Legal Definitions - market-comparison approach

The market-comparison approach, also frequently called the sales comparison approach or market approach, is a widely used valuation method that estimates the value of a specific asset by comparing it to similar assets that have recently been sold in the same or a comparable market. This method operates on the fundamental principle that a rational buyer would not pay more for an asset than the price of an equally desirable and available substitute.

To apply this approach, appraisers or valuators identify several recently transacted "comparable" assets (often referred to as "comps"). They then analyze the differences between the subject asset and these comparables, making adjustments for factors such as size, age, condition, location, features, and market conditions. After these adjustments, a range or single estimated value for the subject asset is determined.

• Example 1: Valuing a Residential Home

  Imagine a homeowner wants to sell their three-bedroom, two-bathroom house in a suburban neighborhood. To determine a fair asking price, a real estate appraiser would use the market-comparison approach. They would identify several homes with similar characteristics (e.g., number of bedrooms and bathrooms, square footage, lot size, age, and overall condition) that have sold in the same neighborhood within the last six months. If one comparable home had a recently renovated kitchen while the subject home did not, the appraiser would make a downward adjustment to the comparable's sale price to reflect this difference. Conversely, if the subject home had a larger backyard than a comparable, an upward adjustment might be made. By analyzing these adjusted sales prices, the appraiser can estimate the market value of the homeowner's property.

• Example 2: Valuing a Commercial Plot of Land

  A developer is interested in purchasing a vacant parcel of land zoned for commercial use to build a new retail complex. To assess the land's value, a commercial real estate appraiser would employ the market-comparison approach. They would research recent sales of other commercially zoned land parcels in the surrounding area, focusing on properties with similar zoning allowances, accessibility to major roads, topography, and utility access. If a comparable parcel recently sold but had superior road frontage, the appraiser would adjust its sale price downwards to account for the subject property's less advantageous frontage. Through these comparisons and adjustments, the appraiser can provide an estimated value for the developer's target land parcel.

• Example 3: Valuing a Small Business

  A prospective buyer is considering purchasing an existing independent coffee shop. To determine a fair purchase price, a business valuation expert might use the market-comparison approach. They would look for recent sales of other similar independent coffee shops in comparable urban or suburban areas, considering factors like annual revenue, profitability, number of employees, lease terms, and the type and condition of equipment included in the sale. If a comparable coffee shop that recently sold had a significantly stronger brand presence or a longer, more favorable lease agreement, the expert would adjust its sale price downwards to reflect the subject coffee shop's potentially weaker position in those areas. This analysis helps the buyer understand the market value of the business they intend to acquire.