What is the ‘sales comparison approach’ to valuation?

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The sales comparison approach to valuation is fundamentally based on analyzing the sale prices of similar properties that have recently sold in the same market area. This method uses data from these comparable sales to arrive at an estimated value for the subject property, factoring in differences such as square footage, location, and amenities. The underlying principle is that a buyer will not pay more for a property than what similar properties have sold for in the current market, making it an effective way to gauge a property's worth.

In using this approach, an appraiser typically identifies several comparable properties and makes adjustments for any differences between the subject property and those that have sold, ensuring that the valuation reflects the current market conditions. This method is widely accepted and is particularly useful in residential real estate markets where properties tend to have many characteristics in common.

Other options present alternate valuation methods that focus on different aspects of valuation. For instance, the technique based on material costs assesses property value by analyzing what it would cost to construct a similar building, while strategies that rely solely on rental income or historical sales data without adjustments miss the nuanced differences between properties that can significantly affect their market value.

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