Property Valuation using Sales Comparison Approach
A real estate appraisal method that compares a piece of property to other properties with similar characteristics that have been sold recently.
This approach provides one of the best methods for estimating value if an ample supply of recent sales of properties with similar characteristics are available. The sales comparison approach relies upon development of a value estimate from prices paid in the open market for properties with adequate exposure to ensure that the prices represent fair market value. The appraiser analyses market sales quantitatively, qualitatively, or both in deriving a value indication.
Careful analysis of sales data must be made to ensure that:-
- the transactions are typical “arms length” market sales,
- the seller is not under necessity to sell and/or the buyer has no undue influence,
- non-personal property (furnishings & fixtures, goodwill, etc.) are separated from the real estate component of value
- the transactions were reasonably “exposed” to the open market
- buyer and seller were reasonably knowledgeable, well informed, and acting in their own best interest.
Application of a sales comparison approach can be problematic for several reasons:
- a property may be so unique that no other properties “match” it’s characteristics
- “special use” properties may not be readily exchanged in the market
- the real estate market for a particular property may be slow or inactive
- what other properties are selling for may be irrelevant if the subject property is impacted by a long term lease, life estate, unusual easements, or other encumbrances
- improvements may not reflect the “highest and best use” of the site