Sales Comparison Approach

The sales comparison approach values a property by comparing it with similar properties that recently sold, adjusting for differences. It is also how a market gross rent multiplier is derived: divide each comparable sale price by its rent, take the typical result, and apply it to the subject's rent.

Six recent sales of similar rentals with GRMs of 8.6, 8.9, 9.1, 9.3, 9.4 and 10.1 give a market GRM around 9.2. A subject renting for $30,000 a year is then worth about $276,000 by that method. The spread of the comparables tells you how much confidence to place in it.

Consistency matters more than precision. If the subject's rent includes other income, the comparables' should too. A comparable sold with a below-market lease will show a high GRM and should be adjusted or excluded. The method assumes the comparables' expenses resemble the subject's; where they do not, a cap rate valuation on the actual NOI is the better check.

Further reading: Sales Comparison Approach on Wikipedia.