A comparable property sold for $450,000. It has a two-car garage worth $8,000, while the subject has a three-car garage worth $12,000. What adjustment should be made to the comparable?
Correct Answer
D) Add $4,000
Why this is correct: In sales comparison, adjustments are made to the comparable's sale price to reflect differences with the subject. If the subject is superior, we add value to the comparable to make it equivalent. Here, the subject's garage ($12,000) is superior to the comparable's ($8,000) by $4,000, so add $4,000 to the comparable's price. Why the other choices are wrong: "Add $12,000" would replace the comparable's garage entirely. "Subtract $8,000" would remove the comparable's garage value incorrectly. "Subtract $4,000" would make the comparable seem worse relative to the subject. Exam tip: Adjust the comparable to match the subject. If subject is better, add to the comparable; if worse, subtract.
Why This Is the Correct Answer
Option A is correct because the subject property has a superior garage feature (three-car garage worth $12,000) compared to the comparable (two-car garage worth $8,000). Since the comparable is inferior by $4,000 ($12,000 - $8,000), we must add $4,000 to the comparable's sale price to make it equivalent to the subject property. This upward adjustment compensates for the comparable's deficiency and brings it to the same level as the subject for comparison purposes.
Why the Other Options Are Wrong
COMPASS Method
COMPASS: COmparable Minus Plus Adjusts Subject Similarity. When comparable is inferior, PLUS (add). When comparable is superior, MINUS (subtract). Always adjust TO the comparable to match the subject.
How to use: When you see an adjustment question, identify which property (subject or comparable) has the superior feature, then remember COMPASS - if comparable is inferior, add the difference; if comparable is superior, subtract the difference.
Exam Tip
Always identify the direction of adjustment first by determining which property has the better feature, then calculate the dollar difference between the two features rather than using absolute values.
Common Mistakes to Avoid
- -Confusing the direction of adjustment by adding when you should subtract or vice versa
- -Using absolute feature values instead of calculating the difference between subject and comparable
- -Forgetting that adjustments are always made TO the comparable, not to the subject property
Concept Deep Dive
Analysis
This question tests the fundamental principle of sales comparison adjustments in real estate appraisal. The sales comparison approach requires adjustments to comparable properties to make them equivalent to the subject property being appraised. When a comparable property is inferior to the subject property in any feature, an upward adjustment (addition) must be made to the comparable's sale price. Conversely, when a comparable is superior to the subject, a downward adjustment (subtraction) is required. The adjustment amount should reflect the difference in value between the features being compared.
Background Knowledge
In the sales comparison approach, adjustments are always made TO the comparable properties to make them equivalent TO the subject property. The direction of adjustment depends on whether the comparable is superior or inferior to the subject in each feature being analyzed.
Real-World Application
In practice, appraisers constantly make these adjustments when comparing sold properties to their subject property. For example, if appraising a home with a pool and the comparable sale had no pool, the appraiser would add the value of a pool to the comparable's sale price to determine what that comparable would have sold for if it had the same amenities as the subject.
More Sales Comparison Questions
A property generates $85,000 in Net Operating Income and sells for $1,062,500. What is the overall capitalization rate?
A property has potential gross income of $180,000, vacancy and collection loss of $15,000, and operating expenses of $65,000. What is the Net Operating Income?
A comparable sale occurred 8 months ago for $425,000. Market conditions indicate property values have increased 0.5% per month since that time. What is the adjusted sale price?
A property generates $150,000 in potential gross income. Market data indicates a 7% vacancy rate and operating expenses of 35% of effective gross income. If the cap rate is 9.5%, what is the indicated value?
A property sold for $320,000 one year ago. If market conditions have improved by 6% since that sale, what is the time-adjusted sale price for comparison purposes?
A commercial building cost $2,500,000 to construct. The land value is $600,000. If the building has suffered 15% physical deterioration and 8% functional obsolescence, what is the depreciated cost of the improvements?
A building's gross rent multiplier (GRM) is 120. If the monthly rent is $2,500, what is the indicated value?
In the cost approach, economic obsolescence is characterized as:
The concept of regression in property values means that:
A commercial property has potential gross income of $120,000, vacancy and collection loss of 8%, and operating expenses of $35,000. Using a cap rate of 9.5%, what is the indicated value?
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