales comparison approach, is a pivotal method for determining the value of a property by comparing it with similar properties recently sold in the same area. This approach is widely embraced due to its grounded methodology in real-world market transactions.
What is Appraisal by Comparison?
Appraisal by comparison involves assessing the value of a property based on the sale prices of similar properties. This technique, central to real estate market analysis, helps establish a property’s worth in a competitive market.
Steps to Conduct an Appraisal by Comparison
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Identify Comparable Properties (Comps): The first step is to find recently sold properties in the vicinity that share similar characteristics such as size, age, condition, and location.
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Evaluate Differences: Understand and note the differences between the subject property and the comps. This might include square footage, number of bedrooms, amenities, and updates.
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Calculate Adjustments: Adjust the sales prices of the comparables to reflect the differences with the subject property. For example, if the comp has an extra bathroom, the price is adjusted to remove the value of that feature.
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Weighted Analysis: Assign relevance weightings to each adjusted comparable property to ensure the most similar comps hold more influence in the final valuation.
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Determine Value: Analyze the adjusted sales prices and come to a conclusive market value for the subject property.
Example of Appraisal by Comparison
Imagine you are valuing a house at 123 Maple Street with the following comps:
- Comp 1: 125 Oak Avenue, sold for $400,000. (Larger kitchen but lacks an extra bathroom)
- Comp 2: 130 Pine Road, sold for $380,000. (Has a larger garage but fewer updates)
After adjustments to reflect the similarities and differences, you arrive at an adjusted price range and ultimately determine the value of the subject property to be around $390,000.
Advantages of the Sales Comparison Approach
- Market Reflection: Directly reflects current market conditions and trends.
- Credibility: Relies on actual sales data, adding credibility to the valuation process.
- Simplicity: Intuitive for market participants to understand and trust.
Challenges of Appraisal by Comparison
- Market Dynamics: Rapidly changing markets can result in outdated prices.
- Data Availability: Requires access to up-to-date and comprehensive sales data.
- Unique Properties: Properties with unique features may not find comparable sales easily.
Frequently Asked Questions
What makes a property a good comparable?
A property is a good comparable if it is in the same vicinity, shares similar structural and aesthetic characteristics, and has been sold recently in an arm’s length transaction.
How often should appraisal by comparison be updated?
Appraisal assessments should be updated frequently, especially in volatile markets, to ensure accuracy.
What is an adjustment in an appraisal by comparison?
Adjustments are changes made to the sales prices of comparable properties to account for the differences between them and the subject property.
Can appraisal by comparison be used for all property types?
While widely used for residential properties, the methodology can also assess commercial or industrial properties with appropriate adjustments.
Related Terms: Comparable Property (Comps), Market Value, Appraisal Methods, Adjustments in Property Comparison.
