Sales Approach to Value
As written about in a previous Allobar blog, The Three Approaches to Value: The Cost, Income and Comparable Sales Methods, the sales approach is one of the three approaches to value used by real estate appraisers and assessors to value real property. As the name suggests, this method uses the prices of recently sold, similar properties and compares them with the subject property to determine value. Its usefulness is dependent upon the quality and quantity of sales of comparable properties. As residential properties sell frequently, this method is usually the preferred method for valuing residential properties. It is also used to value commercial properties that do not generate income, such as owner-occupied properties.
The appraiser uses the sales prices of similar properties and adjusts them for transactional differences (property rights, financing, conditions of sale, market conditions (time) and post-closing expenses), and physical differences between the comparable properties and the subject property. The purpose of the adjustments to the sales prices is to account for the differences in the comparable properties and the subject property that affect value. The adjustment process is a subjective process that requires knowledge, data or personal experience with a market to make reliable adjustments. Brokers, appraisers, and buyers and sellers of properties are good sources of information about a particular market and a particular sale and the factors that affect property values.
The adjusted sales prices of each of the comparable properties produces an indicator of value for the subject property. The appraiser then determines how much weight is given to each indicator of value to arrive at a value estimate for the subject property. The value estimate could be expressed as a number or a range.
As most people have experience buying and selling property, the sales approach is popular and easily understood. If the comparable properties are similar to the subject property and do not require significant adjustments, it can produce an accurate estimate of the value. However, as the amount of the adjustments that are needed to the sales prices of the comparable properties increases, the reliability of the value estimate tends to decrease and is more difficult to defend.
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