Sales Comparison Approach: 5 Key Steps
The Sales Comparison Approach is a method used to estimate property value by comparing recent sales of similar properties. Here's how it works:
- Find Comparable Sales: Look for properties sold recently in the same area with similar features.
- Verify Data: Double-check sale prices, dates, and property details to ensure accuracy.
- Choose Comparison Units: Use a consistent unit (like price per square foot) for analysis.
- Adjust for Differences: Account for variations like location, size, and amenities to align properties.
- Analyze and Estimate: Use adjusted values to determine the property's market value.
This method is straightforward and reflects current market trends. However, it relies on accurate data and works best in active markets with standardized property types. Tools like CoreCast can simplify the process by providing real-time data and insights, helping professionals make informed decisions.
What is the Sales Comparison Approach? (Examples)
Step 1: Find and Pick Good Sales to Compare
When you want to find out what a building is worth, good sales to compare are key. You need to look for buildings sold recently that show what buyers pay now.
First, look for sales info you trust, like MLS lists, local records, or well-known sites. Tools like CoreCast show up-to-date prices, maps, and facts to make your work easier. Once you have this info, pick out the best ones by looking at where the buildings are, and what they are like.
Where the building is is the main thing when you pick sales to compare. Try to find places in the same part of town, since even in one city, the price can change block by block. For example, one office just a few blocks away is a better pick than one far from yours.
Besides where it is, the type of building and what it is used for should match yours. If you have an office, look at other offices, not shops or houses, since these attract other buyers or loans. This helps make sure you see the price for places like yours.
Main Things to Match
After you get your sales, make sure you match the key parts that matter most. Start with size - how big it is. Bigger places can sell for more since it can cost less for each foot.
How old it is and shape it is in matter too. A new office with smart lights and a good heating system can cost more than an older one that needs work. So, pick sales with places close in age and how well they are kept to make the price match well.
Extras also matter. Things like parking with shade, lifts, or truck space should be the same in your place and those you compare. Getting these close makes your price guess better.
Money things like which people rent, for how long, and how full it is are big too. Pick places with the same kind of rents and rules so you don’t have to guess or change numbers too much. You want to find places that need few changes, since big changes can make your guess less true and off-track.
Sales Time Matters Too
How new the sale is counts just as much as size or money parts. You should look for sales in the past six months so prices match what’s happening right now.
Places can change fast when loans cost more, jobs change, or more people want them. Sales that are old, even just six months, may not tell you what a place is worth now, mostly in busy areas. If there are lots of sales, six months will give you enough info. If sales are slow and rare, maybe you need to look back further - but write down why if you do.
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It is key to look at what sold most lately, more so when lots of people want to buy. In these hot times, buyers may pay top prices just to get the home they want. But when prices go down, you should look at sales from the last six months so you do not think homes are worth more than they are. If there are not many sales, you may need to look farther back. When you do, pick the homes most like the one you want to price. Pick the ones with the least you need to change so that you get a true picture of what the home is worth. Making sure you use facts that fit best will keep your price true.
Step 2: Write Down and Check Sale Facts
After you make your list of sales to compare, you must make sure your list is right. Mistakes with price, date, or facts can give you wrong numbers. This may lead you to lose cash or hurt the trust of those who work with you. Make sure each fact is checked twice. Do not just look at the money part, but look hard to make sure the list matches the market now. Good notes turn numbers into strong proof you can use later.
Look at each sale like a story. Do not only care about price; see more than that.
Where To Find Good Sale Facts
Here are three good spots to get the facts you need:
- County office records: These give true facts like what it sold for, when it sold, and what the thing is. But these facts may not be up to date, so be careful.
- Broker reports and MLS sites: You can get new facts here, such as what shape the home is in, how long you can rent, or what the market is doing now. Still, check with at least two places, since mistakes can show up.
- Sale data tools like CoreCast: These apps put many facts in one spot and check them for you. This means you make less wrong moves and save time. CoreCast also works with other apps and gives live sale facts and maps to help see the big sales picture.
You should use two or more good sources for each sale. For instance, if the county says a place sold for $2.5 million, but MLS says $2.4 million, find out why before you pick which one is true.
How To Check Each Sale
Just using the price to compare can hide the truth. Maybe a house sold for $1.8 million seems to be just like the one you want to check - until you learn it was taken by the bank or sold to someone in the family. These do not show what the normal market does.
Make sure the sale is arm’s length - buyer and seller do not know each other and do what is best for themselves. To be sure, call the agent or broker. Ask things like: Was it a normal sale? How long did it take? Were there things that made it not a normal sale?
