A sales comparison approach is one of the ways in which real estate appraisers determine the value of a property. This approach is typically used in residential real estate sales, but may be used for commercial buildings as well. The sales comparison approach takes into consideration the selling price of similar properties located in or near the same neighborhood. Adjustments are made for unique features or legal provisions.
When a real estate appraiser conducts an appraisal of a property using the sales comparison approach, he will typically pull the actual selling prices from past real estate sales. These completed sales are usually within a certain time frame, such as the previous three to six months. A real estate appraisal performed under the sales comparison approach will usually consider completed sales for similar properties. For example, an appraisal being done on a one bedroom condo is not going to consider completed sales for five bedroom houses.
Completed sales are usually pulled from properties that are located near or within the same neighborhood. This is due to the fact that market value can vary substantially from one neighborhood to the next, even in the same city. Real estate valuations that are done under the sales comparison approach are subject to the economic concepts of supply, demand, and substitution.
When the supply of properties is high and demand is low, market values tend to decrease. If supply is low and demand is high, those same market values will usually be higher. Substitution is the idea that if the price of one type of good is too high, potential buyers will find a lower priced substitute good that will meet their needs. For example, if a young couple needs a two bedroom residence, they may substitute a two bedroom condo that is priced lower than a two bedroom detached house.
Unique property features may require adjustments when using the sales comparison approach. Factors such as major improvements, up to date appliances, certain types of windows and doors, floor layouts, and the overall condition of the property may result in an appraisal value that is higher or lower than the market average. For example, if a one bedroom condo is the only property within a 5 mile (8 km) radius that has a fireplace, its appraisal value is likely to be slightly higher than the completed sales on similar residences. Likewise, if the property's overall condition is poor compared to others in the same area, its appraised value is sure to be lower than average.