The Sales Comparison Approach: From Sale Price to Fee Simple Value

1. Introduction: Price Is Not Value

Texas §23.013 permits the market data comparison method only where comparable sales are “appropriately adjusted,” and it excludes sales that are not representative of market conditions. That statutory language does two things. It authorizes the use of transaction evidence, and it conditions that authorization on analysis. A district or an owner who places an unadjusted price per square foot in front of an Appraisal Review Board has satisfied the first half of the statute and ignored the second.

The problem is compounded in Texas by non-disclosure. Sale prices are not recorded in the deed records. Every price in a district's sales file, in a vendor database, or in a protest exhibit arrives through confirmation, questionnaire, or estimate. The number is often approximately right. The terms behind the number are the part most likely to be missing, and the terms are where value distortion lives.

This article treats each category of distortion in turn — property rights, financing, conditions of sale, post-closing expenditures, market timing, and non-realty components — and then works through a full reconciliation of a single comparable from reported price to indicated fee simple value.

2. What the Statute Actually Requires

Market value at §1.04(7) is defined as the price the property would transfer for on January 1 in a cash sale, or the equivalent, under three conditions: exposure for a reasonable time to find a purchaser, both parties knowing of all uses and restrictions and neither being in a position to take advantage of the other's exigencies, and both seeking their maximum advantage.

• “In a cash sale, or the equivalent” — this is the statutory basis for cash-equivalency adjustment. Favorable seller financing is not part of the real estate.
• “Exposed for a reasonable time” — a pocket listing, an off-market portfolio trade, or a forced 30-day close fails this test on its face.
• “Neither in a position to take advantage of the exigencies of the other” — this is the statutory treatment of both distressed sellers and deadline-driven buyers.
• “Both seeking their maximum advantage” — an affiliate transfer, an estate settlement, or a tax-motivated allocation is not a maximum-advantage negotiation.

Each clause is an adjustment instruction. A sale that fails one clause is not automatically excluded; it is admitted only if the failure can be quantified and removed. A sale that fails a clause in an amount that cannot be measured should be excluded rather than adjusted by guess.

3. Sequence of Adjustments

Order matters, because transactional adjustments are multiplicative against the price while physical adjustments are typically applied to the resulting unit rate. The conventional and defensible sequence:

• 1. Property rights conveyed (fee simple vs. leased fee vs. leasehold).
• 2. Financing terms (cash equivalency).
• 3. Conditions of sale (motivation, duress, relationship, exposure).
• 4. Expenditures made immediately after purchase.
• 5. Market conditions (time adjustment to the January 1 lien date).
• 6. Non-realty components (personal property, business value, intangibles).
• 7. Location and physical characteristics — applied last, to the adjusted unit rate.

Items 1 through 6 restate the transaction as if it had occurred in cash, at arm's length, on the lien date, for the real estate alone. Only after that restatement does the comparable become comparable.

3.1 The adjustment matrix

4. Property Rights Conveyed

The first adjustment is the one addressed at length in our companion analysis of fee simple versus leased fee. In summary: the taxable estate in Texas is the fee simple estate valued at market rent. A recorded sale of an income property almost always conveys the leased fee, and the price reflects the lease — its contract rent, its remaining term, and the credit of the tenant standing behind it.

The adjustment is not cosmetic. Where the comparable sold with rents 20% above market on a long remaining term, the leased fee price exceeds fee simple value by roughly the present value of the rent differential over the lease term, plus the cap-rate compression that credit tenancy buys. In practice the two effects compound and the gap frequently exceeds 25%.

5. Financing Terms and Cash Equivalency

§1.04(7) values the property in a cash sale “or the equivalent.” When the seller carries paper below market, or the buyer assumes existing debt at a coupon no longer available, part of the stated price is payment for the loan rather than for the dirt and improvements.

5.1 Owner financing

Seller carry-back has been a defining feature of the 2024–2026 Texas market. With bank credit tight for secondary-market retail and older office, sellers who wanted a headline price financed it themselves. The mechanics of the adjustment are arithmetic, not judgment: discount the contractual note payments at the market interest rate for equivalent debt and add the discounted value to the cash down payment.

