An appraiser is valuing a 1950s bungalow with a detached workshop. None of the recent neighborhood sales can be paired to isolate what a workshop adds, so the appraiser bases the adjustment on the workshop's current replacement cost less depreciation. Which adjustment technique is the appraiser using?
Correct Answer
A) Cost analysis
Basing an adjustment on replacement or reproduction cost less depreciation is cost analysis, one of the recognized quantitative techniques for estimating adjustments, used most often for physical features. Paired sales analysis would subtract one matched sale price from another, which the appraiser could not do here. Capitalization of rent difference converts a rent gain or loss into value, and relative comparison analysis ranks sales as superior or inferior without dollar amounts.
Why This Is the Correct Answer
Option A is correct because the appraiser builds the adjustment from a cost indicator, the workshop's replacement cost less depreciation. Cost analysis uses exactly such indicators, along with cost to cure and deferred maintenance estimates, as the basis for adjustments, particularly for physical characteristics.
Why the Other Options Are Wrong
Option B: Paired sales analysis
Option B, paired sales analysis, measures a feature by subtracting the price of a sale without it from an otherwise identical sale with it. The facts say no neighborhood sales could be paired, so the appraiser did not use this technique.
Option C: Capitalization of rent difference
Option C, capitalization of rent difference, converts a market rent gain or loss caused by a feature into a value adjustment. The appraiser used no rent data, only the workshop's cost less depreciation.
Option D: Relative comparison analysis
Option D, relative comparison analysis, is a qualitative method that ranks sales as superior, inferior or similar without dollar adjustments. The appraiser here produced a dollar amount from cost, which is a quantitative technique.
Cost basis means cost analysis
Look at where the dollar figure came from: a price difference points to paired sales, a rent difference to capitalization, and a cost figure to cost analysis.
How to use: Use this when a question describes an adjustment method without naming it.
Exam Tip
Identify the technique by the source of the number, not by the feature being adjusted. Ranking without dollars is a qualitative method, not a quantitative adjustment.
Common Mistakes to Avoid
- -Calling any adjustment made without paired sales a qualitative adjustment
- -Confusing cost analysis with the full cost approach to value
- -Assuming a cost-based adjustment needs no market check
Concept Deep Dive
Analysis
The question asks the candidate to recognize an adjustment technique from what the appraiser actually does. The clue is the basis of the dollar figure: replacement cost less depreciation is a cost indicator, so the method is cost analysis. It is often the fallback when the market does not offer matched pairs of sales.
Background Knowledge
Recognized quantitative techniques for estimating adjustments include paired sales analysis, statistical analysis, cost analysis, capitalization of rent differences and discounting. Cost analysis relies on cost new less depreciation, cost to cure or deferred maintenance estimates. Its weakness is that cost is not necessarily what buyers pay for a feature.
Real-World Application
An appraiser in an older neighborhood finds that only one recent sale had a detached workshop, and it also differs in size and condition. The appraiser prices a similar workshop with a local contractor, deducts depreciation for its age, and explains the cost basis in the report.
More Sales Comparison Questions
Supported adjustments are: non-market financing $10,000, GLA $36/sf, garage $3,500 per car, pool/spa $12,500. A comparable identical to the 2,800 sf subject sold for $267,000 with non-market financing. What is its adjusted price?
Using GLA $36/sf and non-market financing $10,000: a 3,100 sf comparable sold for $277,000 with non-market financing; the subject has 2,800 sf. Bath count differences are not adjusted. What is the adjusted price?
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