Sales Comparison Approach to Value
The sales comparison approach determines the value of a property by comparing it to similar properties in the vicinity that have been recently sold, along with proper adjustments for acreage, size, amenities, time, etc. This approach to value is mainly based on the principle of substitution.
According to this approach, a buyer will buy a property with the cost which is not more than the comparable substitute property. This approach assumes that an individual will compare prices of the subject property with similar properties and will purchase the property only when the cost is not more than the comparables. Under this approach, the action of parties like sellers, buyers and investors, who are involved in the marketplace are interpreted and measured by appraisers.
Methods of data collection and valuation in sales comparison approach
Data of recently sold properties that are similar to the subject property is collected. Data of comparables may be collected from various sources that include public records, real estate publication, real estate agent and brokers, buyers, sellers, etc. in the appraisal report, every essential detail of comparable sales are described. Then adjustments for size, location, acreage, style, time and so on are made because the subject property and comparables are similar but not identical. When the comparable is superior or inferior in any factor compared to the subject then downward or upward adjustment is made respectively.
For making the adjustment which is quite subjective, an experienced appraiser is needed because everything depends on him. A value indicator of the subject property is selected after analyzing the adjusted sales price of comparables.
Steps followed in sales comparison approach
1. Market research done for getting information about the comparable sales and pending sales.
2. Checking the data collected from the market to ensure they are accurate and correct.
3. Determining appropriate units of comparison like sales price per square feet and developing comparative analysis for each of them.
4. Making comparison between the subject and comparable sales on the basis of elements of comparison and making adjustments as required.
5. Finding a single indicator of value from all the value indications of comparable sales that resulted from the adjustments.