When valuing real estate, ________ utilizes selling prices of properties that are similar to the subject property.
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A. B. C. D.A
When valuing real estate, the method that utilizes selling prices of properties that are similar to the subject property is known as the comparative sales approach, also referred to as the market approach or sales comparison approach.
The comparative sales approach is based on the principle of substitution, which assumes that a rational buyer would not pay more for a property when a similar property is available at a lower price. The approach relies on analyzing recent sales data of comparable properties in the same market area to determine an estimated value for the subject property.
Here's a more detailed explanation of the comparative sales approach:
Selection of comparable properties: To apply the comparative sales approach, the first step is to identify and select comparable properties. These properties should have similar characteristics to the subject property, such as location, size, condition, age, and amenities. The more similar the properties are, the more accurate the valuation will be.
Collection of sales data: Once the comparable properties are identified, data on their recent selling prices is collected. This information can be obtained from public records, real estate databases, or through the assistance of real estate agents or appraisers.
Adjustment of comparable properties: The next step involves adjusting the selling prices of the comparable properties to account for any differences between them and the subject property. For example, if one of the comparable properties has a larger square footage than the subject property, an adjustment is made to reflect the difference in value. Adjustments may also be made for differences in location, condition, amenities, and other relevant factors.
Calculation of the subject property's value: After making the necessary adjustments to the comparable properties, the final step is to calculate the estimated value of the subject property. This is done by averaging the adjusted selling prices of the comparable properties or by applying a weighted average based on the relative importance of each property.
It's important to note that while the comparative sales approach is commonly used in real estate valuation, it may not be applicable in all situations, especially when there is limited data on recent comparable sales or when the subject property has unique characteristics that are difficult to match with comparable properties. In such cases, alternative valuation methods like the income approach or the cost approach may be used.
In the income approach, the value of a property is estimated based on its income-producing potential, taking into account factors such as rental income, operating expenses, and capitalization rates. The cost approach, on the other hand, focuses on estimating the value of a property by considering the cost of reproducing or replacing it, adjusted for depreciation.
In summary, when valuing real estate, the comparative sales approach, or the market approach, is the method that utilizes selling prices of properties similar to the subject property to determine its estimated value.