Sales Comparison Approach

The sales comparison approach estimates value from recent sales of similar properties, adjusting each price for differences in size, condition, location and features. It is the main method for houses and small rentals, and it is also where market cap rates come from.

When comparable sales report both a price and an NOI, dividing one by the other gives a cap rate for each sale. Averaging those gives the market cap rate that the income approach then applies to the subject property. The two methods are connected through the same set of sales.

Appraisers of one to four unit rentals usually lean hardest on the sales comparison approach, since owner-occupants who ignore income are part of the buyer pool. That is one reason small residential rentals often trade at lower cap rates than larger apartment buildings.