5.2 Assumed debt and rate buydowns

The same analysis applies where a buyer assumes a 2021-vintage loan at 3.6% with four years remaining, or where a seller funds an interest rate buydown at closing. Both are consideration paid for financing. Both inflate the reported price above the cash-equivalent number.

5.3 What the data will show

Almost nothing. Vendor databases report a price and, occasionally, a recorded lien amount. The presence of a deed of trust naming the seller as beneficiary is the single most reliable public signal of carry-back financing, and it is available in the county clerk records even in a non-disclosure state. The note terms are rarely recorded; they must be confirmed with a party to the transaction.

6. Conditions of Sale: Motivation and Duress

6.1 The 1031 exchange buyer

A §1031 buyer has 45 days from the sale of the relinquished property to identify replacement property and 180 days to close. Missing the deadline converts a deferred gain into a currently taxable one. A buyer facing a seven-figure tax liability will rationally pay a premium over market to close on time — the premium is cheaper than the tax.

This is the textbook case of a party who is not “seeking their maximum advantage” in the §1.04(7) sense and who is, in the statute's phrase, exposed to the exigencies of a deadline. Exchange premiums in Texas single-tenant net lease and small multi-tenant retail have been observed at 50 to 150 basis points of cap rate — a 5% to 20% price effect depending on the asset.

• Diagnostic: the buyer is a Delaware LLC or trust formed within 120 days of closing, with a qualified intermediary as the grantee of record on the relinquished side.
• Diagnostic: the sale closes on or near the 180th day after an unrelated disposition by the same principal.
• Diagnostic: the price is an outlier of 10%+ against otherwise identical contemporaneous trades in the same submarket.
• Treatment: quantify the premium from paired sales where available; where it cannot be quantified, exclude the sale rather than admit it unadjusted.

6.2 Cash-flow-driven pricing in depressed markets

The mirror image. In a dislocated submarket — 2024–2026 suburban office in several Texas metros is the working example — sellers who must transact price to the buyer's required current return rather than to replacement cost or long-run value. The buyer underwrites in-place cash flow with no credit for lease-up, applies a distressed yield requirement, and the clearing price lands far below the cost of reproducing the asset.

The critical question for ad valorem purposes is whether the depressed pricing reflects market conditions — in which case it is evidence of market value and must be given weight — or reflects seller compulsion, in which case §1.04(7) excludes it. The distinction is empirical, not rhetorical:

• Market condition. Multiple willing sellers, normal exposure periods of 6–12 months, competitive bidding among several buyers, and a consistent band of pricing across the submarket. This is the market. It is admissible and it is often the best evidence of value.
• Compulsion. Lender-directed sale, deed in lieu, receivership, loan maturity default, bankruptcy 363 sale, or a 30–60 day exposure with a single bidder. This is not a §1.04(7) transaction and is excluded or heavily adjusted.

Districts and owners each tend to argue only the half that helps them. The defensible position is to test every low sale against the same criteria used for every high sale, and to say so on the record.

6.3 Related-party, portfolio, and allocated sales

A portfolio trade produces one price for many assets, and the per-asset allocation is a tax and accounting artifact rather than a market negotiation. Sale-leasebacks price the lease being simultaneously created, not the building. Affiliate transfers, estate settlements, partition sales, and transfers between related entities fail the arm's-length requirement outright. Each of these appears in vendor data as an ordinary sale with a clean price.

7. Post-Closing Expenditures and Non-Realty Components

7.1 Expenditures made immediately after purchase

A buyer who pays $60/SF for a building knowing it needs $18/SF of roof, HVAC, and code work has effectively paid $78/SF for the completed asset. Where the expenditure was known and anticipated at closing, it is added to the price before the comparable is used. Conversely, where the subject requires that work on January 1 and the comparable did not, the deduction runs the other way.

7.2 Personal property, business value, and intangibles

Only land and improvements are taxable as real property. A hotel sale carries FF&E, a flag, and a going-concern operation. A restaurant or convenience store carries equipment, inventory, and often a fuel supply agreement. A self-storage sale carries a tenant base and a management platform. Seller credits — free rent buy-downs, TI allowances funded at closing, unfunded leasing commissions — are reductions in effective price that never appear in the reported number.

