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The sales comparison approach is used by real estate appraisers to determine a property’s value by comparing it to similar properties in the same neighborhood. Adjustments are made for unique features, and economic concepts such as supply, demand, and substitution are taken into account.
A sales comparison approach is one of the ways that real estate appraisers determine the value of a property. This approach is typically used in residential real estate sales, but can also be used for commercial buildings. The sales comparison approach takes into account the sales price of similar properties located in or near the same neighborhood. Adjustments are made for unique features or legal provisions.
When a real estate appraiser performs an appraisal of a property using the sales comparison approach, they will typically extract actual sales prices from past real estate sales. These complete sales are usually done within a certain period of time, such as the previous three to six months. A real estate appraisal conducted under the sales comparison approach will generally consider entire sales of similar properties. For example, an appraisal on a one-bedroom condominium will not consider the entire sales of five-bedroom homes.
Entire sales are generally obtained from properties located near or within the same neighborhood. This is due to the fact that the market value can vary substantially from one neighborhood to another, even within the same city. Real estate valuations that are carried out under the sales comparison approach are subject to the economic concepts of supply, demand and substitution.
When the supply of properties is high and the demand is low, market values tend to decline. If supply is low and demand is high, those same market values will generally 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 substitute good that will satisfy their needs. For example, if a young couple needs a two-bedroom residence, they can substitute a two-bedroom condo that is priced lower than a two-bedroom single-family home.
Unique property characteristics may require adjustment when using the compare sales approach. Factors such as major improvements, updated appliances, certain types of windows and doors, floor layouts, and the general condition of the property can result in an appraised value that is higher or lower than 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 appraised value is likely to be slightly higher than entire sales on similar residences. Similarly, if the property’s overall condition is poor compared to others in the same area, its appraised value will likely be lower than average.
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