In today’s third and final installment on the discussion of approaches to value when determining if a property is “the right price” when looking at a purchase, we are going to discuss the most common approach used for general real estate. That would be the Market or Sales Comparison Approach.
In a nut shell, this approach to value is used to estimate the value of a subject property by analyzing similar sales prices of similar (or like kind) properties in the area of your subject property.
An example would be: 3 bedroom, 2 bath house at 1200 square feet. An appraiser would look at sales comparisons in the area for homes that have RECENTLY sold, or are for sale, with the same characteristics to your subject property. An Appraiser will most likely use a Uniform Residential Appraisal Report to make these determinations. We will be posting our own version for you to use on our downloads section of the website in the near future.
Back to our comparison…
Here is a very simplified version of a comparison approach:
1200 Square Feet.
For Sale for 175,000
Comparison Property #1
1175 Square Feet
Sold for $175,000 last week
1200 Square Feet
Sold for $168,000 1 month ago
With this knowledge you might want to adjust your asking price on the subject property to $171,500 which is an average of the two comparables.
Keep in mind that there are a ton of other things that go into your bid submission. Does it need a new roof? How is the foundation? Lot size? All of these things can change the price you might want to offer for the property. Make sure you are thorough in your analysis before you commit to a offer price.
The biggest lesson I ever learned was that you make your profit when you buy, you get your profit when you sell.