The comparative sales approach is used by property appraisers to determine the value of a property by looking at the selling price of similar properties in the same neighborhood. Adjustments are made for unique characteristics. Completed sales are used and subject to supply, demand, and substitution concepts. Unique characteristics may require adjustments.
A comparative sales approach is one of the ways property appraisers determine the value of a property. This approach is typically used in residential property sales, but can also be used for commercial buildings. The comparative sales approach takes into account the selling price of similar properties located in or near the same neighborhood. Adjustments are made for unique characteristics or legal provisions.
When a real estate appraiser makes a property valuation using the sales comparison approach, he typically extracts actual sales prices from past real estate sales. These sales are usually completed within a certain time frame, such as the previous three to six months. A real estate appraisal done with the sales comparison approach usually looks at completed sales of similar properties. For example, an appraisal done on a one-bedroom condo won’t consider completed sales for five-bedroom homes.
Completed sales are usually pulled from properties that are located near or within the same neighborhood. This is because market value can vary greatly from neighborhood to neighborhood, even within the same city. Real estate valuations made using the sales comparison approach are subject to the economic concepts of supply, demand and substitution.
When property supply is high and demand is low, market values tend to decline. If supply is low and demand is high, the market values themselves will usually be higher. Substitution is the idea that if the price of one type of good is too high, potential buyers will find a lower-priced replacement good that will meet their needs. For example, if a young couple needs a two bedroom residence, they can substitute a two bedroom apartment for less than a two bedroom detached house.
The unique characteristics of the properties may require adjustments when using the sales comparison approach. Factors such as major improvements, updated appliances, certain types of windows and doors, floor layouts, and general condition of the property can result in an appraisal value above or below the market average. For example, if a one-bedroom condo is the only property within a 5-mile (8 km) radius that has a fireplace, its appraisal value is likely to be slightly higher than completed sales on similar residences. Similarly, if the general condition of the property is poor compared to others in the same area, its appraisal value will certainly be below average.
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