Describe the sales comparison approach.

The sales comparison approach is a widely used method in real estate appraisal that involves establishing a property's value by comparing it to similar properties that have recently sold. This approach is based on the principle of substitution, which holds that a buyer would not pay more for a property than it would cost to acquire a comparable substitute in the same market.

Appraisers identify comparable properties, also known as "comps," that reflect similar characteristics, such as location, size, age, and condition, and analyze their sale prices. Adjustments are then made to account for differences between the subject property and the comparables to arrive at a fair market value. This comparative analysis is particularly effective in active real estate markets where sufficient data exists on comparable sales.

In contrast to this approach, other methods focus on different aspects; for example, establishing value based on replacement cost involves assessing what it would cost to build a similar structure, while evaluating a property based solely on income pertains to the income approach, which is primarily used for investment properties. Calculating potential future market value looks at anticipated changes in the market rather than historical sales, which is not the focus of the sales comparison approach.