Direct Sales Comparison Approach The three approaches used to estimate market value of real estate are shown in the sample appraisals included in this book. Please review those appraisals as you read the sections outlining the following three approaches for estimating market value:  | 1 The Direct Sales Comparison Approach (also called the Market Data Approach) | | 2 The Cost Approach | | 3 The Income Approach |
The Direct Sales Comparison Approach is based on the assumption that by using recent, closed sales in the local market, the appraiser can estimate market value of the subject property. “Closed sales” refers to properties that have sold and the deal was done (closed) on a date very close to the “as of” date for your appraisal. For example, let’s say you were hired to appraise a condominium with an “as of” valuation date of two years ago for your report. You cannot choose condo sales comparables that sold two months ago because they won’t accurately reflect the real estate market conditions two years ago. Using the Direct Sales Comparison Approach, the appraiser evaluates and compares houses that have recently sold which are located very close to and are very similar to the subject property to estimate market value of the subject property. This is usually the most effective and accurate technique in appraising single family houses and condominiums. The Direct Sales Comparison Approach is the method that you will use most often for your appraisal reports. Basically, in order to estimate market value of the subject property using the Direct Sales Comparison Approach, you analyze recent sales of competitive and comparable properties. You then make adjustments in your appraisal report to try to "equalize" the comparable sales as though they had the exact same characteristics as the subject property. Closed sales comparables for an appraisal report are chosen based upon many factors. Since no two properties are identical, cost adjustments must be made to estimate what the sales comparable would have sold for if it was identical to the subject property. You have to remember that with the Direct Sales Comparison Approach technique you're always comparing the sales comps to the subject property, not vice versa. Don't get confused while writing up a report. For example, don't make a plus adjustment to a sales comp that has a two-car garage when the subject only has a one-car garage. I'm going to describe the appraisal adjustment process and more details about this in the following sections. | | The units of sales comparison to use when evaluating sales comparable properties include: | Physical - compare acre to acre, square feet to square feet, etc. | | Economic - compare rental income to rental income, etc. |
For the Direct Sales Comparison Approach you need to consult all data sources that accurately list recent sales in the area. An appraiser's own files should always be the primary source of data for an assignment. This means that you should have enough information, about the local market and recent sales, in your files to assist you on your appraisals. Obviously, the longer you're in business, the larger and more helpful your files will become in obtaining data. Some other helpful sources that you should use are: the local town hall, the real estate Multiple Listing Service (MLS), REDI Data, and any other sources that are available to you. Just be careful when you're obtaining your data. If you find discrepancies between two different data sources, then you should always use the public record at town hall as the most reliable source. For example, let's say the local MLS has a sales comparable listed that sold for $135,000 four months ago. Well since you're an "A to Z Appraiser" who does good, thorough appraisals, you will try to verify this information at the local town hall. You then find out that the public record for this sales comparable states that it sold for $127,000 five months ago. If this were the case then you should always use the public record as the final say in the matter. I'm letting you know ahead of time that there will be many times that you'll find discrepancies in the data sources. Some discrepancies will involve what the data source has listed, and what is actually at the site for the subject property and sales comps. For example, you'll often find a data source that says the property has a two-car garage. However, when you view the property personally, you find it only has a one-car garage. Or it says the house is in good condition and when you look at it, it's clearly a mess that needs work on the exterior. So you see, don't get lazy and cut corners or else you may end up in a very uncomfortable situation, where you can't defend your actions. |
