Sales Comparison Approach

Foundations of the Sales Comparison Approach

The sales comparison approach, also commonly known as the market data approach, is the primary method used to value single-family residential properties and vacant land. In any valuation assignment, the subject property is the specific parcel of real estate currently being appraised or analyzed. The practitioner compares this subject property to comparable properties, commonly called comps, which are recently sold properties that share similar characteristics.

This valuation method relies directly on the principle of substitution. The principle of substitution states that an informed buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. When buyers evaluate homes in an open market, they compare features, quality, and location against alternative properties available for purchase. If two homes offer identical utility and appeal, the lower-priced property will attract the buyer first.

The sales comparison approach also uses the principle of contribution when accounting for specific differences between properties. The principle of contribution states that the value of any property component depends on how much it adds to the total value, not its actual cost. For instance, a homeowner might spend substantial funds building a swimming pool, but the market might only value that pool at a fraction of its installation expense. Value is determined by what buyers in the competitive market will pay, not by original or replacement expenditures.