What does the "sales comparison" approach assess?

The "sales comparison" approach is a widely used method in real estate valuation that determines the market value of a property by analyzing the sale prices of similar properties in the same area. This method operates on the principle of substitution, which posits that a buyer would not pay more for a property than the cost of purchasing a comparable substitute property.

By looking at recent sales data from comparable properties (often referred to as "comps"), the assessor can adjust for differences in features, conditions, and locations to arrive at an estimated value for the property in question. This is particularly effective in active markets where there are plenty of comparable sales and gives a realistic reflection of current market trends and buyer willingness to pay.

This approach stands in contrast to other methods such as considering rental income potential or the cost to build a similar property, which do not directly reflect the market perspective that buyers use when making purchasing decisions. Assessing tax liabilities also does not directly pertain to determining market value but rather focuses on evaluating properties for taxation purposes. Thus, the sales comparison approach is specifically geared towards establishing the market value based on actual sale transactions of similar properties.