An appraiser develops all three approaches on a new suburban house. Which normally receives the greatest weight?
Correct Answer
C) The sales comparison approach to value
Why this is correct: For typical single-family homes, the sales comparison approach is the most direct reflection of market behavior, as buyers and sellers primarily compare similar properties. It is generally given the greatest weight when sufficient comparable sales data exists. Why the other choices are wrong: 'The cost approach, because the house is new' is secondary; it measures cost, not necessarily market value, though it can be a useful check. 'The income approach, because rents are known' is usually not applicable or primary for owner-occupied housing. 'All three equally, since all were developed' is arbitrary; equal weighting is not required or typically justified. Exam tip: For owner-occupied residential property, sales comparison is king. Weight the other approaches based on their relevance as supporting evidence.
Why This Is the Correct Answer
The sales comparison approach normally receives the greatest weight on a single-family residence because it directly reflects the behavior of the buyers and sellers who make that market. Abundant, verifiable closed-sale data supports it, and the necessary adjustments are modest when comparables come from the same subdivision. On a new house the cost approach deserves genuine secondary weight as a check, which is a nuance worth stating rather than dismissing. The reconciliation must still explain the weighting rather than assert it.
Why the Other Options Are Wrong
Option A: The cost approach, because the house is new
Newness makes the cost approach more reliable than it would be on an older building, since accrued depreciation is minimal and the cost figures are current, and it deserves real weight as a corroborating indication. But cost is not value, and a builder can spend more than the market will return, which is exactly what the sales comparison approach would reveal. Elevating cost to primary would let a construction budget drive a market value opinion.
Option B: The income approach, because rents are known
Owner-occupied houses are not bought as income streams, so the income approach models the wrong buyer. Rental data for houses closely comparable to the subject is often sparse, and gross rent multipliers vary widely with expense structures the multiplier cannot see. The approach may inform an investor-oriented assignment but rarely leads for a suburban residence.
Option D: All three equally, since all were developed
Equal weighting is a default rather than a judgment and would be defensible only in the unusual case where all three indications rest on equally strong evidence and are equally applicable. Reconciliation asks the appraiser to discriminate among indications, not to average them. Developing all three approaches does not obligate the appraiser to weight them alike.
Follow the Buyer
Weight the approach that models how the actual buyer thinks. Homeowners compare houses, so sales comparison leads. Investors compute returns, so income leads. Special-purpose users price construction, so cost leads.
How to use: Identify the buyer pool from the stem, then choose the approach that mirrors their decision process. Treat the others as checks and be prepared to say what each contributed.
Exam Tip
Reconciliation is never averaging and never automatic. Even when one approach clearly leads, the report must explain the weighting rather than simply state a conclusion.
Common Mistakes to Avoid
- -Giving the cost approach primary weight simply because the improvements are new
- -Weighting all developed approaches equally as a default
- -Failing to explain in the reconciliation why one indication was preferred
Concept Deep Dive
Analysis
Reconciliation weighs the indications produced by the approaches applied, judging each by its appropriateness to the assignment, the accuracy of the data supporting it, and the quantity of that evidence. For a typical single-family house in an active suburban market, the sales comparison approach wins on all three counts. It is appropriate because owner-occupant buyers actually behave the way the approach models, shopping among substitutes and paying what similar houses recently brought. The data is accurate and abundant, since closed sales are recorded, verifiable, and numerous. The cost approach earns more weight than usual on a new house, because a new building has little accrued depreciation to estimate and its cost is close to contemporaneous, so it functions as a useful check on the sales conclusion and on whether the builder over-improved for the neighborhood. The income approach is rarely primary for owner-occupied housing, since the buyer pool is not purchasing an income stream and rental evidence for comparable houses is often thin.
Background Knowledge
You need the reconciliation criteria of appropriateness, accuracy, and quantity of evidence, and the typical applicability of each approach by property type. You should also know that USPAP requires the appraiser to develop the approaches necessary for credible results and to explain the exclusion of any approach not developed.
Real-World Application
An appraiser valuing a newly built suburban house grids five sales from the same subdivision, develops a cost approach as a check that confirms the builder did not over-improve, notes that no comparable rental data exists, and explains in her reconciliation why the sales comparison indication carried the conclusion.
More Reconciliation Questions
Reconciliation of the approaches to value is best described as which activity?
Why should the reconciliation address the quantity of evidence as well as its quality?
How long must a report be retained compared with the workfile?
What distinguishes an appraisal review from an appraisal?
An appraiser reconciles to a value at the top of the indicated range because the client needs that figure. What has occurred?
What does it mean that a value opinion must be reasonable rather than merely arithmetically derived?
What should the reconciliation section explain to the reader?
How do the content obligations of the two report options differ with respect to the information analyzed?
The three approaches indicate $480,000, $495,000 and $610,000. What should the appraiser do first?
Three approaches indicate $1.02 million, $1.05 million and $1.04 million. How should this be reported?
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