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Comparable Method

The Comparable Method is used for most types of (non-specialised) properties where there is evidence of previous sales. It based on the assumption that an individual will pay no more for a property than it would cost to purchase a comparable substitute property in a particular area.

It can operate if:

  • there is good evidence of previous sales of comparable properties in the area or as close to it as possible
  • sales of comparable properties are recent or adjustments can be made for market valuation changes for older sales
  • future cash flows through the letting of the property can be estimated by determining the Estimated Rental Value (ERV) with accuracy
  • Comparisons between properties can be done by Units of Comparison or on an Economic Basis.

    Units of Comparison
    This approach compares properties according to common attributes which drive their value. Examples are floor area, distance to amenities, number of rooms, age and condition of the property.

    Economic Basis
    The comparable method is based upon the principles of supply and demand, as well as upon the principle of substitution. Supply and demand indicates value through typical market behavior of both buyers and sellers. Substitution indicates that a purchaser would not purchase an improved property for any value higher than it could be replaced for on a site with equivalent utility, assuming no undue delays in construction.

    Related Topics:

  • income (investment) method
  • profit (accounts) method
  • development (residual) method/
  • contractor's (cost) method