Sales Comparison Approach is one of the three methods of real estate valuation. The other two methods are: Investment Approach and Cost Approach. In this article, I will discuss the first method, sales comparison approach. In my subsequent articles I will discuss the other two methods.
Sales Comparison Approach is the easiest to understand method of estimating the market value of real estate. In this method, you arrive at the value of one real estate by comparing it with prices of other real estates that have been sold. The logic is, if that property was sold for that much, then this property should sell for this much. This amount is then the market value of the property. There are four steps in Sales Comparison Approach:
Steps in Sales Comparison Approach
In sales comparison approach you start by noting the attributes of the real estate to be valued. These attributes include location, building type e.g. apartment, maisonette, building area, number of bedrooms, standard of construction, plot area, condition of the building etc. These attributes will form the elements of comparison with those of sold properties.
The second step in sales comparison approach is sales data collection. You collect sales data that closely match the attributes of your property first and finish with the ones that least match. You will take care not to include sales made under force, coercion, ignorance, desperation, or involving special relations e.g. brothers or business associates. The reason for excluding these sales is that they do not reflect the market.
The ideal scenario in sales comparison approach is to analyze all the data. However the sheer size of the data and the level of analysis may make it a complex exercise. I suggest you take the first few matching sales starting with the most recent. You then make adjustments to the price for the differences. For example, if the sale was made one year ago, you may adjust it up by say 10% to bring it up to date. If the sale is in an inferior location you will need to add a small percentage to compensate for that. You will also adjust for the size so as to match that of your property, and so on. A valuer, an expert analyses a lot of data to be able to determine the adjustments to make.
The fourth and final step in the sales comparison approach is to apply the resultant figures. This will initially give you various figures. Depending on the prevailing market condition, you can choose to go by simple average. However, If the market is optimistic you may tend towards the higher figures. On the other hand, If the market is depressed, you may tend towards the lower figures. This is where the valuer makes a judgment on the value to return.
Registered Valuer, Registered Estate Agent & Registered EIA Expert
Real Estate Consultant at Tysons Limited, Nairobi-Kenya
Personal blog: www.StephenOmengo.com
Personal email: stephen@StephenOmengo.com