What principle forms the basis of the Sales Comparison Approach?

The Sales Comparison Approach is primarily based on the principle of substitution. This principle asserts that a buyer will not pay more for a property than the cost of acquiring a comparable substitute. Essentially, if two properties are similar in features and location, a buyer will choose the less expensive option. This principle is vital as it allows appraisers to estimate the value of a property by comparing it to similar properties that have recently sold in the market, adjusting for differences in characteristics and circumstances.

By employing this principle, appraisers can determine a range of value for the property in question based on what buyers have been willing to pay for similar properties. This direct relationship between demand, supply, and price underpins the effectiveness of the Sales Comparison Approach in real estate valuation.

Understanding this principle emphasizes the rationale behind using comparable sales data and supports the idea that the value of a property is influenced by the prices of similar properties, thus aligning with market behavior.