How it works
The approach rests on substitution: a buyer will not pay more for a property than the cost of acquiring an equally desirable alternative. Its persuasiveness comes from being grounded in what buyers actually paid rather than in a formula, which is why appraisal review treats well-supported comparable analysis as strong evidence, and why it carries most weight in liquid markets with frequent transactions.
The work is in the adjustments. Comparables are never identical, so each is adjusted toward the subject for differences in property rights conveyed, financing terms, conditions of sale, market conditions since the transaction, location, physical characteristics and economic characteristics. Convention applies the transactional adjustments first (rights, financing, conditions, and time), converting each sale to a cash-equivalent, current-market basis before property-level differences are addressed. Reversing that sequence produces different and less supportable results.
Two diagnostics reveal the quality of a comparable set. Net adjustment is the sum of all adjustments for a comparable, and gross adjustment is the sum of their absolute values. A comparable with a low net but high gross adjustment required substantial correction on several dimensions that happened to offset: it is a weaker comparable than one requiring little adjustment of any kind, even though the net figures look similar.
Consistently large gross adjustments across a comparable set usually mean something other than poor technique: there simply are not enough genuinely similar sales in the subject's submarket. That is itself a useful finding, because it tells the appraiser and the reviewer how much weight the sales comparison approach should carry against the income approach in the final reconciliation.
Worked example
Valuing a 45,000 square foot industrial building. Three comparables are adjusted to the subject.
| Step | Calculation | Result |
|---|---|---|
| Comparable A: $132/sf, sold 14 months ago | +6% market conditions, −4% superior clear height | $134.32/sf |
| Comparable B: $145/sf, sold 3 months ago | −8% superior location, +2% smaller size | $136.07/sf |
| Comparable C: $128/sf, sold 8 months ago | +4% market conditions, +3% inferior condition | $137.11/sf |
| Indicated range | $134.32 to $137.11 per square foot | tight clustering |
| Concluded value | $136.00 × 45,000 sf | $6,120,000 |
Three sales spanning $128 to $145 per square foot (a 13% raw spread) converge to within $2.79 per square foot after adjustment, a 2.1% range. That convergence is the evidence that the adjustments were reasonable. Had the adjusted figures spread further apart than the raw ones, the adjustments would be suspect and the approach would warrant less weight in the reconciliation.
Common mistakes
- Applying property adjustments before transactional ones
- Convention converts each sale to cash-equivalent, current-market terms first. Reversing the order changes the result and is harder to defend.
- Using uniform percentage adjustments out of habit
- Adjustments should be market-derived through paired sales or regression where data allows, not applied as conventional percentages.
- Ignoring gross adjustment when net adjustment looks small
- Large offsetting adjustments indicate a weak comparable, even when they net close to zero.
- Treating listings as comparables
- An asking price is an offer, not a transaction. It may indicate a ceiling but is not evidence of what a buyer paid.
Frequently asked questions
- What is the sales comparison approach?
- A valuation method that analyzes recent sales of similar properties and adjusts each for its differences from the subject (location, size, condition, date of sale, and terms) to indicate the subject's value.
- What adjustments are made in the sales comparison approach?
- Transactional adjustments first (property rights conveyed, financing terms, conditions of sale, and market conditions since the sale), then property adjustments for location, physical characteristics, economic characteristics, use and any non-realty components.
- When is the sales comparison approach most reliable?
- In active markets with frequent transactions of genuinely similar assets, where adjustments are small and can be supported with market data. It is least reliable for special-purpose properties and in thin markets, where large adjustments signal that comparable evidence is scarce.