The sales comparison approach is the most common approach to value used in real estate appraisals. This approach to value is the one used for all financial transactions in real estate. When someone requests a mortgage for the purpose of purchasing a home or refinancing a home, the federally regulations often requires an appraisal to be performed.
When an appraisal is requested, it is also requested that the opinion of value be made using the Sales comparison approach. This approach involves researching the real estate market in the subject's area. Appraisers determine what would be considered the market area. Upon this determination, the appraiser locates sales that had occured in the past 12 months. Upon viewing all the homes that have sold, the appraiser selects homes that are the best matches to the subject. These sales are then analyzed in order to make adjustments to the sales price. These adjustments would encompass differences between the subject home and the recent sale for things such as total square feet, age, condition, quality, amenities, finished basements, decks, patios and garages. The monetary adjustments are done based on data that suggests how the market values these differences without regard to actual costs.
The reasoning for the value to be based on market reactions, is that the lender needs to know what the home could sell for in the active market if need be. This simply means that if the home is to be sold due to foreclosure proceedings, the lender needs to know what could be expected to be the active market value. It is this value in which lenders will determine the loan amount.