The market data approach or sales comparison approach is finding value by comparing a property to other properties of similar size and condition in the same area. If two similar properties are $400,000 each, then your property would be estimated at $400,000. It is one of those things where the definition is in the name, kind of like jumbo shrimp. You are comparing sales in the market, hence the name market data approach or sales comparison. If you think about it, you use this approach every day when you go shopping. What is a good price for the shoes I want? Well, what do shoes that are similar cost?
Typical appraisers will use comparable homes that were sold within six months of the appraisal. If you are becoming a residential real estate agent, you will become very familiar with this approach. The market data approach is widely accepted as the most accurate method of comparison for residential real estate.
This approach is also perfect for vacant lots. When there is a vacant lot, there are not many variables, so it is easier to get a direct comparison to the property in question. Whereas with a house, the more add-ons there are, the more variables there are to take into consideration when comparing two properties. This is the most difficult aspect of this approach. When comparing two properties you need to adjust for features that aren't equal. For example, if one property has a pool and the other does not, you need to account for the value of the pool. Finding out the value of the pool in relation to the property can be very tricky. Evaluating the property entails adjusting the value of the home by adding and subtracting for size, location, amenities, and condition in comparison to other recently sold properties on the market. This approach utilizes the entire property as the unit of comparison. The basis of the market data is the principle of substitution.
Market data is also usually used to establish rent schedules. How much do you want to charge somebody for rent? Just ask the tenants next door how much they are paying. Market data becomes less reliable during times of rapid economic change or instability, in an inactive market, or in analyzing unique properties for which there are limited options for comparison.