An appraiser is reconciling three value indications: Sales Comparison $485,000, Cost Approach $510,000, Income Approach $475,000. The property is a 15-year-old single-family residence in an active market. Which approach should typically receive the most weight?
Correct Answer
A) Sales comparison approach, because it's most relevant for this property type
Why this is correct: For single-family residences in active markets, the sales comparison approach is most relevant because it directly reflects market behavior through comparable sales, which are typically abundant and reliable for this property type. Why the other choices are wrong: The income approach is less relevant for non-income-producing properties like primary residences. The cost approach may be less reliable for older properties due to depreciation estimates. Equal weighting ignores the relevance of each approach. Exam tip: Weight the sales comparison approach most heavily for residential properties with good comparable data.
Why This Is the Correct Answer
The sales comparison approach receives the most weight for single-family residences in active markets because this property type is frequently traded, providing abundant comparable sales data. Single-family homes are typically purchased by owner-occupants who make decisions based on comparison shopping with similar properties, making the sales comparison approach most reflective of actual market behavior. Active markets ensure that comparable sales are recent and reliable, further supporting the primacy of this approach for residential properties.
Why the Other Options Are Wrong
SFR-SCA Rule
Single Family Residence = Sales Comparison Approach gets the most weight. Remember: 'SFR loves SCA' - Single Family Residences love Sales Comparison Approach because families shop by comparing homes.
How to use: When you see a question about reconciliation for single-family homes, immediately think 'SFR-SCA' and look for the answer that emphasizes sales comparison approach, especially if the market is described as active with good comparable sales.
Exam Tip
Look for key phrases like 'single-family residence,' 'active market,' and 'adequate comparable sales' - these are strong indicators that sales comparison approach should receive primary weight in reconciliation questions.
Common Mistakes to Avoid
- -Choosing the approach that gives the highest or lowest value rather than the most reliable approach
- -Giving equal weight to all approaches without considering property type and market conditions
- -Overemphasizing the income approach for single-family residences that aren't typically income-producing
Concept Deep Dive
Analysis
This question tests understanding of the reconciliation process in real estate appraisal, specifically how to weight different approaches based on property type and market conditions. The reconciliation process requires appraisers to analyze the reliability, applicability, and quantity of data available for each approach. For single-family residences in active markets, the sales comparison approach typically provides the most reliable indication of value because these properties are commonly bought and sold, creating abundant comparable sales data. The appraiser must consider which approach best reflects how typical buyers and sellers behave in the market for this specific property type.
Background Knowledge
Appraisers must understand that different approaches to value have varying degrees of reliability and applicability depending on property type, market conditions, and available data. The reconciliation process requires professional judgment to determine appropriate weighting based on these factors rather than mechanical averaging or bias toward particular value indications.
Real-World Application
In practice, when appraising a single-family home in a suburban neighborhood with recent sales, an appraiser might give 70-80% weight to sales comparison, 15-20% to cost approach (as a check), and minimal or no weight to income approach since the property isn't typically viewed as an investment.
More Reconciliation Questions
A property generates $85,000 in Net Operating Income and sells for $1,062,500. What is the overall capitalization rate?
A property has potential gross income of $180,000, vacancy and collection loss of $15,000, and operating expenses of $65,000. What is the Net Operating Income?
A comparable sale occurred 8 months ago for $425,000. Market conditions indicate property values have increased 0.5% per month since that time. What is the adjusted sale price?
A property generates $150,000 in potential gross income. Market data indicates a 7% vacancy rate and operating expenses of 35% of effective gross income. If the cap rate is 9.5%, what is the indicated value?
A property sold for $320,000 one year ago. If market conditions have improved by 6% since that sale, what is the time-adjusted sale price for comparison purposes?
A commercial building cost $2,500,000 to construct. The land value is $600,000. If the building has suffered 15% physical deterioration and 8% functional obsolescence, what is the depreciated cost of the improvements?
A building's gross rent multiplier (GRM) is 120. If the monthly rent is $2,500, what is the indicated value?
In the cost approach, economic obsolescence is characterized as:
The concept of regression in property values means that:
A commercial property has potential gross income of $120,000, vacancy and collection loss of 8%, and operating expenses of $35,000. Using a cap rate of 9.5%, what is the indicated value?
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