The Sales Comparison Approach
In real estate appraisal, there are three methods used to determine the value of a property: sales comparison approach, cost approach, and income approach. This blog will cover the sales comparison approach.
The sales comparison approach is based on the principle of substitution, meaning a prospective buyer would not pay more for a property than he or she would pay to purchase a comparable property. The approach stems from the acknowledgement that a buyer will compare the prices of various suitable properties and purchase the one with the lowest cost. Within the sales comparison approach, a state-licensed real estate appraiser will gauge and study the actions of buyers, sellers, and investors in the marketplace.
The appraiser will collect information on recent sales of properties similar to the property being valued. These compilations of data are called “comparables.” Sources of comparable data include real estate publications, public records, buyers, sellers, real estate agents, real estate appraisers, and others. Details of each comparable sale are in the appraisal report. Since comparable sales are not identical to the subject property, adjustments are sometimes made for date of sale, location, style, number of bathrooms, square feet, etc. The idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property. If the adjustment to the comparable is higher or lower than the subject property’s value, an adjustment is made higher or lower, as appropriate, to the subject property’s value. From the analysis of the adjusted prices of the comparables, the real estate appraiser determines the subject property’s value.
By: Present Value