Legal Definitions - comparative-sales approach

The comparative-sales approach is a widely used valuation method that estimates the value of a specific property or asset by comparing it to recent sales of similar properties or assets in the same or comparable markets. It operates on the principle that a property's value is best reflected by what other, similar properties have recently sold for under normal market conditions.

This approach is a primary technique employed within the broader "market approach" to valuation, which relies on observable market data to determine value. Valuers using this method identify "comparable sales" (often called "comps") and then make adjustments for any differences between the subject property and the comparable sales, such as variations in size, age, condition, location, or features, to arrive at an estimated market value.

Here are some examples illustrating the comparative-sales approach:

• Residential Home Appraisal: Imagine a family is applying for a mortgage to buy a house. The bank requires an appraisal to ensure the loan amount is appropriate for the property's value. The appraiser uses the comparative-sales approach by researching recent sales of three to five homes in the same neighborhood that are similar in terms of square footage, number of bedrooms and bathrooms, age, and overall condition. If one comparable home sold for more because it had a newly renovated kitchen, the appraiser might adjust the value of the subject home downwards slightly to account for its older kitchen. Conversely, if the subject home has a larger lot than a comparable sale, an upward adjustment might be made. By analyzing and adjusting these comparable sales, the appraiser determines a fair market value for the home the family wishes to purchase.

• Valuation of a Small Business: A potential buyer is interested in purchasing an established independent bookstore. To determine a reasonable offer price, a business valuation expert might employ the comparative-sales approach. They would research recent sales of other independent bookstores in similar-sized towns or urban areas, considering factors like annual revenue, profit margins, inventory levels, customer base, and the condition of the lease or owned property. By comparing these "business comps" and making adjustments for any unique strengths or weaknesses of the target bookstore (e.g., a particularly strong online presence or a very outdated inventory system), the expert can estimate a fair market value for the business.

• Assessment for Property Tax: A local government needs to assess the value of commercial office buildings for property tax purposes. To do this efficiently and fairly, the tax assessor's office uses the comparative-sales approach. They identify recent sales of similar-sized office buildings in the same commercial district, taking into account factors like the building's age, class (e.g., Class A, B, or C), occupancy rates, and amenities. If a particular office building has recently undergone significant renovations that increased its market appeal compared to a comparable sale, its assessed value might be adjusted upwards. This method helps ensure that properties with similar market characteristics are taxed equitably based on their estimated market value.