Sales Comparison Approach in Real Estate Valuation
The sales comparison approach, also known as the market approach, is one of the most common and widely accepted valuation methods by courts and financial institutions around the world. Its concept is simple: comparing the prices of recently sold properties that are similar to the property being appraised, within the same area and under comparable sale conditions.
This method is based on the principle of substitution, which assumes that a buyer will not pay more for a property than the cost of acquiring a comparable substitute with similar utility and use, assuming no delay in time. It also relies on the principle of balance, which assumes that property prices are created through competition and stabilize when demand equals available supply.
Steps for Applying the Sales Comparison Approach
To properly apply this method, the appraiser follows nine sequential steps:
Determining an appropriate time period.
Studying the details of the subject property.
Identifying the factors that must be evaluated.
Collecting and verifying comparable sales.
Analyzing comparisons, identifying differences, and making adjustments.
Reconciling value indicators.
Elements of Comparison in Real Estate Valuation
The comparison elements include:
Property ownership rights transferred.
Financing terms.
Immediate expenses after purchase.
Location.
Physical characteristics such as size and construction quality.
Economic characteristics such as operating expenses.
Property use.
Movable components such as kitchens and air conditioning systems.
Challenges of the Sales Comparison Approach
However, the greatest challenge of this method lies in finding sufficient comparable sales that closely match the specifications of the subject property, especially in markets with limited transactions or for unique properties. In addition, the quality of comparables and verification of their credibility from reliable sources are essential for ensuring an accurate valuation.