Property Valuation – The Sales Comparison Approach
One very important thing that to remember when trying to secure a mortgage is the overall market value of the property. However, just because a real estate broker lists a property for a certain value doesn’t necessarily mean a lender will agree and extend a corresponding loan. In the financial world, there are certain appraisal systems in place that help lenders make the most objective decisions before any loan closes. Let’s explore the sales comparison approach.
Market-Based Approaches to Value
When entering the real estate market, many first-time homebuyers assume that a property will sell for somewhere close to the listing price after some back and forth negotiating and a reasonable time on the market. Since most cannot buy a property entirely with cash on hand, buyers take out a mortgage.
One thing many buyers overlook is that lending institutions will only assume as much risk as the market determines. To find out what the market is reflecting, lenders will order an appraisal.
A common way to determine a residential market is to observe the sales data. What is selling and for how much? What is the size of the market? Do enough qualified sales exist to confidently support a value?
Since markets fluctuate on a daily basis, this is done for every mortgage. And those appraisals will only be good for that single date of appraisal – one day.
The Sales Comparison Approach
A common approach to supporting residential values is what’s known as the Sales Comparison Approach. This is a method used to determine value of a subject property against similar properties. It allows for a more detailed approach within the overall comparative market analysis.
Each characteristic of a similarly-comparable property is assigned a value and compared to the subject property. Positive and negative monetary or percentage adjustments are made to the comparable sales where necessary. The sum of these differences set against the original sale price is the adjusted value.
Several adjusted sales then give a subject property value that can then be supported in an objective way. Since the objective is current market value, recent sales should be considered.
If a lender cannot support an agreed upon value between a buyer and seller, they will not extend a loan or they will only agree to a loan at the appraised value.