When you write down sale notes, put in as many facts as you can, like:
- How much it sold for, and when
- Where the home is, and its legal name
- How big it is, when it was built, and what has been fixed
- How it looks or the shape it is in
- If it is rented, the rent rules and who rents it
- If there are more than one tenant, who they are, when rent stops, rent costs, and open spots
Also, look at how long it took to sell. If it sold too quick, it may mean the seller had to sell fast. If it was for sale too long, maybe the price was too high. Both things can make the sale less good for you to compare to your own sale.
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Write down where you got each bit of info and the date you checked it, so you have a clear record. Put in phone numbers or names for any experts who helped you. This proves you are careful, and also helps if someone needs to look over your work.
If you find things don’t match up, like prices that don’t agree from other places, look into it more. It may be that one place gives the full price, while another shows the price after changes. It’s best if all things match, so keep checking until you know for sure which price is true.
Step 3: Select Units of Comparison
Step 3: Pick How You Compare
After you check your sales data, pick how you will compare it to what’s in the market. This makes sales from many kinds of buildings easy to line up, side by side.
Think of the unit you pick as a shared way to talk about cost. For office space, people often look at "dollars per square foot." Apartment buildings get priced in "dollars per unit." If you pick a way that folks in your city don’t use much, your numbers can look off and people may not trust your take.
Follow the way your market does things. For offices, use the space people pay to use instead of the whole building. If you’re not sure what counts as normal, look at sale ads near you, talk to people who help others buy or sell, and check what gets used in deals like yours. In big cities, office space often goes for something like $250 for each square foot people can rent.
Every type of place is different. It matters which unit you use. For homes with lots of units, compare by unit - buyers care about how many they can rent out. Warehouses care more about the full size of the space. Stores care most about size they can rent because who rents and how many people come by is key.
Ways to Compare Units
- Price per square foot: This works best when space is what matters. Offices, stores, and warehouses use this a lot. Offices often look at space people can rent; stores check for space they can lease.
- Price per unit: Best for places with lots of rent options, like big apartment buildings. If a place with 100 apartments sells for $15 million, the cost per unit is $150,000. This lets you line it up with other such homes.
- Gross space vs. space you can rent: Total size means all of the building, while rentable area means just places you can rent out. An office with 100,000 square feet total may only have 80,000 feet people can rent if you count halls and shared rooms. If you look at all the space, your price per foot will look different.
Some places use their own way to compare. Hotels look at price for each room. Land gets priced per acre or by square foot.
Picking the Best Way
Choose what matches the building. For a doctor’s office with suites in lots of sizes, price by rentable space is smart. For one big warehouse where just one group rents, look at price per foot for the whole area.
If you see that people use more than one way to measure, pick the way most used in sales like yours. Tools like CoreCast help by making sizes match, so you can look at all homes the same way.
Write down the way you picked, and tell why it is best for this home and the area. If other homes use other ways to measure, change their numbers so they all use the same way. For this, you can use plans or numbers from old reports. Make sure you do this before you make changes. Doing it the same way each time helps your price to show what people really pay for homes like this one.
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Step 4: Change for Property Differences
Office buildings and shops are not all the same. They have many kinds, sizes, and states. Some look nice and new. Others are old or run down. You must change prices to make things fair when you compare them. These changes help show the real worth by looking at what each place has or does not have.
For instance, let’s say your building has indoor spots for cars. The other place you look at does not. You should add to their price, since your parking is worth more. If they have newer rooms, or their shape is better, take some away from their price. These are some cases, but there are lots of things that need changes.
Most of the time, you change for things like size of space, how old the place is, and the state it is in. You also look at how good the spot is, how many cars you can park, what kind of shops or tenants are inside, the rent deals, and extras like lifts or guards. These parts matter a lot when folks think about what to pay. So, you need to look at them each time.
How to Make Changes
First, write down each change you make. If a thing makes a place better, you add points. If it makes it worse, you take points away. Here are examples:
- Say a 50,000-foot work spot sold for $200 for each foot. It has 20 covered spots for cars. Your place has 10. You might drop the other price by $2 for each foot.
- Where a place is can change the price by a lot, too. If a spot is in the main city zone, it might be worth $50 to $100 more for each foot than in a spot not so nice. But if a place needs big fix-ups, like new heat or roof, you might drop the price by $20 to $30 per foot for it when you look at it next to a fixed-up spot.
How to Use a Simple Change Method
When you have your other spots picked, use a step-by-step method to change prices. Tables help keep all your facts in order. Write each other spot down, show how it is not the same as yours, and change the price bit by bit, either with numbers or with percents. Start from the sale price for each foot, and change for each big thing one by one. If new spots sell for $15 more for each foot than old ones in the same street, use that number for each old spot as you look.
