Posted by Hi everyone. Becka here at the Coach’s Hangout. Today we’re looking at the Comparison Approach.
The Comparison Approach is used to estimate the comparative market value of a property and is a challenging concept that could crop up on the real estate licensing exams. This concept can cause havoc for students. So an analogy will really help you see why. I’m sorry. Someone’s dad insisted on that.
Suppose you’re in the market for a luxury car. You found this blue car, which you absolutely love, but it recently sold for $100,000. Nice car. Fortunately, there’s a yellow car available and it’s almost identical, except it includes a sports package valued at approximately $10,000. What do you think the yellow car is worth? If you answered $110,000, I have some great news. Not only did you use the comparison approach, you got it right. You may just want to make a downward adjustment for the yellow color though.
Now, whether you agree or disagree with the yellow color comment, it brings me to an important point. Estimating the value of real estate is usually a little subjective. Rest assured though, on the exam, if you know your stuff, the right answer will be clear.
When it comes to real estate, the Comparison Approach can get a lot more involved. You may need to make several adjustments up or down due to differences between the comparable property, which is a similar property that recently sold, and the subject property, which is the one that you’re evaluating. Adjustments could need to be made for things like the square footage, the number of bedrooms, the home finishes, the lot size. You get the idea.
On the exam, I’d be prepared to make adjustments for as many as five key differences, but hopefully less. There shouldn’t be too many key differences because the properties are supposed to be the same or comparable. No matter how involved the scenario, always keep our car analogy in mind because the same basic premise always applies. Enough of me talking though. This concept is a lot like riding a bike. You can’t learn it by just talking about it. You need to practice and sometimes learn from your mistakes. Practice will make perfect. If you’re working with the SeeWhy exam preparation tools, you’ll even be provided with a printable PDF worksheet, which will help you master this concept.
Thanks everybody. I hope you found this helpful and good luck on your exams.