Buyer evidence shows a condo tower’s purchasers do not treat nearby detached houses as substitutes, despite a shared ZIP code. Their demand, price drivers and competing supply differ. How should the appraiser treat these facts?
Correct Answer
B) Distinct submarkets with different buyer pools and price drivers
Under the stated buyer evidence, separate the competitive submarkets while considering any interactions. Postal code and overlapping price bands do not establish interchangeability. Other markets may show cross-type substitution, which must be investigated rather than assumed.
Why This Is the Correct Answer
Option B is correct because the buyer evidence shows condo purchasers do not treat the detached houses as substitutes, and their demand, price drivers and competing supply differ. These are distinct submarkets, though the appraiser can still consider any interactions between them.
Why the Other Options Are Wrong
Option A: A single unified market, since the location is virtually identical
Option A treats the properties as a single unified market because the location is nearly identical. Shared location or ZIP code does not establish interchangeability when buyers do not substitute one property type for the other.
Option C: One market if the price bands overlap
Option C combines them into one market if price bands overlap. Overlapping prices do not show that buyers see the properties as substitutes, and the evidence here shows they do not.
Option D: Unrelated to each other in any respect
Option D says the segments are unrelated in any respect. Separate submarkets can still interact, so declaring them completely unrelated overstates the evidence.
Substitutes define the submarket
If buyers would not swap one property for the other, the properties compete in different submarkets, whatever the ZIP code says.
How to use: Use it when a question offers geography or price overlap as the reason to merge markets.
Exam Tip
Choose the answer grounded in buyer behavior evidence. Extremes such as one market or completely unrelated markets are usually traps.
Common Mistakes to Avoid
- -Defining markets by ZIP code alone
- -Merging segments because price ranges overlap
- -Treating separate submarkets as having no interaction
Concept Deep Dive
Analysis
This question tests market and submarket delineation. Competitive markets are defined by buyer behavior and substitution, not by postal codes or overlapping price bands. When buyer evidence shows different demand, price drivers and competing supply, the properties belong to distinct submarkets.
Background Knowledge
The principle of substitution holds that buyers compare properties they consider acceptable alternatives. A market or submarket is defined by the group of buyers and competing properties that interact, and its demand and supply factors drive price changes. Whether property types substitute for each other varies by market and must be investigated.
Real-World Application
An appraiser valuing a unit in a downtown condo tower finds nearby single-family homes sold in the same period. Because condo buyers in that area seek different amenities and do not shop for detached homes, the appraiser selects condo comparables and analyzes condo supply and demand.
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