To change prices right, you need good facts from the market. You can use pairs of sold places that are the same except for one part, to find out the right change number. You can also use local books, sale lists, public files, and sites with building facts. Some tech tools make this easier by giving you live data, doing the math by computer, and even letting you see each building’s facts and changes on a map you can click and move.
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| Change Made | Good Change Example | Bad Change Example |
|---|---|---|
| Place | Place close to many shops and work | Place far from town, not so nice |
| Shape | Place fixed up and looks brand new | Place broken and needs lots of work |
| Extras | Place has roof for cars | Place does not have any lift stairs |
Put your work on what matters most to folks who want to buy. For example, a change of $50,000 in how the entry looks can be a big thing for nice office spaces, but it does not matter much for big storage places. Do not put too much thought or effort into things that do not make a big change.
Writing Down Changes
Each new change needs good, clear reasons, facts, and ways you got your answer. Say you take $10 off for each square foot of space because of how the place looks. Show a few other places that had this same cut to help prove your point.
This work takes time, and it gets better as you do it more. If you make a strong book or list with all your market info, it will help you a lot in the long run. You can use tools, like CoreCast, to keep all your info in once place and help make reports.
Be careful, since even small mistakes can make for big errors in what a building is worth. Just missing $5 for each square foot in a big spot can mean you are off by $500,000 in total. Making the right change is key, since it helps find the true price and gets you ready for the next step.
Step 5: Analyze Adjusted Values and Determine Final Estimate
Once you've adjusted the comparables, it's time to evaluate their prices and determine your building's market value. Start by organizing all the adjusted prices from lowest to highest. Look for any values that stand out significantly from the others. For instance, if one comparable is priced at $150 per square foot but the majority fall between $200 and $220, dig deeper to understand the reason. Such discrepancies might point to errors in your adjustments or specific characteristics that make that comparable less relevant. After identifying and addressing these outliers, weigh the adjusted values to arrive at your final estimate.
Focus on comparables that required fewer adjustments, reflect recent sales, and are located nearby. These factors provide a clearer picture of current market conditions and make the data more reliable.
Your final estimate will typically land near the middle of the adjusted values, but it should lean toward the figures you find most reliable. Avoid simply averaging all the values without thought - prioritize the ones that best represent the market and align with your analysis.
Document your reasoning behind the final estimate. For example, if you choose $210 per square foot, explain how it aligns with the most reliable comparable in your dataset. This step ensures your valuation reflects a thorough and logical process rooted in the data you've gathered and adjusted.
Lastly, double-check your estimate against the broader market. If similar local properties are selling for $180–$200 per square foot and your estimate is $250, revisit your adjustments to identify any potential errors.
Using Analytical Tools for Decision-Making
Analytical tools can make this step much easier and more precise. Platforms like CoreCast bring all your data together in one place, allowing you to spot patterns and assess market trends more effectively. Instead of juggling spreadsheets and multiple programs, you can view your property alongside adjusted comparables and real-time market data on an integrated map. This consolidated view highlights which comparables are most similar to your property and which ones should carry less weight in your analysis. Additionally, these tools often include features like deal tracking and portfolio analysis, helping you compare performance across properties and evaluate future opportunities.
The biggest benefit of using these platforms is that they help you avoid common mistakes during the final valuation. By centralizing your data, identifying outliers quickly, and comparing your results with current market trends, you're more likely to arrive at an accurate and trustworthy estimate. Use these insights to refine and validate your final valuation, ensuring your estimate reflects the true market value of your building. This data-driven approach leads to more confident and informed decisions.
Pros and Cons of the Sales Comparison Approach
The Sales Comparison Approach comes with its own set of strengths and challenges. Its success largely hinges on the availability of market data, the type of property being assessed, and the specific conditions of the market.
One of its key advantages is that it’s rooted in actual market transactions. By using recent sales data, this method reflects real buyer behavior and provides a clear snapshot of current market trends. This makes the valuation process not only reliable but also easy to explain to clients, lenders, and investors, which is a huge plus.
Another benefit is its transparency. The straightforward process allows stakeholders to easily grasp how the valuation is determined. However, despite these strengths, there are practical challenges that can limit its effectiveness.
For example, this approach struggles in markets where data is scarce or when dealing with properties that are highly specialized. In areas with few recent sales or for unique properties - like historic buildings repurposed as office spaces or niche facilities like data centers - finding enough comparable transactions can be difficult, making the method less reliable or even unusable.
There’s also an element of subjectivity involved. Adjustments for differences in property features - such as location, condition, or amenities - often rely on the appraiser’s judgment rather than a standardized formula. This means valuations can vary, even among experienced professionals, based on how those adjustments are handled.
