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The Sales Comparison Approach  
The Sales Comparison Approach derives a value indication by comparing the subject being appraised to similar properties that have sold recently.

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It is based upon the theories of supply and demand, balance, and substitution. The theory of substitution holds that the value of a property replaceable in the market tends to be set by the cost of acquiring an equally desirable "substitute" property.  The theories of supply, demand, and balance are somewhat inter-related in that supply and demand forces tend to move toward equilibrium in the market.  

This approach provides one of the best methods for estimating value if an amply 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 analyzes  market sales quantitatively, qualitatively, or both in deriving a value indication. 

In a quantitative analysis,  several "arms length" market sales are compared to the subject property based upon some unit of comparison such as price per acre, per square foot, per pad, or even the total sale price.  This "unit" of comparison  is generally the most common indicator of value recognized by market participants and it varies according to property type.  Adjustments to this "unit of comparison" are made for differences in such factors as time of sale, location, quality, condition, and amenities.  In the comparison, if a sale is rated superior to the subject, a minus adjustment is made and when the subject is rated superior, a plus adjustment is made to the sale. When the comparable is similar to the subject, there is no adjustment. The adjusted values of the comparables are then reconciled into a value conclusion for the subject.  The sales requiring least adjustment are deemed most like the subject and thus, provide greatest value support. 

A qualitative analysis, on the other hand, simply arranges sales into an array depending upon their superiority, equality, or inferiority with the subject property being appraised. 

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

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. 

Time has demonstrated that real estate is an imperfect market.  Each property is unique and the preferences of buyers and sellers can vary so widely that it is not unusual to see a wide range of sales prices even in a neighborhood of seemingly identical properties. Despite this phenomenon, markets are relatively efficient and with an abundance of neighborhood sales,  the sales comparison analysis can provide credible evidence of value.  

 

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