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The sales comparison approach (SCA) is a
real estate appraisal Real estate appraisal, home appraisal, property valuation or land valuation is the process of assessing the value of real property (usually market value). The appraisal is conducted by a licensed appraiser. Real estate transactions often require ...
valuation method that relies on the assumption that a matrix of attributes or significant features of a property drive its value. For examples, in the case of a single family residence, such attributes might be floor area, views, location, number of bathrooms, lot size, age of the property and condition of property. This method is in contrast to the two other main pricing methods for real estate which are cost approach and
income approach The income approach is a real estate appraisal valuation method. It is one of three major groups of methodologies, called valuation ''approaches'', used by appraisers. It is particularly common in commercial real estate appraisal and in business a ...
.


Economic Basis

The sales comparison approach is based upon the principles of
supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris_paribus#Applications, holding all else equal, the unit price for a particular Good (economics), good ...
, as well as upon the principle of substitution. Supply and demand indicates value through typical market behavior of both buyers and sellers. Substitution indicates that a purchaser would not purchase an improved property for any value higher than it could be replaced for on a site with equivalent
utility In economics, utility is a measure of a certain person's satisfaction from a certain state of the world. Over time, the term has been used with at least two meanings. * In a normative context, utility refers to a goal or objective that we wish ...
, assuming no undue delays in construction.


Examples of Methods

In practice, the most common SCA method used by estate agents and real estate appraisers is the sales adjustment grid. It uses a small number of recently sold properties in the immediate vicinity of the subject property to estimate the value of its attributes. Adjustments to the comparables may be determined by trend analysis, matched-pairs analysis, or simple surveys of the market. More advanced researchers and appraisers commonly employ statistical techniques based on multiple regression methods which generally compare a larger number of more geographically dispersed property transactions to determine the significance and magnitude of the impact of different attributes on property value. Research has shown that the sales adjustment grid and the multiple regression model are theoretically the same, with the former applying more heuristic methods and the latter using statistical techniques. Spatial auto regression plagues these statistical techniques, since high priced properties tend to cluster together and therefore one property price is not independent of its neighbor. Given property inflation and price cycles, both comparison techniques can become unreliable if the time interval between transactions sampled is excessive. The other factor undermining a simplistic use of the SCA is the evolving nature of city neighborhoods, though in reality urban evolution occurs gradually enough to minimize its impact on this approach to value. In more complex situations, such as litigation or contaminated property appraisal, appraisers develop SCA adjustments using widely accepted advanced techniques, such as repeat sales models (to measure house price appreciation over time), survey research (e.g. -- contingent valuation), case studies (to develop adjustments in complex situations) or other statistically based techniques.see, for example, Kilpatrick, Throupe, Mundy, & Spiess, Valuation of Impaired Property, ''When Bad Things Happen to Good Property'', Robert Simons, ed., 2006


See also

*
Real estate appraisal Real estate appraisal, home appraisal, property valuation or land valuation is the process of assessing the value of real property (usually market value). The appraisal is conducted by a licensed appraiser. Real estate transactions often require ...
* Cost approach *
Income approach The income approach is a real estate appraisal valuation method. It is one of three major groups of methodologies, called valuation ''approaches'', used by appraisers. It is particularly common in commercial real estate appraisal and in business a ...
*
German income approach The German income approach (German: Ertragswertverfahren, abbr. EWV) is the standard income approach used in Germany for the real estate appraisal , valuing of property that produces a stream of future cash flows. Basic principles and regulatio ...
*
Pricing Pricing is the Business process, process whereby a business sets and displays the price at which it will sell its products and services and may be part of the business's marketing plan. In setting prices, the business will take into account the ...
*
Real estate business Real estate business is the profession of buying, leasing, managing, or selling real estate (commercial, industrial, residential, or mixed-use development, mixed-use premises)."Real estate": Oxford English Dictionary online: Retrieved September 18 ...


Further reading

*''The Appraisal of Real Estate, 12th Edition'', by the Appraisal Institute is an industry-recognized textbook. *''The Uniform Standards of Professional Appraisal Practice'', by The Appraisal Foundation, updated and published annually through the 2006 edition; henceforth, updated editions are to appear biannually.
''Sales Comparison Approach''
by Lloyd D. Hanford, Jr., MAI


References

{{reflist Real estate valuation