One of the most widely used methods real estate professionals use to determine the value of a home is the sales comparison approach. The sales comparison approach, also known as the market data approach, estimates a property’s value by comparing it to similar properties that have recently sold in the same area.
Think of it like this: if you want to know what your car is worth, you’d look at what similar cars of the same make and model have recently sold for. This technique helps both buyers and sellers understand a property’s true market worth. This Redfin real estate guide goes deeper into the sales comparison approach and how you can use it to your advantage as a seller.
What is a sales comparison approach?
The sales comparison approach is a real estate appraisal method that determines a home’s value by comparing it to similar properties’ sales data. Real estate professionals analyze listing and sales prices, market conditions, and the home itself to find its fair market value. A comparative market analysis, best performed by an agent or appraiser, helps understand price trends.
An overview of how the sales comparison approach to valuing homes works
- The sales comparison approach is a key component of a comparative market analysis used by real estate agents.
- Agents identify recently sold properties that share as many similar attributes as possible with the subject property.
- Real estate agents possess expertise in recognizing desired buyer attributes and their value contribution to a home.
- Agents are adept at assessing a home’s condition and comparing it to recently sold homes.
Find real estate comparables
When using the sales comparison approach, an agent considers recent sales of homes with similar characteristics to the home being priced. Key factors include:
- Location and neighborhood: Homes in the same neighborhood or subdivision to account for local market factors and school districts.
- Home style and features: Looking for homes with similar styles, number of bedrooms and bathrooms, and other features.
- Construction quality: Comparing homes with similar construction quality for an accurate comparison.
- Age and condition: Finding homes of similar age and condition.
- Square footage and lot size: Matching homes with similar house and lot sizes.
- Recently sold area listings: Using the most recent sales data possible for accuracy.
Make adjustments to comparables
No matter how many comps you have to choose from, you’ll never find a house that’s identical to yours. As a result, even when using the most comparable home, you’ll still probably have to make some adjustments to the prices on the comps you find.
Here are some factors you may use to make adjustments to comparable home values:
- Market conditions: The real estate market can change quickly. Even if a comparable home just sold a month ago, the market could have changed since then, meaning you’ll have to make adjustments to the comparables to account for that.
- Qualities and features: No two homes are identical. Even in two homes with similar characteristics, one could be worth more. Maybe one home has recently had its kitchen renovated or has a more on-trend style.
- Location characteristics: Even two homes in the same neighborhood could have different values based on their location. Is one on a busy street while the other is on a quiet cul-de-sac? Is one closer to certain amenities?
Analyze weight adjustments
Once your real estate agent has completed the comparative market analysis, you’ll use a weighted average of the comparable homes to determine the fair market value of your home. When using a weighted approach, you’ll give the most weight to the homes that are most similar to your home, while homes that need more adjustments will have less weight.
Sales comparison approach vs. cost approach
Sales comparison approach:
- Ideal for pricing homes in areas with abundant recent sales data (suburbs, established city neighborhoods).
- Helps determine market value.
- Less useful for unique properties, remote areas, or investment homes due to limited data.
Cost approach:
- An alternative when the sales comparison approach is less useful.
- Estimates a home’s value based on rebuilding costs (land, structures, improvements, depreciation).
- Has two types:
- Reproduction cost: creating an exact duplicate with original materials.
- Replacement cost: assessing how much a similar house would cost using modern materials and techniques
The bottom line
The sales comparison approach is one of the most popular methods for pricing homes. Whether you’re getting ready to buy or sell a home – or both – it’s important to understand how this strategy plays into the price you’ll pay for a home or how much you can get for your current home.
If you’re getting ready to sell your home and need help setting an asking price, get connected with a Redfin Real Estate Agent and see which selling approach they offer.
Frequently asked questions:
When should you use the sales comparison approach?
The sales comparison approach is best when you live in a large neighborhood or subdivision where there are plenty of comparable homes. If you live in a rural area or have a unique home, the sales comparison approach may not work.
What is a “comparable” property?
A comparable property is a recently sold property that is similar in characteristics to the property being appraised, located in the same or a very similar market.
What is one weakness of the sales comparison approach?
The biggest weakness of the sales comparison approach is that no two homes are identical. No matter how many similar homes you find, there will still be differences that can make pricing your home a challenge.
Is the sales comparison approach always accurate?
While highly reliable, its accuracy depends on the availability of truly comparable sales and the appraiser’s expertise in making appropriate adjustments.
Can I use the sales comparison approach myself to estimate a home’s value?
While you can certainly research recent sales data, a professional appraiser has the expertise to select the most relevant comparables and make precise, defensible adjustments.
The post Sales Comparison Approach: A Guide for Home Sellers appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.
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