An appraiser extracts cap rates of 7.1%, 7.3% and 9.8% from three sales. Before using the 9.8% sale, the appraiser should:
Correct Answer
D) Verify it — the spread suggests that sale differs in kind
Why this is correct: A cap rate significantly higher than peers (9.8% vs. ~7.2%) suggests the sale may not be truly comparable—possibly due to distress, unusual terms, or different property characteristics. Professional standards require investigation before use. Why the other choices are wrong: 'Average all three' ignores the need for comparability. 'Discard it automatically' is arbitrary without analysis. 'Weight it double' is an unsupported statistical manipulation. Exam tip: Outlier cap rates require verification, not automatic inclusion or exclusion.
Why This Is the Correct Answer
The spread itself is evidence that the sale is not the same kind of transaction as the others, and the appraiser's job is to find out why before deciding how to use it. Verification means confirming the price, the income basis, the terms, and the motivations with a party to the transaction, not just re-reading the listing sheet. Only after that can the appraiser say whether the 9.8% reflects a market condition relevant to the subject or a circumstance that disqualifies the sale. Choice D is the only option that puts investigation ahead of judgment.
Why the Other Options Are Wrong
Option A: Average all three, since each is market evidence
Averaging treats all three indications as equally reliable and equally comparable, which is the very question the outlier raises. Reconciliation weighs the quality of each indication; it is not arithmetic performed on whatever numbers were gathered. Blending an unverified rate into a mean also hides the problem inside a single number no reader can unwind.
Option B: Discard it automatically as an obvious statistical outlier
Automatic exclusion is a rule of thumb dressed up as statistics, and with three data points there is no statistical basis for calling anything an outlier. The high rate may be the most informative sale in the set if it prices a risk the subject also carries. Discarding is defensible only after verification shows the transaction was not an arm's length exchange or was not comparable.
Option C: Weight it double in the reconciliation to stay conservative
Double weighting is an unsupported manipulation, and choosing it to stay conservative imports a direction into the analysis before the evidence is in. Weight follows the quality and relevance of the indication, not the appraiser's preference for a lower value. Deliberately steering toward a particular outcome also collides with the requirement that the opinion be independent, impartial, and objective.
Ask, Do Not Axe
An outlier is a question, not a verdict. Ask the parties what happened before you axe the sale or average it away. Wide spread means different in kind, and different in kind is something you can only learn by calling.
How to use: When a stem shows one number far from its peers, look for the option containing verify, confirm, investigate, or research. Reject any option that acts on the number, whether by including, excluding, or weighting it, without learning anything first.
Exam Tip
Verification answers are correct far more often than they look. If one choice gathers more information and the others act on incomplete information, pick the one that gathers.
Common Mistakes to Avoid
- -Averaging extracted rates instead of reconciling them by reliability
- -Excluding a high or low indication automatically without contacting a party to the sale
- -Adjusting weights to reach a conservative value rather than to reflect evidence quality
Concept Deep Dive
Analysis
Overall capitalization rates extracted from sales are only as good as the two numbers behind each one, the net operating income and the price, and both are easy to get wrong from secondary sources. A rate that sits 250 basis points above its peers is a signal that something in that transaction differs in kind rather than in degree: the income may be actual rather than stabilized, the price may include personal property or a below-market ground lease, the seller may have been distressed, or the buyer may have been pricing a short-term rollover risk the other properties do not carry. Verification is the step that tells you which of those it is, and the answer changes what you do next, because a rate driven by an atypically motivated seller should come out of the array while a rate driven by real lease rollover risk may be the single most relevant indication if the subject shares that risk. Discarding or averaging before verification substitutes a rule of thumb for the analysis of comparability that a credible income approach requires.
Background Knowledge
You need how an overall rate is extracted, Ro equals NOI divided by sale price, and the verification practices that confirm both figures, including who to contact and what to ask about terms and motivation. You also need the idea that reconciliation weighs indications by reliability and relevance rather than averaging them.
Real-World Application
An appraiser pulls a 9.8% rate from a strip center sale, calls the buyer's broker, and learns the price included a vacant outparcel and the NOI was trailing twelve months during a repositioning. Restated on stabilized income for the improved portion only, the sale indicates 7.4%, and the file documents both versions.
More Income Approach Questions
In a percentage lease, rent is commonly structured as:
In a DCF, what is the reversion?
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
Replacement reserves cover which kind of expenditure?
What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
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The mortgage constant represents:
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