Definition
The Sales Comparison Approach is a real estate valuation method that estimates a property’s market value based on recent sales of similar properties in the same area. Often used for residential properties, this approach involves comparing the subject property to comparable properties (comps), making adjustments for differences in features, condition, location, and other factors.
Explanation
This approach relies on the principle of substitution, which suggests that a buyer will not pay more for a property than the cost of acquiring a similar one. Comparable sales should ideally be within six months and located within a few miles of the subject property. Appraisers adjust the sales prices of comps based on differences in size, age, amenities, lot size, and condition to arrive at a fair market value.
✅ Key Features of the Sales Comparison Approach:
- Comparable Sales: Uses recently sold properties with similar characteristics.
- Adjustments: Accounts for differences in square footage, lot size, upgrades, and condition.
- Market Data: Relies on Multiple Listing Service (MLS) data, public records, and market trends.
Pros and Cons of the Sales Comparison Approach
✅ Advantages:
- Accuracy: Provides a realistic value based on actual sales data.
- Market Relevance: Reflects current market conditions and buyer preferences.
- Widely Used: Standard for residential appraisals and lender financing.
❌ Disadvantages:
- Availability of Comps: Limited or outdated comparable sales can impact accuracy.
- Subjectivity: Adjustments for differences can be subjective.
- Market Volatility: Less effective in rapidly changing markets.
Example
An appraiser evaluates a 2,000 sq ft home with 3 bedrooms and 2 baths. They find three comparable properties sold within the past six months:
- Comp 1: 2,100 sq ft, sold for $420,000.
- Comp 2: 1,900 sq ft, sold for $390,000.
- Comp 3: 2,000 sq ft with a pool, sold for $450,000.
After making adjustments for differences in size, location, and amenities, the appraiser estimates the subject property’s market value at $410,000 based on the Sales Comparison Approach.