How To Find The Value of Your House?
If you're considering selling your house, there are several ways to determine its worth. One way to get a rough estimate is by using the "comparables" method.
We'll go through the basic concepts of the sales comparison approach and some of its potential pitfalls, so you'll be able to use it for any future real estate transaction and understand differences between valuation model.
What Is The Sales Comparison Approach?
Sales Comparative Analysis (SCA): Sometimes referred to as "comparable" analysis, SCA is a real estate appraisal technique used to estimate the value of an individual piece of real estate by comparing it to similar pieces of real estate that have been sold within a specified time frame according to the public records.
It uses data to determine which factors influence house price the most.
Comparative Market Analysis Yields Asking Price
Professional appraisers and realtors use comparative market analysis (CMA) to help them estimate the approximate price of a house when they're selling it. Remember that real property values fluctuate depending on whether the housing market is a seller's or buyer's market.
Professional appraisals specialists and real estate agents are in the best positions to help home sellers set their selling price because they are in close proximity to the current housing conditions and can spot the market trend.
For example, if an attorney is representing a client who wants to sell her house, she would look at comparable houses in the same area or neighbourhood to get an idea of what the property is currently worth. She might call this evaluation 'comparables' or 'comping'.
The asking price isn't always the appraised value.
It’s essential to keep in mind that the results of the sale comparison approach isn't the same as a home appraisal. Home appraisers are concerned with determining the fair market value of a property. When markets warm up, however, appraisers aren't interested in taking risks on properties that may be worth less than their purchase price.
Instead of comparing sales prices, compare cost and income approaches.
If you're selling a house in a suburban development or an established neighborhood in large metro areas, there is usually enough recent sale data to determine its current market value. But if your property is unique, located in an unpopulated region or being bought for investment purposes, there isn't a lot of data available, so the comparable approach is less helpful.
Another two ways to value companies are the cost approach and income approach.
The Cost Approach
If you're comparing the value of a new home to others, you need to know whether they've recently sold or not. Otherwise, you can't compare them fairly.
When valuing property using an income method, appraisers look at the current market rent for comparable properties. They then subtract out expenses associated with operating the property (e.g., mortgage payments, taxes, insurance). After accounting for these costs, they calculate the net operating income (NOI) for each property. NOI represents the annual rental revenue minus the annual operating expenses.
There are two main categories of the “replacement” method: the first is the "reproducible" method, which involves calculating how much it would take to reproduce an exact replica of the original; the second is the "replacement" method, which calculates how much a new house would be worth if built today.
The Income Approach
To be an investor looking for a property investment, you’ll need to take into account both the cost and value approaches to real estate valuation. These require different levels of research and understanding of market conditions.
An investor who wants to invest in real estate needs to understand market factors and the current state of the local housing markets. They need to know whether they're buying at a time when the local housing markets are cooling down or if they're buying in an area where there is no sign of any slowdown.
If we look at it mathematically, the "income" approach is simpler than the "price" approach.
How Does The Sales Comparison Approach Work?
A realtor will use a comparative market approach when trying to sell a property. They will look for comparable homes with as many common features as possible.
Real estate agents are able to recognize different types of properties and know which ones are selling well. They are also good at assessing the condition of a property and determining whether it compares favorably to similar properties that have recently been purchased and may give you more accurate price estimate.
Location, Location, Location
When comparing homes in the same general neighborhood or subdivision, take special consideration of differences in schools or other amenities that might affect their values.
Age And Condition
If you're looking at buying a house, it's important to look at comparable houses in the same age range.
Number Of Rooms/Bathrooms
Finding homes with the exact same number of rooms and bathroom will yield the best result. It's hard to compare the prices of a five bedroom house with a three bedroom house.
When comparing houses for sale, you need to take into account their overall sizes. Try to find the same general house sizes.
If one house has a larger lot than another, then finding houses with similarly sized plots that have similar features is important.
Recently Sold Area Listings
If there has been a lot of interest in a particular house, recently sold houses tend to be worth more than those sold further back in time.
Limits To The Sales Comparison Approach
The sales comparison approach isn't perfect; even similar homes may differ in terms of their location, size, or other features.
The sales comparisons approach also relies on recent sales information. Without this information, the approach isn't very effective. It may also be less effective in an overheated housing market where homes sell quickly. Using older sales information could lead to an estimate that is too low compared to current pricing trends.
You won't be able to use a sales comparison analysis to get a mortgage without an official home inspection.
Professional appraisal may give you more realistic price range and allow you enough time to secure additional funds (e.g. equity loan or cash-out refinance) for additional property. You can also better asses property taxes or determine opportunistic time for sale.