What is the sales comparison approach in real estate appraisal?
What is the Sales Comparison Approach?
The sales comparison approach in real estate appraisal estimates property value by comparing it to similar, recently sold properties in the area. Appraisers adjust the sale prices of these "comparables" for differences in features, size, and condition. This method, relying on market data and adjustments, is most effective in active markets with many comparable sales.
The sales comparison approach is often considered the most reliable and understandable method for residential properties, and it's based on the principle of substitution, which assumes that a rational buyer would not pay more for a property than the cost of acquiring a similar substitute property. Here's how it works:
- Selection of Comparables: Appraisers select recently sold properties ("comparables" or "comps") that are similar to the subject property in terms of location, size, layout, age, condition, and other relevant characteristics.
- Adjustment of Comparables: Because no two properties are exactly alike, the appraiser makes adjustments to the sale prices of the comps to account for differences between them and the subject property. For example, if a comp has a renovated kitchen and the subject property does not, the sale price of the comp would be adjusted downward.
- Analysis of Adjusted Prices: After adjustments, the appraiser analyzes the adjusted sale prices of the comps. This analysis often involves averaging the adjusted prices or giving more weight to the most similar or most recently sold properties.
- Estimation of Property Value: The final step is to use the analysis of adjusted prices to estimate the market value of the subject property.
The sales comparison approach is particularly effective in active markets where numerous comparable sales are available. It's less effective in areas with few sales or in valuing unique properties for which there are no real comparables.