We use one of three approaches to establish an assessed value (also known as "Current Value Assessment") for properties: The approach we used depends on your property type and how frequently similar types of
properties are bought and sold on the open market. This is the most commonly known valuation approach. We analyze recent sales of comparable properties to determine the value of your property. In considering any sales evidence, we ensure that the property sold has a similar or identical use as the property to be valued. The direct comparison approach is typically used for the following types of properties: An income-producing property’s ability to earn revenue is directly tied to its current value. When using the income approach, we carry out a detailed analysis of your property's income and expenses and then compare it to similar properties to determine how much income a property could be expected to generate.Direct comparison approach
Income approach
We then analyze the relationships between incomes and sale prices to calculate the capitalization rate (cap rate) for the property by dividing the income by the sale price.
The income approach is typically used for the following types of properties:
- hospitality properties
- industrial malls
- multi-residential properties
- office buildings
- shopping centres
Cost approach
When a property type is unique and rarely sold on the market, we can’t rely on either the comparison or income approaches to determine its current value. In these cases, we estimate your property’s current value with a three-step process:
- We calculate the current cost of replacing buildings, structures or other taxable components on the land.
- We apply a deduction for depreciation due to age, functional or economic conditions that could impact the value of the property.
- We determine the value of the land and add it to the calculations to produce an overall valuation.
The cost approach is typically used for the following types of properties:
- general-purpose industrial properties
- grain elevators
- gravel pits
- large and special purpose properties
- warehousing
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What Is a Sales Comparison Approach (SCA)?
The term sales comparison approach refers to a real estate appraisal method that compares one property to comparables or other recently sold properties in the area with similar characteristics. Real estate agents and appraisers may use the sales comparison approach when evaluating properties to sell. This method accounts for the effect that individual features have on the overall property value. In other words, the total value of a property is the sum of the values of all of its features.
Key Takeaways
- A sales comparison approach is a valuation method used in the real estate industry that compares one property to similar ones recently sold in the area.
- The SCA is used as the backbone for the comparative market analysis which considers prices of recently sold properties that are similar and within the same geographic area.
- Some of the common characteristics that make up the SCA include location, recently sold listings, features, age and condition, and average price per square foot.
Understanding the Sales Comparison Approach (SCA)
The sales comparison approach helps real estate professionals and buyers determine if the price of a home is fair and comparable to the current market. Professionals use similar properties that were recently sold within a short distance of the subject property—usually in the same neighborhood—that share similar characteristics as a comparison.
The SCA is used as the backbone for the comparative market analysis (CMA). This is an analysis of the prices of recently sold properties that are similar and within the same geographic area. In other words, the approach often entails looking at local properties to see what they have in common. From there, appraisers can determine a value for a property based on its features.
Although there are many steps that a real estate appraiser can take in evaluating a property's value, the following are some of the most common characteristics used in an SCA:
- Location and neighborhood: Geography may directly impact the value of real estate. It's important to compare homes in the same neighborhood rather than those found in another part of town. Factors considered include proximity to schools, nearby bodies of water, parks, and how close they are to highways and overpasses, as well as pollution levels.
- Recently sold listings: These properties can provide a starting point for the value of homes in the area. Although features and the market factor into the sale price, reviewing property values and recent sales are good baseline numbers.
- Features: A home should be compared with properties with the same number of bedrooms, garages, and bathrooms. The comparison should include homes of about the same square footage on parcels of land that are about the same size.
- Age and condition: It's important to compare homes of similar age as well as soundness. A home's condition significantly influences an appraisal. For example, there may be two similar homes in the same neighborhood. But if one is in need of repair, it can seriously affect its value.
- Average price per square foot: Once similar homes are compiled, take each of their sale prices and divide them by their square footage. The result yields the cost per square foot based on the homes in the sales comparison analysis. Take the average cost per square foot for all comparable homes and multiply that number by the square footage of the home being appraised.
Special Considerations
There are many other features that may increase the value of a home. However, a sales comparison analysis is not an exact science since the value of a home is somewhat subjective, meaning one family may find more value in it than another, thereby increasing their offer. As stated earlier, outside factors such as the overall state of the economy, the job market, and the state of the real estate market all play heavily into how much a home is sold for or how long it sits on the market.
Since the sales comparison approach isn't an official appraisal, owners may need to hire an appraiser for unique properties and those that are hard to value.
But remember, the sales comparison approach used in real estate valuation is not an official appraisal. In cases where a unique property is to be valued or one whose value is difficult to determine, a formal appraisal may be required. This means hiring an appraiser—an independent and unbiased professional who determines the property's fair value by using certain facts, figures, and other considerations.