The selling price of similar properties
After all the necessary data have been gathered and analyzed, the appraiser proceeds to the fourth step in the appraisal process. Here, the appraiser considers which of the three appraisal approaches to perform based on the property and the purpose of the appraisal.
The three appraisal approaches are:
- The market comparison approach, also known as the sales comparison approach;
- The cost approach derived under the replacement or reproduction method; and
- The income approach, derived under the gross rent multiplier or capitalization income method.
The market comparison approach is the most commonly used approach to establish the fair market value of the residential real estate.
Applying the market comparison approach, the appraiser looks at the current selling prices of similar properties to help establish the comparable value of the property appraised. This refers to the price the property was actually sold for, not the artificial price for which it was listed.
Adjustments are made for any differences in similar properties, such as their location, obsolescence, lot size and condition.
For example, consider a property owner’s neighbor who recently sold their residence for $445,000.
The neighbor’s house is of a similar age, size and condition as the owner’s house, except it have a fireplace worth $5,000 which the owner does not have. Adjusting for the difference in the improvements — the fireplace — between the owner’s and neighbor’s house would establish the value of the owner’s house at approximately $440,000.
To produce the most reliable appraisal report, the appraiser gathers data on numerous comparable sales, frequently called comps.
The appraiser then compares each against the property being appraised for their similarities.
Sales information is most commonly obtained from the multiple listing service (MLS) but it can also be obtained through tax records and title insurance companies.
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