Sales Comparison In the sales comparison approach, the appraiser determines value by comparing the property being appraised (the subject property) against properties that have recently sold in the area and are similar in size, age, construction, and amenities. These properties are also known as comparable properties (or comps).
The goal of the sales comparison approach is to determine market value. Again, market value is the most probable price that a property should bring in a sale under normal market conditions. Essentially, the sales comparison approach establishes market value under the premise that a buyer will not pay more for one property than the cost to purchase another similar property ( a comparable property) in the same area. The key to successfully determining value under the sales comparison approach is for the appraiser to identify three to five properties that have sold recently, (generally no more than six months since the sale of the property) are similar to the subject property, and can be found within a one mile radius of the subject property. It is rare that an appraiser will find exact replicas of the subject property. In order to accomodate for any differences between properties in size, age, materials, etc., the appraiser notes any dissimilar features and makes a price adjustment for each by using the following formula: Sales Price of Comp + or - Adjustments = Adjusted Value
These adjustments will increase or decrease the value of the subject property. For example, if a comparable property has an area of 1300 sq. feet and the subject property has an area of 1200 sq. feet, the adjusted value would be decreased accordingly. Conversely, if the subject property has a two car garage and the comparable property has a one car carport, the adjusted value would be increased. Most adjustments include those made for physical features (sq. footage, parking, or a pool), locational influences (proximity to a freeway or railroad tracks, or a greenbelt in the backyard), conditions of the sale (under foreclosure, for example, or probate court ), and length of time from the date of the comparable sale (the more recent, the more accurate). As a rule, comparable properties are always adjusted (up or down) to make it as similar to the subject property as possible.
The accuracy of the sales approach is dependent upon the appraiser's use of reliable adjustment values. These values will vary from region to region and amenity to amenity. Large adjustments suggest that the properties used are not similar enough to be considered comparable. While the requirements will differ from lender to lender and loan to loan, underwriters generally will not accept appraisals with large adjustments.
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