8. Market Conditions and the Lien Date

Every comparable must be trended to January 1 of the tax year. In a stable market this is a minor refinement. Between 2022 and 2026 it has been one of the largest adjustments in the grid, because the discount-rate environment repriced income real estate faster than rents or occupancy moved.

The defensible method is a cap-rate-derived or paired-sale index for the specific product type and submarket. Two common errors: applying a general inflation index to real property prices, and applying a single metro-wide trend across product types that moved in opposite directions — Texas industrial and suburban office did not share a trend line in this period.

9. Working Reconciliation: One Comparable, Start to Finish

The following applies the full sequence to a single multi-tenant retail sale in a Texas suburban submarket, reported in a commercial database as a clean arm's-length trade at $228 per square foot.

The reported rate and the adjusted rate differ by more than a quarter. A grid built on the reported number does not merely reach a slightly high conclusion; it reaches a conclusion about a different asset under different terms on a different date.

10. Confirmation Practice in a Non-Disclosure State

Because Texas does not record prices, adjustment quality is a function of confirmation quality. The following sources, in descending order of reliability:

• A party to the transaction — buyer, seller, or the principal's counsel — confirming price, terms, and motivation directly.
• The listing or procuring broker, confirming exposure time, bidder count, and any seller concessions.
• County clerk records: deed of trust beneficiary and face amount (reveals seller financing), lien releases, affidavits of correction, and the deed's recital of restrictions.
• Closing statements produced in discovery or offered voluntarily in a protest.
• Vendor databases (CoStar, Reonomy, county sales files) — useful for identifying candidate sales, insufficient alone as evidence of terms.
• Assessor questionnaires returned by the taxpayer — self-reported and frequently incomplete on terms.

A sale that cannot be confirmed as to terms should carry a documented reliability qualifier and reduced weight. It should not be silently treated as a clean cash arm's-length trade because no one asked.

11. Presenting the Analysis to an ARB

Under §41.43 the district carries the initial burden to establish value by a preponderance of the evidence. Where the district's case rests on unadjusted sales, the burden is a live issue rather than a formality. Under §42.26, the equal-and-uniform remedy expressly requires “a reasonable number of appropriately adjusted comparable sales” — an unadjusted grid does not satisfy the statute the district is invoking.

• Open with the statute: §23.013 permits comparable sales only as appropriately adjusted, and §1.04(7) defines the transaction conditions that must hold.
• Take the district's own comparables and adjust them, rather than substituting a different set. This is more persuasive and harder to rebut.
• Show your work numerically for each adjustment, with the confirmation source named for each fact relied on.
• Where a sale is excluded, state the specific §1.04(7) clause it fails — exposure, compulsion, knowledge, or maximum advantage.
• Apply the same criteria to sales that help and sales that hurt, and say so. Selective rigor is the fastest way to lose a Board.

12. The Long-Term Lease to a National Credit Tenant

No single fact distorts a comparable sale more than a long-term lease to an investment-grade national tenant. A twenty-year absolute-net lease to a rated credit converts a building into what the investment market treats as a bond-like income stream, and the price paid reflects the tenant's balance sheet, the lease's escalations and term remaining, and the buyer's cost of capital — none of which are attributes of the real property that Texas taxes under §23.01 and §25.18.

12.1 What the credit is actually buying

• Credit spread: a rated national tenant transacts at a materially lower cap rate than an identical building leased to an unrated local operator. That spread is intangible tenant credit, not real estate.
• Term certainty: remaining primary term, renewal options at fixed rents, and the absence of rollover risk are contract attributes that price separately from the improvements.
• Contract rent above market: build-to-suit and sale-leaseback rents are frequently set to finance construction or to raise proceeds, not to reflect what the space would command on the open market.
• Lease structure: absolute-net obligations shift roof, structure, and capital risk to the tenant, raising price without changing the building.
• Guaranty: a corporate guaranty from the parent rather than a single-purpose operating entity is a credit enhancement priced into the sale.

12.2 Why the sale is a leased fee sale

A net-leased credit transaction is, without exception, a sale of the leased fee estate. It is priced by capitalizing contract rent at a credit-driven rate. Placing that price into a grid intended to conclude fee simple market value imports both the contract rent differential and the credit spread into the assessment, and the resulting value follows the tenant rather than the property. Where the same building is later vacated or re-let at market, the assessment built on the credit sale is left describing an asset that no longer exists.

