Valuation questions test the three approaches to value, how a CMA differs from an appraisal, and the principles that affect property value.
The sales comparison approach uses recent sales of similar properties (comps) and is most common for residential. The cost approach estimates the cost to rebuild minus depreciation, used for unique or new properties. The income approach capitalizes the net operating income, used for investment properties.
A Comparative Market Analysis (CMA) is prepared by a licensed agent to help price a listing. It uses comparable sales but is not a formal appraisal. Only a licensed appraiser can perform an appraisal for lending purposes.
Physical depreciation is wear and tear (curable or incurable). Functional obsolescence is outdated design or features (e.g., no garage, one bathroom in a four-bedroom house). External (economic) obsolescence is caused by forces outside the property (e.g., nearby highway construction). External obsolescence is always incurable.
Substitution: a buyer won't pay more when a comparable alternative exists for less. Highest and best use: the most profitable legal use determines value. Conformity: properties achieve maximum value when they conform to the neighborhood. Regression: a high-value property in a low-value neighborhood loses value.
1. A comparable sold for $350,000 and has a fireplace the subject property lacks. If a fireplace is worth $8,000, what is the adjusted sale price of the comparable?
The comp is better than the subject (it has a fireplace the subject lacks). Subtract from the comp: $350,000 − $8,000 = $342,000. Rule: 'Adjust the comp, not the subject.'
2. Which appraisal approach is most appropriate for appraising a church?
The cost approach is best for special-use properties like churches, schools, and government buildings because there are few comparable sales and these properties are not typically income-producing.
3. A property has an annual NOI of $60,000 and a capitalization rate of 8%. What is the estimated value?
Value = NOI ÷ Cap Rate = $60,000 ÷ 0.08 = $750,000. This is the fundamental income approach formula — know it cold.
Appraisal
A professional opinion of a property's market value, performed by a licensed or certified appraiser.
Capitalization Rate
The ratio of a property's net operating income to its market value, used to estimate the value of income-producing property.
Comparable Sales (Comps)
Recently sold properties similar to the subject property, used in the sales comparison approach to estimate market value.
Depreciation
A loss in property value due to physical deterioration, functional obsolescence, or external factors.
Gross Rent Multiplier (GRM)
A quick valuation metric that divides a property's sale price by its gross annual or monthly rent.
Income Approach
An appraisal method that estimates property value based on the income it generates, using capitalization of net operating income.
Market Value
The most probable price a property would bring in a competitive, open market under fair sale conditions.
Net Operating Income (NOI)
A property's gross income minus operating expenses, before mortgage payments and income taxes.
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