1
Chapter: What is the most common approach used by appraisers to value residential properties? (EN)
Introduction: Residential Appraisal - Dominance of the Sales Comparison Approach
Residential property valuation is a cornerstone of financial markets, impacting mortgage lending, property taxation, investment decisions, and real estate transactions. The accurate determination of market value is therefore paramount. While several recognized appraisal methodologies exist, including the cost approach, the income capitalization approach, and the sales comparison approach, empirical evidence and industry practice reveal a clear dominance of the latter in residential valuations.
The sales comparison approach, also known as the market approach, relies on the principle of substitution: a prudent purchaser will pay no more for a property than the cost of acquiring an equally desirable substitute in the open market. Scientifically, this approach leverages readily available, observable market data (i.e., sales prices of comparable properties) to infer the value of the subject property. Its validity hinges on rigorous data analysis, including the identification of key value-driving characteristics, such as location, size, condition, amenities, and date of sale. Quantitative and qualitative adjustments are then applied to the comparable sales prices to account for differences between the comparables and the subject property. Statistical techniques, such as regression analysis, can be employed to enhance the accuracy and objectivity of these adjustments, although their application in routine residential appraisals varies.
The scientific importance of understanding the sales comparison approach lies in its direct connection to real-world market behavior. It provides a framework for systematically analyzing market data, identifying trends, and quantifying the impact of various property characteristics on value. Its widespread adoption reflects its perceived reliability and relevance to the dynamics of the residential real estate market.
This chapter aims to provide a comprehensive understanding of the prevalence and application of the sales comparison approach in residential appraisal. Upon completion of this chapter, participants will be able to:
Identify the core principles underlying the sales comparison approach.
Explain why the sales comparison approach is the most frequently used method for residential property valuation.
Describe the process of selecting and analyzing comparable sales data.
Articulate the methodologies for making quantitative and qualitative adjustments to comparable sales prices.
Evaluate the strengths and limitations of the sales comparison approach in various market conditions.