12.3 Restating the sale to fee simple

The correction runs through the income the sale represents, not through a judgment percentage. Recapitalize the transaction at market rent and a real-estate capitalization rate derived from sales of comparably located, unencumbered or market-leased buildings, then use the recapitalized figure in the grid.

12.4 Two adjustments, or one?

Quantify the rent differential and the rate differential separately so each is supportable, but apply them once, through a single recapitalization. Deducting a percentage for “credit tenant” and then separately adjusting the cap rate double counts the same economic effect — the error described in Section 14.5.

12.5 Sale-leasebacks

A sale-leaseback deserves its own flag. The rent is set by the parties at closing, usually to hit a targeted proceeds number for the seller-tenant, and the transaction is a financing as much as a conveyance. Under §1.04(7) the parties are not two informed strangers each seeking maximum advantage as to the real estate; the price is negotiated jointly with the rent. A sale-leaseback should be excluded from a fee simple grid unless the rent can be shown to be at market, and the exclusion should be stated with that reason on the record.

13. When the Sale Price Is All You Have

The common case in a non-disclosure state is a sale where the price is reported, the parties will not confirm, and no closing statement is available. The question is whether such a sale can be used at all.

13.1 The short answer

Yes, with conditions. An unconfirmed sale is admissible market evidence and may be used, but it must be used as what it is: a data point of unknown terms, entitled to weight in proportion to what is known about it. It may not be presented as a clean cash arm's-length fee simple trade merely because nothing is known to the contrary. Absence of information about compulsion is not evidence of its absence.

13.2 What can still be established without the parties

A sale is rarely as unconfirmed as it first appears. Before labeling one unusable, exhaust the public record:

• Deed of trust: beneficiary identity and face amount reveal seller carry-back financing and approximate loan-to-value; a non-institutional beneficiary is a direct indicator of non-market terms.
• Deed type and recitals: special warranty, trustee's deed, deed in lieu, or a substitute trustee's deed identify foreclosure and distress on their face.
• Grantor and grantee identity: related entities, an exchange accommodation titleholder, or a qualified intermediary in the chain identify a 1031 transaction without any confirmation call.
• Recording date versus contract date, and any assignment of contract, which bear on exposure and marketing time.
• Occupancy at closing, from field inspection, permits, and CO records — a vacant building and a fully leased building are different assets and different rights.
• Listing history: days on market, price reductions, and whether the property was openly marketed at all.
• Post-closing permits, which indicate deferred maintenance or capital known to the buyer at closing.

A sale with a verified deed instrument, an identifiable lender, a known occupancy status, and a documented marketing history is substantially confirmed even if neither party returned a call.

13.3 How to qualify a price-only sale

Where terms remain unknown after that work, the sale should be carried in the analysis with an explicit reliability qualifier stated in the grid itself, not buried in a narrative:

• Label the confirmation source and its level — party-confirmed, broker-confirmed, public-record only, or vendor-reported unverified.
• State affirmatively which adjustments could not be tested: property rights, financing, and conditions of sale are the three that matter most and the three most often unknown.
• Assign reduced weight in the reconciliation and say what weight was assigned and why. A price-only sale supports a range; it does not set a point conclusion.
• Do not enter a zero adjustment where the fact is unknown. A blank or “not determinable” is accurate; a zero is an affirmative finding that the sale was at market terms.
• Use price-only sales as a bracketing check on a conclusion built from confirmed sales, rather than as the primary evidence.

13.4 When a price-only sale should be excluded outright

• The public record shows an indicator of distortion — a trustee's deed, a related-party grantee, a seller-held note — that cannot be quantified without terms.
• The sale is the sole support for the conclusion, and its unadjusted use would drive the value by itself.
• The property type is one where rights and terms routinely dominate price, such as single-tenant net lease, where an unconfirmed price is nearly meaningless as to fee simple value.
• The reported price itself traces only to a vendor estimate or a rumored figure with no instrument, transfer-tax proxy, or party behind it.

