Extracted rates are 7.1%, 7.3% and 9.8%. What is appropriate before using the 9.8% observation?
Correct Answer
D) Verify its inputs and investigate why it differs materially.
Verify the anomalous rate’s NOI, price, transaction conditions and property characteristics before deciding its relevance. The numerical spread suggests a question to investigate, not proof that the sale differs in kind or must be discarded. Automatic averaging or extra conservative weight is unsupported.
Why This Is the Correct Answer
Option D is correct because the appraiser should verify the anomalous rate's inputs, such as NOI, price, transaction conditions and property characteristics, and investigate why it differs. The numerical spread raises a question; it does not prove the sale is unusable. Only after verification can the appraiser decide its relevance and weight.
Why the Other Options Are Wrong
Option A: Discard it from the analysis without reviewing the sale.
Option A discards the 9.8% observation without reviewing the sale. Dropping data without investigation is unsupported, because the sale may be valid and may reveal a market or property difference worth understanding.
Option B: Average all three rates, since each came from a sale.
Option B averages all three rates simply because each came from a sale. Averaging without checking why one rate differs could blend an unverified or non-comparable data point into the conclusion.
Option C: Double its weight to obtain a conservative conclusion.
Option C doubles the outlier's weight to obtain a conservative conclusion. Giving extra weight to an unverified rate has no analytical support and is not how appraisers reconcile data.
Outlier means investigate
When one data point stands apart, ask why before you average it, drop it or weight it.
How to use: Use this whenever an answer choice handles an outlier mechanically.
Exam Tip
Choose answers that verify and explain data over answers that mechanically average, discard or reweight it.
Common Mistakes to Avoid
- -Throwing out an outlier without checking the sale
- -Averaging all extracted rates without verification
- -Assuming a numerical spread proves the sale is not comparable
Concept Deep Dive
Analysis
This question tests how to handle an outlier among market-extracted capitalization rates. The 9.8% rate stands apart from 7.1% and 7.3%, which signals that something may differ about that sale. Sound practice is to investigate before deciding whether and how to use it.
Background Knowledge
Overall capitalization rates are extracted by dividing each comparable's NOI by its price. Differences among extracted rates can come from data errors, unusual financing or conditions of sale, or real differences in property risk and characteristics, so each should be verified.
Real-World Application
An appraiser extracts cap rates from three sales of rented duplexes and one comes out well above the others. Calling the agent reveals one unit was vacant and the roof needed replacement at sale, so the appraiser explains why that sale is less comparable before reconciling.
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