The sales comparison approach (SCA) 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.
Economic Basis
The sales comparison approach is based upon the principles of
supply and demand, as well as upon the principle of
substitution. Supply and demand indicates value through typical
market behavior
Market is a term used to describe concepts such as:
* Market (economics), system in which parties engage in transactions according to supply and demand
* Market economy
*Marketplace, a physical marketplace or public market
Geography
*Märket, a ...
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
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosoph ...
, assuming no undue delays in construction.
Examples of Methods
In practice, the most common SCA method used by
estate agents
An estate agent is a person or business that arranges the selling, renting, or management of properties and other buildings. An agent that specialises in renting is often called a letting or management agent. Estate agents are mainly engaged i ...
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
Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...
and
price cycles
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...
, 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
Contingent valuation is a survey-based economic technique for the valuation of non- market resources, such as environmental preservation or the impact of externalities like pollution. While these resources do give people utility, certain aspects ...
), 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]
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
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Real estate valuation