Steps in Sales Comparison Approach

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The Steps in the Sales Comparison Approach are:

 

1.  Find recent sales of similar houses in the subject's market area

2.  Verify data regarding comparables

3.  Compare each sale with the subject to determine the differences

4.  Make adjustments to determine the dollar differences

5.  Derive an indicated value after making adjustments

 

What to avoid in using the sales comparison approach to value:

 

Sales that closed over a year ago
Excessive adjustments
Transactions that are not arm's length
Distorted or abnormal sales

 

What to strive for when applying the sales comparison approach to value

 

Sales in the subdivision
Houses similar in style
Houses with few adjustments

 

Sales should be as similar to the subject property as possible.  It would be ideal if every appraisal included an identical house next door that sold recently but they rarely do.  If possible use sales in the subject's subdivision that are the same style as the subject.  It is difficult to estimate value differences are numerous or when the subject is a different style.  Sales without basements when the subject has one or vice versa are difficult to reconcile.  Avoid them if all possible.

 

FNMA and FHA both set limits on the amount of adjustments that are permitted.  The limits may be ignored if there are good reasons.  The appraiser, of course, has to explain the reasoning.

 

The gross amount of the adjustments may not exceed 25% of the appraised value.  The gross amount of the adjustments is the sum total of the adjustments without regard to the sign.

 

Example:  An appraiser makes three adjustments.  The adjustments are +4,000, -2,000, and +3,000.  The gross amount of the adjustments is $9,000.

 

The net amount of the adjustments may not exceed 15% of the appraised value.  The net amount of the adjustments is the sum total of the adjustments including the signs.  Example:  An appraiser makes three adjustments.  The adjustments are +4,000, -2,000, and +3,000.  The net amount of the adjustments is $5,000.

 

No line item (single adjustment) may be more that 10% of the appraised value.

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