Definition
The Market Comparison Approach (Sales Comparison Approach) is a real estate appraisal method used to determine the value of a property by comparing it to similar properties—known as comparables—that have recently sold in the same area. This approach is based on the principle of substitution, which suggests that a buyer will not pay more for a property than the cost of acquiring a similar one with the same features and conditions in a comparable market.
Examples
-
Residential Property Valuation:
An appraiser assesses the value of a single-family home by comparing it to three similar homes that sold in the past six months within the same neighborhood. The appraiser adjusts the sales prices of each comparable home based on differences like square footage, age, and amenities to estimate the subject property’s value.
-
Commercial Property Appraisal:
To value an office building, an appraiser identifies three office buildings of similar size and condition that have recently sold within the same business district. Adjustments are made for differences in location, lease structures, and physical condition to arrive at the subject property’s estimated value.
Frequently Asked Questions
Q: What types of properties are best suited for the Market Comparison Approach?
A: The Market Comparison Approach is best suited for residential properties, vacant land, and small income-producing properties like apartment buildings. It is less effective for unique properties or those seldom sold in the market.
Q: How do appraisers select comparable properties?
A: Appraisers select comparable properties based on the similarity in location, size, condition, age, and architectural style. They also consider recent transaction dates to ensure the data reflects current market conditions.
Q: What adjustments might an appraiser make when using the Sales Comparison Approach?
A: Adjustments may be made for differences in property size, number of bedrooms, lot size, amenities (such as swimming pools or garages), condition of the property, age, and any renovations or upgrades that have been made.
- Comparable Properties (Comps): Recently sold properties with similar features to the subject property, used for comparison in the appraisal process.
- Adjusted Sales Price: The price of a comparable property after adjustments are made for differences between it and the subject property.
- Market Value: The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller.
Online References
Suggested Books for Further Studies
- “The Appraisal of Real Estate” by Appraisal Institute: A comprehensive guide on real estate valuation principles, including the Market Comparison Approach.
- “Real Estate Appraisal: From Value to worth” by Tom Bisbee: A detailed look at the methodologies of property appraisal, with practical examples and case studies.
- “Essentials of Real Estate Economics” by McKenzie and Betts: This book covers fundamental real estate economic principles, including market analysis and valuation methods.
Fundamentals of Market Comparison Approach: Real Estate Appraisal Basics Quiz
### What is the basis principle behind the Market Comparison Approach?
- [ ] The Cost Approach
- [ ] The Income Approach
- [x] The Principle of Substitution
- [ ] The Supply and Demand Principle
> **Explanation:** The Market Comparison Approach is based on the Principle of Substitution, suggesting that a buyer will not pay more for a property than the cost to acquire a similar one with the same features and conditions.
### In what type of property markets is the Market Comparison Approach most effective?
- [x] Residential properties
- [ ] Industrial properties
- [ ] Agricultural properties
- [ ] Unique historical properties
> **Explanation:** The Market Comparison Approach is most effective in residential property markets or for properties where there are ample comparable sales data available.
### What type of adjustment might be made for a property with a larger yard compared to a comparable?
- [ ] No adjustment, as yard size is irrelevant.
- [ ] A negative adjustment.
- [x] A positive adjustment.
- [ ] An adjustment based on the comparable's location.
> **Explanation:** A positive adjustment might be made if the subject property has a larger yard compared to a comparable property, adding to its value.
### When is the Market Comparison Approach less useful?
- [ ] For determining the value of condos
- [ ] For small residential appraisals
- [x] For properties with unique features
- [ ] For properties with many comparables available
> **Explanation:** The Market Comparison Approach is less useful for properties with unique features where comparable sales data are not readily available.
### How many comparables are typically used in a property appraisal using the Market Comparison Approach?
- [ ] 1-2
- [ ] 8-10
- [x] 3-5
- [ ] Over 10
> **Explanation:** Typically, 3-5 comparables are used in property appraisal to ensure a more accurate valuation.
### What is the principal factor for choosing comparables in an appraisal?
- [x] Similarity to the subject property
- [ ] Highest sales price
- [ ] Distance from the subject property
- [ ] Number of days on the market
> **Explanation:** The principal factor for choosing comparables is their similarity to the subject property in terms of size, location, condition, and other relevant characteristics.
### What term is used to describe the price of a comparable property after making necessary adjustments?
- [ ] Net Sales Price
- [x] Adjusted Sales Price
- [ ] Market Value
- [ ] Gross Sales Price
> **Explanation:** The Adjusted Sales Price refers to the price of a comparable property after making necessary adjustments for differences.
### Which appraisal method is typically used alongside the Market Comparison Approach?
- [ ] The Replacement Cost Method
- [x] The Cost Approach and Income Approach
- [ ] The Gross Rent Multiplier Method
- [ ] The Discounted Cash Flow Approach
> **Explanation:** The Cost Approach and Income Approach are typically used alongside the Market Comparison Approach to provide a comprehensive appraisal of the property.
### What factor is NOT typically an adjustment consideration in the Market Comparison Approach?
- [ ] Size of the property
- [ ] Location of the property
- [x] Owner's personal preference
- [ ] Age of the property
> **Explanation:** The owner's personal preference is not typically a consideration for adjustments in the Market Comparison Approach.
Thank you for taking the time to learn about the Market Comparison Approach in real estate appraisal. Your dedication to understanding property valuation is commendable!