That said, the Sales Comparison Approach shines in active markets with standardized property types. For instance, office buildings in well-established business districts, retail spaces in developed areas, or industrial properties in bustling markets often provide a wealth of comparable sales data, making valuations more reliable and consistent.
Comparison Table of Pros and Cons
Here’s a quick summary of the pros and cons:
| Pros | Cons |
|---|---|
| Reflects real buyer behavior and current market conditions | Requires sufficient recent comparable sales in active markets |
| Transparent and easy for stakeholders to understand | Relies on subjective adjustments for property differences |
| Based on actual market transactions | Less effective for unique or specialized properties |
| Provides a realistic measure of buyer willingness to pay | Even small adjustment errors can lead to significant valuation differences |
| Works well for standardized property types in established markets | Struggles in emerging or inactive markets with limited sales data |
| Quick to apply when adequate comparable data is available |
To address these challenges, many real estate professionals combine the Sales Comparison Approach with other valuation methods when data is limited. Additionally, tools like CoreCast can be used to aggregate broader market data and monitor trends across larger regions, enhancing the reliability of valuations.
Recognizing these factors underscores the importance of thoughtful adjustments and thorough market analysis. Knowing when to apply the Sales Comparison Approach - and when to consider alternative methods - ensures more accurate and dependable results.
Conclusion
The Sales Comparison Approach boils down to five key steps: selecting comparables, verifying data, determining comparison units, making adjustments for differences, and conducting a final analysis. Together, these steps create a structured process for evaluating market values with precision.
What sets this method apart is its reliance on real transaction data. This makes it straightforward to explain to clients and investors, as it directly reflects market trends and sentiment.
However, the method’s accuracy hinges on the availability and quality of data. In markets with limited sales activity or for unique properties, finding suitable comparables can be a challenge. Precise adjustments require careful judgment, and even minor missteps can lead to significant valuation errors.
Modern tools like CoreCast are transforming how professionals approach this process. CoreCast simplifies data collection, mapping, and analysis, offering real-time insights. By reducing the manual workload, it allows professionals to focus on refining adjustments and making sound valuation decisions.
"Our family office needed a solution to manage legacy real estate assets. They have been instrumental to streamline our valuation and underwriting processes", says James Gueits, Principal at MHP Operator.
The Sales Comparison Approach continues to be a cornerstone of commercial real estate valuation because it answers a critical question: What are similar properties actually selling for? With the integration of modern technology, this reliable method becomes even more efficient, enabling faster and more precise valuations that inspire confidence in investment decisions.
For real estate professionals working in active markets with standardized property types, this approach remains an essential tool for understanding market trends and establishing credible property values. By following its core steps and leveraging advanced platforms, professionals can confidently assess market dynamics and make smarter investment choices.
FAQs
How do I account for differences in property features when using the Sales Comparison Approach?
When applying the Sales Comparison Approach to property valuation, it's crucial to account for differences in property features to make fair comparisons. Start by focusing on key factors that influence a property's value, like its location, square footage, age of the building, lot size, and any additional amenities. Then, review recent sales of similar properties to understand how these features have influenced their sale prices.
To refine your comparison, adjustments are made by either adding or subtracting value depending on how the subject property stacks up against the comparable ones. For instance, if the property you're valuing has a larger lot or more modern upgrades than a comparable property, you might increase its value. On the other hand, if it lacks certain features, you may need to lower its valuation. These adjustments help level the playing field, ensuring that differences between properties are accounted for.
By carefully addressing these variations, you can arrive at a valuation that accurately reflects the property's market value.
What challenges can arise when using the Sales Comparison Approach in less active or emerging real estate markets?
The Sales Comparison Approach can be tricky in markets where property transactions are sparse or just starting to grow. When there aren’t enough recent sales of similar properties, setting accurate valuation benchmarks becomes a real challenge. Add market volatility or unpredictable pricing trends into the mix, and the process gets even more complicated.
In these cases, real estate professionals often have to get creative. They might pull data from a wider range of sources, make adjustments for major differences between properties, or even explore alternative valuation methods to fill the gaps. Tools like CoreCast can be incredibly useful here. By delivering detailed real estate insights and analytics, it provides a more dynamic view of market conditions, helping professionals navigate these hurdles with greater confidence.
How does CoreCast improve the accuracy and efficiency of the Sales Comparison Approach in real estate?
CoreCast takes the Sales Comparison Approach to the next level by offering real-time insights and bringing all the necessary tools together in one convenient platform. It empowers real estate professionals to effortlessly evaluate comparable properties, monitor market trends, and get a clear view of the competitive landscape.
With features like built-in mapping, portfolio analysis, and pipeline tracking, CoreCast simplifies complex workflows and ensures data is precise. This means property valuations can be done more efficiently and with greater confidence.