A Landowner’s Guide to Understanding the Comparable Sales Approach
This Article is written by Owners’ Counsel of America for general informational purposes only. It is intended to assist landowners in understanding some of the basic elements of one of the most utilized appraisal approaches in determining the value of property in an eminent domain proceeding. The approach is referred to as the Comparable Sales Approach or the Market Approach.
What Is the Comparable Sales or Market Approach?
The comparable sales or market approach is a real estate appraisal method that is often used in determining the value of property in an eminent domain proceeding. Value is determined by comparing the subject property to other properties with similar characteristics that have sold recently. The method takes into account the effect that individual property characteristics (such as location, size, access, topography, utilities, etc.) may have on the overall property value. Price adjustments are made for any meaningful differences between the comparable and the subject property.
What is the Degree of Comparability That Must Exist to Use a Sale as a Comparable Sale?
Jurisdictions differ on the degree of comparability that must exist in order to use a sale as a comparable in determining the value of the subject property. It is also important to understand that similarity does not mean identical. The important thing to understand is that the more comparable a sale is to the subject property, the stronger that sale’s indication of value is for the subject property. Think of two properties with many similar and overlapping characteristics. If one property sales for X amount, the chances are high that the other property (within a reasonable period of time) will likely sell for the same or a similar amount. The sales comparison approach rests on the presumption that a buyer will not pay more for a property than what was previously paid for a comparable property. This is called the principle of substitution.
Tell Me More About the Different Characteristics of Property that Should Be Considered?
In practice, there can be many factors that can cause price differences between two comparable properties. These differences can fall into several categories. Below are some of the primary categories that are often considered:
Ownership – Differences in ownership can sometimes result in differences in value. A property is valued differently if the owner has a fee simple interest (meaning the owner possesses 100% of all rights in the property) vs. one where the owner only has a leased interest.
Market Conditions – Depending on the local economy and market for real estate, prices may move up or down over time. The impact that changing market conditions may have on the property’s value is something that must be considered and taken into account. Accounting for market conditions is sometimes referred to as making a time adjustment.
Locational Characteristics – Location is a key element in real estate valuation because an individual property’s value is dependent upon the properties and area that surround it. Location takes into account many elements, including transportation, traffic patterns, school quality, shopping availability, and access to adequate utilities.
Zoning and Highest and Best Use – How the property is zoned and what uses can be made of it is often important in determining its value. Zoning also takes into account density and other factors that may dictate how the property can be developed. Highest and Best Use takes into account the most appropriate use for the property that maximizes its value. See “A Landowner’s Guide to Understanding the Concept of Highest and Best Use” under Featured Articles.
Physical Characteristics – Physical characteristics make up the most obvious differences between two comparable properties and can include similarities and differences attributed to a host of factors, including age, condition, terrain, topography, floodplain, wetlands, etc.
How Does the Adjustment Process Work?
The goal of the adjustment process is to make the comparable property look more like the subject property in order to reflect what the subject property would have sold for, if it too had been available for sale on the same day as the comparable sold. Thus, for each of the factors and characteristics referenced above, the appraiser will make an adjustment to the comparable sale to account for its similarity or dissimilarity to the subject property. Adjustments can either be qualitative (meaning based on qualities rather then precise measurements) or quantitative (meaning based on numeric values or measurements). Determining the actual amount of the price adjustment to be made is often based on the judgment of the appraiser.
What If My Property is So Unique or Special, There Are No Comparable Sales?
There may be situations where the subject property is so unique or special in the way it is being used or operated that it is difficult to find truly comparable sales. If the value of the property cannot be ascertained by the use of other valuation approaches (such as the cost or income approach), there may be an argument to be made that its value should be determined by less traditional methodologies. The degree to which a court may allow other valuation approaches to be used in ascertaining value for eminent domain purposes will depend upon the jurisdiction where the case is being tried and the case law applicable to that jurisdiction.