Sales Comparison Approach
The sales comparison approach for valuing real estate is a common approach to value real estate. The approach is particulary attractive when there are many comparable transactions taking place. This is the case for residential real estate. The sales comparison method is based on the premise that a buyer would not pay more for a property than others are paying for similar properties in the current market environment. Thus, it is important to use recent comparable sales.
On this page, we discuss the sales comparison approach steps, provide a sales comparison approach Excel spreadsheet and finally do a cost approach vs sales comparison approach analysis.
Sales comparison approach formula
The sales comparison method works as follows. First, we collect recent sales of similar properties. We collect both the price as well as the characteristics of the properties. Next, we adjust the properties for differences with the property we would like to value.
It is extremely important to apply the formula in the following way. We adjust the value of the comparable sales upward (downward) for undesirable (desirable) differences. This way, we adjust the prices of the comparable properties such that they become comparable to the property we are valuing. We apply the formulas in a sales comparison approach example in the following section.
Sales comparison approach examples
Because a lot of calculations are required to do all the direct sales comparison approach adjustments, we apply the method in an Excel spreadsheet. The following table shows all the characteristics as well as the adjustments.
A common mistake when performing the sales comparison approach adjustments is not applying the adjustments to the original sales price. Thus, don’t forget to apply each adjustment to the original sales price. Otherwise, your estimates will be wrong.
Cost approach vs sales comparison approach
In a way, the cost approach and the sales comparison method look similar. In both cases, we adjust the value of the property for depreciation and other characteristics that impact the value of the property.
The big difference however, is that the sales comparison method makes use of sales data on actual sales. This is more reliable than the cost approach, which needs to estimate the replacement cost of the property. This is a lot harder than adjusting the prices of actual sales for differences with the property we wish to value.
We discussed the sales comparison method to value real estate. Once we have a set of comparable properties that were recently sold, it is very easy to come up with a reliable estimate for the value of a property. This explains why this method is often used by real estate agents to value residential real estate. Very often, real estate agents will combine this approach with hedonic pricing to get an accurate estimate of a property’s value.
Want to have an implementation in Excel? Download the Excel file: Sales Comparison Approach