13.5 The symmetry rule

Whatever standard is applied to price-only sales must be applied in both directions in the same analysis. A grid that admits unconfirmed high sales and excludes unconfirmed low ones — or the reverse — is not an appraisal problem but a credibility problem, and an ARB or a court will treat it as one.

14. Common Errors

14.1 Treating the reported price as the transaction

The mistake: importing a vendor price into a grid without confirming rights, terms, or motivation. In a non-disclosure state the reported price is an unverified assertion, not a finding.

14.2 Adjusting out of order

The mistake: applying a physical or location adjustment to a price that still contains a lease, a below-market note, and an exchange premium. Percentage adjustments compound; the sequence in Section 3 exists so they compound correctly.

14.3 Rejecting every low sale and accepting every high one

The mistake — on both sides: characterizing a depressed sale as “distressed” and an exchange-driven sale as “the market.” The test is the transaction's conditions, not its direction.

14.4 Unquantified adjustments

The mistake: a grid showing “−10%, conditions of sale” with no derivation. An adjustment without support is an assertion. Where a distortion is real but unmeasurable, excluding the sale is the more defensible course.

14.5 Double counting

The mistake: deducting an exchange premium and separately deducting a cap-rate difference that was itself caused by the exchange premium. Each economic effect gets one adjustment.

15. Conclusion

The sales comparison approach is the most intuitive of the three approaches and the easiest to misuse, because its raw material looks like objective fact. It is not. A price is the output of a specific negotiation between specific parties operating under specific constraints, and Texas law defines market value by excluding precisely those constraints.

• Confirm the terms before using the price — in a non-disclosure state, unconfirmed is unadjusted.
• Restate credit-tenant and sale-leaseback trades at market rent and a real-estate cap rate before they enter the grid.
• Restate the transaction to fee simple, cash, arm's-length, lien-date, real-property-only before comparison.
• Sequence the adjustments; percentage effects compound.
• Distinguish depressed market conditions, which are evidence, from seller compulsion, which is not.
• Use price-only sales with a stated reliability qualifier and reduced weight, never as a silent clean comparable.
• Apply the same standard to sales in both directions, and document that you did.

Where that discipline is applied, the sales comparison approach is the strongest evidence available of fee simple market value. Where it is not, the approach produces a confident number about the wrong property, on the wrong terms, as of the wrong date.

References

1. 01Texas Property Tax Code §23.01: “Appraisals Generally.” Market value as of January 1 using generally accepted appraisal methods and techniques.
2. 02Texas Property Tax Code §1.04(7): definition of market value, including the requirements that the property be exposed for a reasonable time, that both parties know of the uses and be under no compulsion, and that both seek their maximum advantage.
3. 03Texas Property Tax Code §23.013: “Market Data Comparison Method of Appraisal.” Comparable sales must be similar and “appropriately adjusted,” and may not include sales that are not representative of market conditions.
4. 04Texas Property Tax Code §23.0101 and §23.012: consideration of alternate methods and market-derived income inputs.
5. 05Texas Property Tax Code §41.43 and §42.26: burden of proof at the ARB and the equal-and-uniform remedy based on a reasonable number of appropriately adjusted comparable sales.
6. 06Texas is a non-disclosure state: sale prices are not recorded, so district and third-party sales files rest on confirmation, questionnaires, and vendor estimates of varying reliability.
7. 07Internal Revenue Code §1031: like-kind exchange rules, including the 45-day identification and 180-day closing deadlines that create time-pressured buyers.
8. 08The Appraisal of Real Estate, 14th ed. Chicago: Appraisal Institute, 2019 — Ch. 17 (Sales Comparison Approach) and Ch. 18 (Comparative Analysis).
9. 09The Dictionary of Real Estate Appraisal, 7th ed. Chicago: Appraisal Institute, 2022 — “cash equivalency,” “conditions of sale,” “arm's-length transaction.”
10. 10USPAP 2024–2025 Edition, Standards Rule 1-4(a) and 1-2(e): analysis of comparable sales data and identification of the interest valued.
11. 11Texas Comptroller of Public Accounts, Appraisal Review Board Training Manual — Ch. 4 (Approaches to Value) and Ch. 5 (Evidence).
12. 12Texas Comptroller of Public Accounts, Property Value Study and Self-Report Manual: sales validation, ratio study outlier treatment, and confirmation standards.