The Sales Comparison Approach Guide

The Sales Comparison Approach is a widely used valuation method in commercial real estate.  Let’s break it down step by step:

1. Identify Comparable Sales – Start by selecting arm’s-length transactions of properties that have recently sold and are similar to the subject property.  The more recent and relevant the comparables, the fewer adjustments you will need to make.

   
   

2. Unit of Comparison – Identify the unit of comparison that is most relevant to buyers and sellers in this market for the subject property type (e.g., per square foot or per unit).

   
   

3. Determine Key Adjustment Factors – Identify physical characteristics that impact value and warrant adjustments.

   
   

4. Apply Adjustments Systematically – Maintain relative scaling across the comparables.  If two comparables are both superior to the subject property but one is more superior than the other, then this hierarchy must be reflected appropriately in the adjustments.

   
   

5. Calculate Adjusted Sale Prices – The comparables will arrive at an adjusted sale price per square foot or per unit.  This represents what the comparable would sell for if it were identical to the subject property.

   
   

6. Reconcile Values – Analyze the adjusted sale prices and weigh them based on comparability.  The final step is to reconcile the adjusted prices into an estimate of market value.

Understanding the Sales Comparison Approach is essential for producing accurate and defensible valuations.  Whether you’re an appraiser, investor, lender, or broker, knowing this valuation method and how it works will help with informed decision-making.