What principle of value does the sales comparison approach rely upon?

The sales comparison approach to valuation is primarily based on the principle of substitution. This principle posits that a buyer would not pay more for a property than what it would cost to acquire a comparable substitute property with similar utility. When appraisers utilize the sales comparison approach, they look at recent sales of similar properties in the same market area to determine what buyers are willing to pay.

This method ultimately relies on the notion that the value of a property is fundamentally connected to the cost of similar properties nearby, assuming all other factors are equal. For instance, if a homeowner is considering a property purchase, they will typically evaluate its price in relation to similar homes that have recently sold. If the price is significantly higher than those comparable sales, the buyer is likely to reconsider their offer, adhering to the principle of substitution. This ensures that market dynamics help establish fair market values based on comparable or equivalent properties.