A market study covers a subdivision where only four sales occurred in the past year. How should the appraiser proceed?
Correct Answer
C) Widen the area or period and note what was done
Why this is correct: A sample of only four sales is statistically insufficient to support a reliable market study. Widening the geographic area or extending the time period increases the data pool, and disclosing this adjustment is necessary for a credible analysis. Why the other choices are wrong: 'Report statistics from those four sales as definitive' is incorrect because such a small sample does not reliably represent the market. 'Decline the assignment for lack of adequate data' is often unnecessary; appraisers must adjust their methodology to use available data credibly. 'Substitute figures from a comparable subdivision' is wrong; data from a different market area is not directly comparable without significant adjustment and analysis. Exam tip: When data is sparse, expand your search parameters and clearly explain the adjustments made in your report.
Why This Is the Correct Answer
Widening the geographic area or the time period restores an adequate sample, and disclosing what was done lets intended users weigh the analysis.
Why the Other Options Are Wrong
Option A: Report statistics from those four sales as definitive
Four sales carry sampling error too large to support definitive statistics. Presenting them as such overstates their reliability.
Option B: Decline the assignment for lack of adequate data
Declining is premature. Credible results are usually achievable once the area or period is widened.
Option D: Substitute figures from a comparable subdivision
Substituting another subdivision's figures without disclosure conceals the very expansion that should be explained.
Widen and Disclose
Widen and Disclose. The same expansion done quietly is the wrong answer.
How to use: Say what you widened and why. The disclosure is what separates good practice from concealment.
Exam Tip
Sales pulled from a longer period require market conditions adjustments. Widening the window without adjusting introduces a different error.
Common Mistakes to Avoid
- -Presenting statistics from a very small sample as definitive
- -Widening the period without adjusting for market conditions
- -Substituting data from elsewhere without saying so
Concept Deep Dive
Analysis
Four sales cannot support reliable statistics β the sampling error is large enough that any measure computed from them is nearly meaningless β but that is a reason to widen the net, not to abandon the assignment. The standard response is to expand the geographic area to include competing subdivisions with similar characteristics, or extend the time period and apply market conditions adjustments to the older sales, or both. What makes the expansion legitimate is disclosure: the appraiser states what was widened, why, and what effect the expansion has on the reliability of the analysis, so an intended user can weigh it. The distractors each fail differently. Reporting four sales as definitive presents a conclusion the data cannot support. Declining is premature, since credible results usually remain achievable with a wider frame. And substituting another subdivision's figures without disclosure conceals the substitution β the same widening, done invisibly.
Background Knowledge
Where data is thin, appraisers expand the geographic area or time period to obtain an adequate sample, applying market conditions adjustments to older sales, and disclose the expansion and its effect on reliability.
Real-World Application
An appraiser finding only four subdivision sales expands to two competing subdivisions and eighteen months, adjusts for market conditions, and explains the expansion in the report.
More appraisal-statistical-methods Questions
A price index rises from 100 to 121 over two years. What compound annual rate does this represent?
A sample of four sales drawn from a market with 200 annual transactions is:
A set of comparable sales has a mean of $250,000 and a standard deviation of $20,000. What is the coefficient of variation?
A property sold for $400,000 and resold three years later for $463,050 with no physical change. What compound annual rate does this indicate?
An appraiser includes both 'total room count' and 'bedroom count' as independent variables in a regression model estimating single-family home sale prices. The variance inflation factor (VIF) for 'bedroom count' is calculated as 12.3. What is the most appropriate appraisal action based on this result?
An appraiser runs a regression of sale price on GLA, age, and a binary variable for 'renovated' (1 = yes, 0 = no). The estimated coefficient for 'renovated' is $18,400 with a standard error of $6,200 and a t-statistic of 2.97. Assuming a two-tailed test at Ξ± = 0.05 and 42 degrees of freedom, what conclusion is supported regarding the market's recognition of renovations?
To validate the functional form of a regression model used for adjustments, an appraiser plots residuals against predicted values and observes a clear inverted-U pattern. What does this pattern indicate, and what is the most defensible corrective action?
A histogram of neighborhood sale prices shows two distinct peaks. What does this most likely mean?
What does it mean to validate a regression model?
An appraiser includes months elapsed since each sale as a variable in a price model. What is this intended to capture?
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