Market Approach 


  The market approach is based on comparison of the subject property to similar properties which have sold in the same market. The Economic Principle of Substitution weights heavily on this approaches application.  Similarities and differences must be noted in detail such as: date of sale, location of property, physical characteristics, and conditions of the sale. For investment properties, potential income should also be documented.  

The conditions of the sale are extremely important when considering whether a property is comparable to the subject or not. If the parties are related, or special financing was obtained, or the seller was forced to sell by some condition of their life (a move, divorce, etc.) then the sale might have to be eliminated as invalid. Remember the definition of "market value": "the most probable price, in terms of cash, in a competitive and open market, assuming a willing and knowledgeable buyer and seller, allowing sufficient time for the sale, and assuming that the transaction is not affected by undue pressures." Some factors like size or shape or location may have to be accommodated by adjusting the value of the comparable up or down to reflect the difference between that property and the subject. The comparable is always adjusted, never the subject property.  

The market approach indicates a range of possible values, rather than a precise figure, especially if few sales are available or many adjustments have to be made.  The market approach is the most widely used for residential property valuation. It is ideal for types of property which are regularly sold, and it may be the only valid approach for valuing properties which are very old, or for which reliable cost or income data is unavailable.