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GlossaryValuationAppraisal

Sales comparison approach

2 min read
Short answer
The sales comparison approach values a property against recent sales of similar ones, adjusting for differences in size, condition, location and features. It is the primary method for residential valuation, and its reliability depends entirely on whether genuinely comparable sales exist.

The sales comparison approach values a property by looking at what similar properties recently sold for, then adjusting for the differences.

It is the primary method for residential valuation, and the one a buyer, a seller and an appraiser are all implicitly using.

How it works#

Select comparable sales — recent, nearby, genuinely similar.

Adjust each one toward the subject property. The comparable had an extra bathroom, so deduct its contributory value. The subject has a finished basement the comparable lacked, so add.

Reconcile the adjusted figures into a value conclusion, weighting the comparables that needed fewer adjustments more heavily.

The direction of adjustment matters and is easy to get backwards: the comparable is adjusted, not the subject.

Adjustments signal reliability#

The number and size of adjustments tell you how comparable the comparable was.

A sale needing three small adjustments is strong evidence. One needing eight large ones is being stretched to fit, and the value it produces should carry less weight.

That is a useful discipline for anyone assembling their own comparables. If the adjustments are doing most of the work, the comparable is not comparable.

Where it fails#

Thin markets. Rural Minnesota with few sales in a year offers no raw material, which is exactly where assessed values and automated models also become unreliable.

Unusual properties. Large acreages, non-standard construction, mixed use. There are no peers to compare against.

Distressed sales. A sheriff's sale, a short sale or an estate sale is not an arm's-length transaction between willing parties, so it is poor evidence of market value — while being excellent evidence of what distressed property fetches, which is a different question.

Distressed sales as their own comparable set#

Worth separating, because both uses are legitimate.

Valuing a house at market, distressed sales are poor comparables and are generally excluded or adjusted heavily.

Valuing what a property will fetch at a sheriff's sale or a county land sale, distressed sales are the only relevant comparables and ordinary sales are the misleading ones.

Using the wrong set for the question is how after-repair values get overstated and how auction bids get set too high.

Against the other approaches#

Sales comparison — what similar properties sold for. Residential.

Income approach — what the income supports. Rental and commercial.

Cost approach — what it would cost to replace, less depreciation, plus land. New construction, unique properties, insurance.

An appraiser considers all three and weights whichever the evidence supports. On an ordinary house that is almost always the first.

Common questions

What makes a sale comparable?
Proximity, recency, and genuine similarity in size, age, condition and configuration. A sale two miles away and eleven months old is doing a lot of work, and adjustments cannot rescue a fundamentally different property.
How do adjustments work?
Each difference between the comparable and the subject is adjusted in dollar terms — the comparable is adjusted toward the subject, not the other way round. Large or numerous adjustments signal that the comparable was not very comparable.
When does it fail?
In thin markets with few sales, on unusual properties with no peers, and on distressed property where the sales themselves are not arm's-length. Each removes the raw material the method needs.
Keep reading
Comparable sales
Recent sales of similar nearby properties, adjusted for differences, used to estimate what a subject property is worth.
Cost approach
Valuing property by estimating what it would cost to replace the improvements, less depreciation, plus the land value.
Income approach
A valuation method deriving property value from the income it produces, used for rental and commercial property.