Sales Comparison Approach: A Guide For Home Sellers

One of the most challenging parts of selling a home is pricing it just right. Price it too low, and you could walk away with less money than your home is really worth. But price it too high, and you risk driving away potential buyers.

One of the most popular ways of pricing a home is using the sales comparison approach. This method uses other homes in the area to correctly price your home for the current market. We’ll cover what the sales comparison approach is, how it works and how it differs from other methods.

What Is A Sales Comparison Approach?

The sales comparison approach is a popular real estate appraisal method that compares the sales price and other data from similar or comparable properties to another home to determine its value. A real estate agent or appraiser analyzes the listing and sales prices of other homes in the area and reviews current market conditions and the home itself to determine its value.

The goal of the sales comparison approach is to find the home’s fair market value, meaning what it can reasonably sell for given the current real estate market. The comparative market analysis used in this method is best done by a real estate agent or appraiser, as they’re in the thick of the market and know which way prices are trending.

An Overview Of How The Sales Comparison Approach To Valuing Homes Works

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 with as many common attributes as possible.

Real estate agents quickly become experts at recognizing the various attributes buyers in their market are looking for and how much these features add to the value of a home. They are also excellent at sizing up your home’s condition and comparing it to the conditions of homes that have recently sold.

Find Real Estate Comparables

When using the sales comparison approach, an agent will look for recent sales of homes that share some or all of the following characteristics with the home you’re trying to price:

• Location and neighborhood: The sales comparison approach is best done using homes within the same neighborhood or subdivision since it accounts for different school districts and other factors that would affect the local market. You can also use the neighborhood trend report to learn more about the market in your area.
• Home style and features: When you’re using the sales comparison approach, try to find homes that are as similar to yours as possible, including their style, the number of bedrooms and bathrooms, etc.
• Construction quality: Not all homes are constructed the same. It’s best to find homes that have a similar construction quality, so you know you’re looking at two truly comparable homes.
• Age and condition: Look for homes that are roughly the same age and condition as yours. If a home is significantly newer or older than another home, the sales comparison approach won’t be as accurate.
• Square footage and lot size: Home size is important when using the sales comparison approach. Try to find a home that’s the same general house size as yours and has a lot that’s roughly the same size and quality.
• 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.

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: As we said, 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 In Real Estate Example

Suppose you’re planning to sell the suburban home that you built 10 years ago. It has four bedrooms and three bathrooms and is about 2,500 square feet. When pricing your home, your real estate agent would seek out other 2,500-square-foot homes in your neighborhood with four bedrooms and three bathrooms that are roughly 10 years old.

During the comparative market analysis, your agent is likely to find some differences. For example, maybe one similar home has a plain yard while yours has a recently built outdoor living space. Or maybe the other home has a recently renovated kitchen, while yours is still original to the home.

Using these factors, your agent would make adjustments to the comparables, either increasing or decreasing the price based on factors that are better or worse than your home. In the end, the weighted average of all the comparable homes will give your agent a good idea of where you should price your home.

Of course, there’s no guarantee that you’ll get the same sale price for your home as another comparable, no matter how similar they are. The market is constantly changing, and buyers may be willing to pay more or less for your home based on other homes that are on the market at the same time, changes in interest rates and other factors.

Sales Comparison Approach Vs. Cost Approach

The sales comparison approach may be the most common method of pricing a home, especially if you live in a suburban area or an established neighborhood in a large metropolitan area where there’s plenty of recent sales data to find the market value of your home.

However, if your home is unique, located in a sparsely populated area or is being purchased for an investment, there may be little to no sales data available and the sales comparison approach is less useful. In those cases, you could use the cost approach instead.

The cost approach determines the value of a home by asking how much it would cost to build the home again. The cost approach looks at the cost of the land and the buildings, including any improvements to the building, as well as depreciation.

There are two subcategories of the cost approach. One is the reproduction cost, which would involve the cost of building a true duplicate of the original using original materials. The other is the replacement cost, or how much a similar house would cost using modern building materials and techniques.

Sales Comparison Approach FAQs

Before using the sales comparison approach to sell your home, be sure to read the answers to these frequently asked questions on the topic.

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 the basic principle of the sales comparison approach?

The basic principle of the sales comparison approach is to price your home based on other comparable homes that have recently sold. Assuming little time has passed since the comparable homes sold, we can assume the market will treat them similarly.

What are the steps of the sales comparison approach?

The sales comparison approach involves doing a competitive market analysis of comparable homes, making adjustments to the prices of the comps based on differences, and taking the weighted average of all comps to find the fair market value of your home.

What are the three valuation approaches in real estate?

The two valuable approaches we’ve already talked about are the sales comparison approach and the cost approach. But there’s also the income approach, which values the home based on its income potential.

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.

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 Rocket Homes℠ Verified Partner Agent and see which selling approach they offer.