The sales comparison approach

Sales comparison: infer value from competing properties

The sales comparison approach estimates a subject property's value by analyzing sales of similar properties. It rests on substitution: a buyer generally will not pay more for a property than the cost of an equally desirable substitute. This approach is especially useful for homes in markets with sufficient comparable sales.

Choose recent, verified sales that compete with the subject for buyers. Compare location, property rights, use, size, condition, and amenities. Investigate financing, seller concessions, and unusual motivations; a recorded price alone does not establish that a sale reflects ordinary market conditions. Listings and pending sales can help describe competition, but they are not completed sales.

Adjust the comparable, not the subject

Start with each comparable's sale price and adjust it to indicate what it would have sold for if it matched the subject on relevant characteristics. If the comparable is superior, subtract the market-supported value of that advantage. If it is inferior, add the market-supported value of what it lacks. A comparable with a garage the subject lacks needs a downward adjustment; a comparable lacking a garage the subject has needs an upward adjustment.

Suppose a comparable sold for $600,000. Its inferior condition calls for adding $20,000, while its superior location calls for subtracting $10,000. The adjusted indication is $600,000 + $20,000 - $10,000 = $610,000. The subject's price is not the adjustment starting point.

Let the market measure differences

Adjustment amounts reflect buyers' reactions, not necessarily construction costs. Paired-sales analysis compares sales that are otherwise similar to isolate a feature's contributory value. Several pairs strengthen the inference. Time adjustments account for market changes between a comparable's sale and the valuation date. Rising prices may call for an upward time adjustment to an older sale; falling prices may call for a downward adjustment.

An improvement can cost more than it contributes to market value. Avoid counting the same benefit twice, such as capturing the same extra living area in both a size adjustment and a room adjustment.

Reconcile the evidence

After adjustments, reconcile the indications into a supported value opinion. Give greater weight to more similar, well-verified sales with reliable adjustments. Do not mechanically average prices or choose the highest indication. Large offsetting adjustments can produce a small net adjustment while leaving substantial uncertainty; examine the total adjustment burden too. No single similarity score or adjustment percentage decides reliability by itself.

The approach becomes less dependable when comparable sales are scarce or market conditions change rapidly. The final opinion concerns the property and valuation date, not a promise of its eventual sale price.