There are three main styles of real estate valuation. The sales comparison approach, the income approach, and lastly the cost approach. Each uses real estate comps in one way or another. Let’s take a look at them more in depth so to gain a better understanding of the concepts. I want to start with the sales comparison style.
The sales comparison approach, the most commonly used style, is used at property tax hearings for houses, land and owner-occupied buildings. It is sometimes used for income properties as a secondary method of valuation. To perform the sales comparison approach you need information on sales of property similar to your property. You can obtain this information from a variety of sources including the appraisal district, real estate appraisers, brokers and third party vendors. Inspect and photograph the comparable sales making detailed notes regarding differences between the comparable sales and your property. Then make adjustments for differences between the subject property and comparables. Adjust comparable sales to the subject property. For example, if a comparable sale has four bedrooms and your home has three bedrooms, make a downward adjustment to the sales price to the comparable sale to bring it down to the level of your house. Select sales as similar as possible to the subject property to minimize adjustments. Comparable sales data is given strong consideration in property tax hearings for houses, land and owner-occupied commercial buildings.
Taking this approach to make comparisons between your investment properties will help you price them competitively and get that SOLD sign posted in no time! In my next post I will be discussing the second real estate valuation style, the income approach.