Property Valuation Methodology: The Comparable Sales 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.

Property Transaction Database

mouseprice.com provide the UK's leading comparable transaction database. Their service is the preferred choice of Surveyors and Valuers across the country. mouseprice.com offers a cleansed version of the entire Land Registry dataset for England & Wales - containing every sale since April 2000 and continually updated with the most recent prices.

The mouseprice.com service provides an invaluable tool in the search for comparable data. They allow fast searches by price paid, date of sale, address and postcode. For £9.95 per month Joe Public can use the same powerful valuation facility favoured by Surveyors and Estate Agents.

To find comparable data on mouseprice.com we recommend two search methods:

1. Search recent sales of close proximity by specifying the following search parameters:

a)     Specify 'transaction date' as all sales within the last year.

b)     Specify the location by using a partial postcode - we find the Postcode Sub-Sector works best, e.g. 'SN11 8D' - all the postcode except for the last letter.

c)     Try this out for yourself here: http://www.mouseprice.com/

2. Search recent sales in a similar price range within a wider geographic area:

a)     Specify 'transaction date' as all sales within the last year.

b)     Specify the 'price range' as +30% and -30% of your best guess on price

c)     Specify 'transaction date' as all sales within the last year

d)     Specify the location by using a partial postcode - we find the Postcode Sector works best in this case e.g. 'SN11 8' all the postcode except for the last two letters

e)     To search using this method you need to subscribe to the mouseprice.com professional services (£9.95pcm at time of writing).

Example: let's say you were the owner of No. 54 Milton Street, York YO10 3EP and were looking to sell. A search on the mouseprice database using method 1. above would tell you that four identical houses on the same terrace all sold for between £125,000 and £135,000 while the end-of-terrace house sold for £158,000 - all within the last six months.

 A search using method 2 would show there were also four similar terrace houses sold on the parallel Nicholas    street for between £122,500 and £142,500. Armed with this information, the seller can confidently assume that  his house price should be no less than £120,000 and could possibly fetch £140,000.

 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.