A Look at the Sales Comparison Approach

The Sales Comparison Approach (SCA) is a method for measuring the value of a piece of real estate on the market. This approach is used by real estate agents or homeowners seeking to learn the appropriate list price for their properties. It relies on using an index of comparable properties in the area that have recently sold. By comparing a current property to these, the listing agent can determine where the current property is likely to fall along the price range.

Comparison Matrix

The SCA relies on a comparison matrix to approximate value. This matrix lists major factors affecting a property's value. Once a matrix has been established, comparable homes will be graded in each category. How the home scores in comparison will ultimately generate its listing price. For example, factors listed on the matrix include these:

  • Lot size
  • Square footage
  • Number of bedrooms and bathrooms
  • Proximity to important amenities
  • School district
  • Floor plan
  • Condition of kitchens and bathrooms
  • Time from listing to sale (how long it took a comparable property to sell and if it sold for list price or below)

These are just a few of the points that may be used to determine a home's value. The listing agent may also travel to local properties currently on the market during open houses to check out the general condition of the property. Homes that have been well-staged, meaning they have been redesigned to appeal to current buyers, will be valued higher than homes that have less market appeal.

The area where the property is listed will also factor in greatly when it comes to "weighting" the matrix. For example, in Chicago, proximity to the public transit system will be a high value factor; the presence of parking structures may also be important. In Los Angeles, proximity to the beach will matter far more than proximity to public transit. Priority items will carry a greater weight when determining the home's price.

Cost Approach

Another method that may be used to value a property is called the "cost approach." With this method, the cost of the home is added to the money spent on improvements and additions. The total cost of the property is then adjusted for inflation and changes in the market. The home is listed at a price relative to this cost plus the profit the owner would like to receive. Ultimately, the sale of other homes in the area and market trends will have less impact on the listing price in this approach.

Income Approach

The income approach to valuing a property is unique in that it considers not what a buyer would pay but what a renter would pay to use the space. By determining the income a property could earn in a year, a reasonable mortgage price is estimated. This is then used to extrapolate the cost of the property. This method essentially determines how much the property is worth as an investment. It can be useful when buying a home as well as selling. Using the income approach, a potential buyer can determine whether it makes more sense to purchase a home or to rent a home and invest the additional savings in alternative resources. 

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