What is the direct comparison approach?

• A. A method based on replacement cost
• B. One of 3 techniques that appraisers use to estimate value. An informed buyer will pay no more for a property than the cost of acquiring an existing property with the same utility.
• C. A method of determining property taxes
• D. A method of scheduling property inspections

Answer: (B)

The direct comparison approach estimates value by examining prices paid for similar properties that have recently sold in the same market and adjusting those prices for differences in features, condition, and location to reflect the subject property’s value. This method rests on the substitution principle: an informed buyer won’t pay more for the subject property than the cost of obtaining a comparable property with the same utility. It’s one of three main techniques appraisers use to estimate value, the others being the cost approach and the income approach. It works best in active markets with good comparable sales and for typical homes; it’s less reliable for unique properties or markets with few recent sales.