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So why do appraisers use comps to arrive to a certain value for a property? There are three approaches to valuing real estate and the Sales Approach is what lenders typically require and is typically the most sensible approach to valuing residential property. The whole premise of the sales approach is that the subject home is compared to other homes that would possibly be an adequate substitution for that property. Meaning, would that buyer consider these comparable (comps) as a suitable alternative? An an ideal situation (this can happen in certain subdivisions, tract homes, condos, etc), an appraiser may find an identical match. They then would compare what that sold for and use that as a reference for valuing your property. If the market has changed since the property has sold, an adjustment may be warranted. Essentially, an appraiser has only certain sales to utilize (preferably recent sales) and comparables will have to be chosen from that. Location adjustments may also be considered if that identical property was in another area that may be superior or inferior to the subject home. Really what the sales approach is based on is the principle of substitution. What this principle states is that a home's value tends to be set by the cost of acquiring an equally desirable and valuable substitute property, and assuming no costly delay is encountered in making the substitution. Also, the principle of substitution says that a buyer will not pay more for a property than the cost of an equally desirable alternative (substitute) property. Ex. Home A on Example St is being appraised. An identical home sold last week across the street from House A with identical condition & characteristics for $400,000. Another property sold on a similar road with identical characteristics for $400,000. With these two comparable sales, it is reasonable to… Continue Reading