Ch3. The Sales Comparison Approach — Comparable Selection and Adjustments

The Logic of the Sales Comparison Approach

Sales Comparison Approach: Value is estimated by comparing the subject property to recent sales of similar properties, then adjusting the sale prices for differences.

Theoretical basis: The Principle of Substitution — a buyer will pay no more than the cost of acquiring an equally desirable substitute. Market transactions of comparable properties provide the most direct evidence of market value.

Sales Comparison formula:
Indicated Value = Sale Price of Comparable
                × Conditions of Sale Adjustment
                × Market Conditions (Time) Adjustment
                × Location Adjustment
                × Physical Characteristics Adjustment
                (× unit size, if applicable)

Best-suited property types:

Residential properties (single-family homes, condominiums)
Any property class with an active, arms-length sales market

Criteria for Selecting Comparable Sales

Comparable selection requirements:
① Arms-length transaction (no atypical motivations)
② Recent sale date (within adjustment range for market conditions)
③ Similar property type (use, location, size, physical characteristics)
④ Verifiable transaction data

Sales typically excluded:
- Related-party or family transfers
- Sales under financial distress or foreclosure (unless typical for the market)
- Sales involving assemblage or plottage premiums
- REO / bank-owned sales (may reflect below-market motivation)
- Other non-arm's-length transactions

The Adjustment Process

Step 1: Conditions of Sale Adjustment

If a comparable sale reflects atypical motivation (motivated seller, non-arm’s-length buyer), the sale price must be adjusted to reflect what a normal transaction would have produced.

Conditions of Sale Adjustment = Normal Price / Actual Sale Price

If a seller accepted 10% below market due to financial distress:
Adjustment = 100 / 90 ≈ +11.1%
(the comparable's price is adjusted upward to simulate a normal sale)

Step 2: Market Conditions (Time) Adjustment

Accounts for price changes between the date of the comparable sale and the effective appraisal date.

Market Conditions Adjustment = Current Index / Sale-Date Index

Index sources: local price indices, paired-sales analysis,
               published market trend data

Step 3: Location Adjustment

Accounts for differences in location quality between the comparable’s market area and the subject’s market area.

Location Adjustment = Subject Location Value / Comparable Location Value

Example: subject location is 5% superior → +5% location adjustment

Step 4: Physical Characteristics Adjustment

Accounts for individual property differences (size, lot dimensions, condition, quality, features) within the same market area.

Physical adjustment elements (land):
- Road frontage / access (most influential for most sites)
- Shape (regular vs. irregular)
- Topography (level vs. sloped)
- Orientation / exposure
- Utilities available (water, sewer, gas)

Physical adjustment elements (improvements):
- GLA / building size
- Age and condition
- Quality of construction
- Amenities (garage, pool, etc.)

Worked Example

Comparable Sale: $200,000 (sold 2 years ago, distressed — 5% below market)
Market appreciation: 3% per year → 2-year adjustment = 1.0609
Location: subject is 3% superior to comparable → +3%
Physical: subject is 2% inferior to comparable → −2%

Adjusted Price:
$200,000 × (100/95) × 1.0609 × 1.03 × 0.98
= $200,000 × 1.0526 × 1.0609 × 1.03 × 0.98
≈ $225,300

Paired-Sales Analysis

The preferred method for extracting individual adjustments is paired-sales analysis — finding two sales that are identical except for the element being adjusted, then isolating the dollar or percentage difference attributable to that element.

Example — extracting a garage adjustment:
Sale A (no garage): $280,000
Sale B (1-car garage, otherwise identical): $295,000
Implied garage adjustment: +$15,000

Key Concept Cards

Four-Step Adjustment Sequence ★★★★★ : Conditions of Sale → Market Conditions → Location → Physical. Apply in this order — each step normalizes the comparable before the next adjustment is applied. Memory trigger: Sale Conditions · Time · Location · Physical — CTLP

Conditions of Sale Adjustment ★★★★★ : Adjusts a non-arm’s-length price to a market-normal price. Required whenever the comparable involved atypical motivation. Memory trigger: Adjustment = Normal ÷ Actual (100 ÷ (100 ± %change))

Paired-Sales Analysis ★★★★☆ : The market-based technique for extracting adjustments by isolating matched pairs that differ only in the element being measured. Memory trigger: Paired-sales = isolate one variable at a time

Practice Quiz

Q. A comparable sold one year ago for $180,000 under conditions of a motivated seller (8% below market). What is the conditions-of-sale adjustment factor?

Adjustment = 100 / (100 − 8) = 100 / 92 ≈ +8.70%. Adjusted price = $180,000 × 1.087 ≈$ 195,650.

Q. What is the difference between a location adjustment and a physical characteristics adjustment?

Location adjustment: accounts for the difference in the surrounding market area (neighborhood quality, proximity to employment, amenities) between the comparable’s location and the subject’s location. Physical characteristics adjustment: accounts for differences in the property’s own features (size, condition, quality, amenities) within the same market area.

OIYO Editorial