Adjust the comparable, never the subject
The sales comparison approach rests on substitution: a buyer will pay no more than the cost of an equally desirable substitute. The appraiser starts with what similar homes actually sold for and corrects each sale for its differences from the subject.
The single rule that governs every adjustment is this: always adjust the comparable toward the subject, never the subject. The subject is the unknown being valued; it has no price yet to adjust. So:
- If the comparable is superior, subtract.
- If the comparable is inferior, add.
A basement the subject lacks makes the comparable superior, so its value is subtracted from the comparable's sale price. Adding it to the comparable, or touching the subject's figure at all, is the classic error.
A worked adjustment
A comparable sold for $350,000. It has a garage worth $15,000 that the subject lacks, and the subject has a basement worth $20,000 that the comparable lacks.
Garage: comparable superior, so subtract $15,000. Basement: comparable inferior, so add $20,000.
$350,000 − $15,000 + $20,000 = $355,000
The distractors are all sign errors: $385,000 adds both, $315,000 subtracts both, and $345,000 reverses both signs.
Time adjustments in a rising market
Prices move, so a sale from months ago must be brought forward. A comparable sold six months ago for $300,000 in a market appreciating 4% per year:
$300,000 × 4% × 6/12 = $6,000
It sold before prices rose, so the adjustment is added: $300,000 + $6,000 = $306,000. Watch two traps — applying a full year (giving $312,000) and subtracting in a rising market (giving $294,000).
How many comparables, and how recent
The approach requires a minimum of three closed comparable sales, generally closed within the last 12 months, preferably from the same market area or subdivision. Closed sales are the primary evidence. Current listings cannot be substituted for them, because listings tend to indicate the top of value — they show what sellers ask, not what buyers paid.