Home.co.uk
Home.co.uk

Property Valuation Methodology: The Comparable Sales Method

Value Value Table of Contents Income Method Income Method

What Is It?

The "Comparable Sales Method" is sometimes called the "Inferred Analysis" method of property valuation. This method estimates the value of a house by comparing it to the prices of similar properties sold in similar locations within a recent period of time. The basic assumption is therefore that a property is worth what it will sell for, in the absence of undue stress and if reasonable time is given. This method works with the market value of homes. It is the most prevalent method in the residential property market, concerning general trends and projections and employing the principle of substitution.

Procedure

  1. The central task is to systematically assemble data on comparable properties. Basically, the forces influencing value have to be weighed against each other. The relevant elements to look for can be split into transaction and asset characteristics:

    Transaction Characteristics - Date of transaction, means of payment, transaction speed, etc.

    Asset Characteristics - Size, location, conditions, utility, building regulations, business climate, etc.

  2. The best way to compare property would obviously be to inspect it in person. Since this option is very time-consuming and not always possible, the next best solution is to search property transaction databases. An ideal database will contain information relating to transaction date, price paid, property features and size etc.

  3. Once the data has been obtained and collated the task is to draw informed conclusions on the value of your property - for example a valuation price range - based on the evidence collected. Obviously those properties that are most similar to yours should receive a greater weighting than those which are less comparable.

Comparable Sales Method Advantages

  • It is the most easy and straightforward method and has become general practice in the residential housing market.
  • It leads to an objective valuation being placed on the property. The answer is connected to the actual market value as opposed to an individual's preferences.

Comparable Sales Method Disadvantages

  • Sometimes it might be difficult to locate enough similar property transactions to draw meaningful conclusions with regards to what the value should be.
  • Market value and price might differ due to "unreasonable" actions by other actors.
  • This technique makes no reference to intrinsic value. If a property's price is reasonable on a comparable basis, it does not necessarily follow that this is a reasonable buying or selling price for an individual. For example, I might want to purchase a property in order to let it. The property's price might be within a reasonable market price range, but because average rents in the area are not very high, the investment would not be profitable to me.

Value Value Table of Contents Income Method Income Method

See also: Housing Market Data

Back to: Property Help And Advice