Definition
The Market Comparison Approach (MCA), also known as the Sales Comparison Approach (SCA), is a method for appraising the value of real estate. This approach estimates the value of a property by comparing it to comparable properties, known as “comps,” that have recently been sold in the same area. The MCA adjusts the value of these comparable properties to account for differences in qualities such as size, location, condition, and amenities.
Examples
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A Single-Family Home: If a single-family home with three bedrooms and two bathrooms in the suburbs is on the market, an appraiser would look at the sale prices of other three-bedroom homes with similar characteristics in the same neighborhood that sold recently.
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A Condominium: For a 2-bedroom, 2-bathroom condominium in an urban area, the appraiser might use sales data from other similar 2-bedroom condos within the same building or nearby to determine value adjustments.
Frequently Asked Questions (FAQs)
How is the Market Comparison Approach applied?
The MCA involves several steps: selecting comparables, analyzing the similar properties, making adjustments to the sale prices of these comparables to reflect differences from the subject property, and deriving a value estimate for the subject property.
What factors are considered in adjusting comparable properties?
Factors often considered include the size of the property, age and condition, location, amenities, and overall market conditions at the time of sale.
What are common uses of the Market Comparison Approach?
The MCA is commonly used for residential properties where there are numerous recent comparable sales. It is also used for commercial real estate to a lesser extent.
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Comparable Sales (Comps): Recently sold properties similar in size, location, and amenities used for comparison in the sales comparison approach.
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Adjustment Process: The method of making modifications to the sale price of comparables to account for differences between the compared property and the subject property.
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Subject Property: The property being appraised or evaluated.
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Appraisal: The process of estimating the market value of a property.
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Valuation: The act or process of assessing the value or worth of an asset, including real estate.
Online Resources
- Investopedia: Market Approach
- Real Estate Appraisers: What is a Comparative Market Analysis?
- The Balance: How to Use the Sales Comparison Approach in Real Estate
- U.S. Appraisal Institute
References
- Brueggeman, William B., and Jeffrey D. Fisher. “Real Estate Finance and Investments.” McGraw-Hill Education, 15th edition.
- Boykin, James H. “The Valuation of Real Estate.” Appraisal Institute, 3rd edition.
- Glickman, Sam. “Real Estate Valuation and Strategy: A Guide for Family Offices and Their Advisors.” Wiley Finance.
Suggested Books for Further Studies
- “Real Estate Appraisal: From Value to Worth” by Tom Wilson.
- “The Appraisal of Real Estate” by Appraisal Institute.
- “Real Estate Valuation Methods” by David Melton.
Real Estate Basics: Market Comparison Approach Fundamentals Quiz
### What is the primary purpose of the Market Comparison Approach?
- [ ] To measure the income potential of a property.
- [ ] To determine the cost of building a new structure.
- [x] To estimate the value of a property by comparing it to similar properties.
- [ ] To analyze the economic impact of real estate trends.
> **Explanation:** The primary purpose of the Market Comparison Approach is to estimate the value of a property by comparing it to similar properties that have recently sold in the same area.
### What are comparables, or "comps," used in this approach?
- [x] Recently sold properties similar to the property being appraised.
- [ ] Properties with the same market value as the appraised property.
- [ ] Future predictions of property market trends.
- [ ] Newly built properties in the area.
> **Explanation:** Comparables, or "comps," are recently sold properties similar in size, location, and amenities to the property being appraised.
### In the Market Comparison Approach, what must an appraiser do after selecting comparables?
- [ ] Advertise the property.
- [x] Adjust the sale prices of the comparables.
- [ ] Negotiate the sale price.
- [ ] Inspect the neighboring properties.
> **Explanation:** After selecting comparables, an appraiser must adjust the sale prices of these comparable properties to reflect differences from the subject property.
### Which factor is generally NOT considered when adjusting comparable properties?
- [ ] Size of the property.
- [ ] Location.
- [x] Personal preferences of the seller.
- [ ] Condition of the property.
> **Explanation:** Personal preferences of the seller are generally not considered when adjusting comparable properties; adjustments are made based on objective factors such as size, location, and condition.
### Why is the Market Comparison Approach often used in residential property appraisal?
- [ ] It’s the cheapest method.
- [x] Comparable sales data is usually readily available.
- [ ] It requires the least amount of time.
- [ ] It doesn't require any prior knowledge.
> **Explanation:** The Market Comparison Approach is often used in residential property appraisal because comparable sales data is usually readily available, making it easier to find similar properties for comparison.
### Which of the following is a limitation of the Market Comparison Approach?
- [ ] It requires detailed market analysis.
- [x] It may not work well in areas with few comparable sales.
- [ ] It can only be used for commercial properties.
- [ ] It doesn't provide a numeric value for properties.
> **Explanation:** A limitation of the Market Comparison Approach is that it may not work well in areas with few comparable sales, making it difficult to accurately estimate property values.
### How does the adjustment process affect the comparables in the Market Comparison Approach?
- [ ] It aligns the market value with the owner's asking price.
- [x] It modifies the sale prices to reflect differences from the subject property.
- [ ] It changes the subject property’s condition.
- [ ] It determines the distance between properties.
> **Explanation:** The adjustment process in the Market Comparison Approach modifies the sale prices of comparables to reflect differences from the subject property, such as size, condition, and location.
### Which statement is true about the subject property in the context of the Market Comparison Approach?
- [ ] It is the property used as a basis for comparables.
- [x] It is the property being appraised.
- [ ] It is always the newest property on the market.
- [ ] It is the lowest-priced property used for comparison.
> **Explanation:** The subject property in the context of the Market Comparison Approach is the property being appraised or evaluated.
### What element is critical when selecting comparables for the Market Comparison Approach?
- [ ] Similar landscaping styles.
- [x] Recent sale dates.
- [ ] Similarities in paint color.
- [ ] Same number of floors.
> **Explanation:** Recent sale dates are critical when selecting comparables for the Market Comparison Approach to ensure that the comparison reflects current market conditions.
### Why is the Market Comparison Approach considered subjective?
- [ ] Due to the lack of data and variables.
- [ ] Because it cannot provide any useful valuation.
- [ ] As it ignores locale-specific factors.
- [x] Because adjustments are based on the appraiser's judgment.
> **Explanation:** The Market Comparison Approach is considered somewhat subjective because price adjustments made to comparables can depend on the appraiser's judgment regarding differences in property attributes.
