An appraiser derives an overall rate of 7.5% from four sales ranging from 6.9% to 8.2%. The conclusion should:
Correct Answer
D) Explain why the rate fits the subject
Explain why the chosen rate fits the subject’s income, risk, growth expectations and comparable evidence. Neither a midpoint nor the lowest observed rate is automatically correct. A supported statistical summary can inform the analysis but does not eliminate the need to assess comparability.
Why This Is the Correct Answer
Option D is correct because the appraiser should explain why the selected 7.5% rate fits the subject's income, risk, growth expectations and the comparable evidence. Rates extracted from comparable sales provide market support, but the selection still depends on comparability. Explaining the reasoning makes the conclusion credible.
Why the Other Options Are Wrong
Option A: Average the four rates without comment
Option A says to average the four rates without comment. A simple average ignores differences in comparability, and leaving it unexplained provides no support for why it fits the subject.
Option B: Use the midpoint of the observed range
Option B says to use the midpoint of the observed range. The midpoint of 6.9% to 8.2% is not correct by default; the selected rate should reflect how the subject compares with each sale.
Option C: Adopt the lowest rate to be conservative
Option C says to adopt the lowest rate to be conservative. The lowest rate, 6.9%, would actually produce the highest value, and choosing it without regard to comparability is unsupported.
Select, then support
Pick the rate based on comparability, then explain why it fits the subject.
How to use: Use this whenever a question asks how to conclude a rate, adjustment or value from a range.
Exam Tip
Prefer answers that call for reasoned, explained judgment over mechanical shortcuts like averages, midpoints or extremes.
Common Mistakes to Avoid
- -Averaging rates without considering comparability
- -Thinking the lowest cap rate is conservative
- -Reporting a rate with no explanation
Concept Deep Dive
Analysis
This question tests how an appraiser reconciles a range of market-derived capitalization rates. Selecting a rate requires judgment about how the subject's income, risk and growth compare with each comparable. The conclusion should be explained and supported, not produced mechanically.
Background Knowledge
Overall capitalization rates are commonly extracted from comparable sales, which provide market support for the subject's rate. The comparables will usually show a range, reflecting differences in risk, income quality and growth. The appraiser selects a rate within or near that range and explains the reasoning.
Real-World Application
An appraiser extracts overall rates from four apartment sales ranging from 6.9% to 8.2%. Because the subject has newer construction and a stronger tenant base than the high-rate sales, she selects 7.5% and explains in the report how each sale compares.
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