RealTown Words

A method of appraising or valuing real property based on the principle of substitution (comparison). The appraiser using this method estimates the value of property by comparing the prices paid for similar properties and concludes the value accordingly. The three main steps in what was formerly called the market-data approach are the following:
1. Locate comparable properties (properties with the same “highest and best use”) that have sold recently, usually within the past six months, in arm’s-length transactions. This excludes certain sales, such as bankruptcy or foreclosure sales, sales by the government, sales between relatives, and so on. Adjust the contract sales price to an effective sales price, considering unusual seller concessions and changes in market conditions from the time of sale.
2. Compare these properties with the subject property and make all necessary adjustments in the sales prices for any significant differences in the property, such as age, location, and physical characteristics. Adjustments are necessary even in comparing vacant land, such as hookups for utilities, soil composition, and location. There should be similarities in the number of rooms, bathrooms, bedrooms, size of lot, building age, style, and condition.
3. Reconcile all the comparable information and draw a conclusion of value.
The direct sales comparison approach is the most reliable gauge of the market and is most frequently used in appraising residential property, where the amenities are often difficult to measure. This approach is also a component for use in the other two methods of determining value. In the cost approach, market data are used to determine the depreciation figure, and in the income approach, market data are used to determine the market rent and capitalization rate. The direct sales comparison approach requires an active real estate market for the type of property being appraised. Also called competitive market analysis. (See appraisal, comparables, concession, contribution, corner influence, progression, regression, supply and demand