In a neighborhood of 1970s split-level homes, none of the recent sales can be paired to isolate four features that some comparables have. The appraiser is deciding which feature's adjustment can rest most safely on its depreciated cost. Which feature is the best candidate for a cost-based adjustment?
Correct Answer
A) A two-year-old heat pump like those in most area homes
Cost analysis works best where cost and value move together: a feature that is nearly new and matches what buyers in the market expect. A recent heat pump of the kind most area homes have fits that description. An expensive indoor pool in a split-level neighborhood is a superadequacy whose cost far exceeds what buyers pay, a themed theater reflects one owner's taste, and a 30-year-old kitchen carries depreciation and dated design that are hard to measure from cost.
Why This Is the Correct Answer
Option A is correct because a two-year-old heat pump of the kind most area homes have is new, ordinary for the market and lightly depreciated. For such an item, cost less depreciation is most likely to match what buyers pay, so a cost-based adjustment rests on the firmest ground.
Why the Other Options Are Wrong
Option B: A $70,000 indoor lap pool added by a former owner
Option B, a $70,000 indoor lap pool, far exceeds the standard of a 1970s split-level neighborhood. It is a superadequacy, and buyers are likely to pay well below its cost, so depreciated cost would overstate its contribution.
Option C: A basement home theater with murals and themed decor
Option C, a basement theater with murals and themed decor, reflects one owner's personal taste. Many buyers would pay little for it or would plan to redo it, so its cost says little about its contribution.
Option D: A 1995 kitchen with its original cabinets and counters
Option D, a 1995 kitchen with original cabinets and counters, has heavy physical wear and dated design. Estimating that depreciation from cost new involves large judgments, so cost is a weak basis for the adjustment.
New and normal costs right
Cost tracks value best for features that are new and normal for the market; the further an item is from new or from normal, the less cost tells you.
How to use: Use this when a question asks which feature suits a cost-based adjustment.
Exam Tip
Rank the choices by how new they are and how closely they match local standards. An expensive, unusual or dated item is a poor fit for cost analysis.
Common Mistakes to Avoid
- -Using full cost for an over-improvement
- -Treating personal-taste finishes as worth their cost
- -Assuming any feature with a known cost suits cost analysis
Concept Deep Dive
Analysis
The question tests the conditions under which depreciated cost is a reliable stand-in for contribution. Cost is not market derived, so the appraiser looks for the feature where the gap between cost and value is smallest. That is a new item, typical for the market, with little depreciation to estimate.
Background Knowledge
Under the principle of contribution, a component is worth what it adds to the whole property, which can differ greatly from its cost. Cost analysis is a recognized adjustment technique, but its shortcoming is that cost may not equal market value. The gap is widest for over-improvements, items built to personal taste and old items with heavy depreciation.
Real-World Application
An appraiser finds no paired sales for several features in a group of comparables. She uses depreciated cost for a recently installed, standard heat pump but relies on market interviews and qualitative analysis for an oversized pool and a custom theater room.
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?
Using garage $3,500 per car and pool/spa $12,500: a comparable with a 2-car garage and a pool/spa sold for $268,000. The subject has a 3-car garage and no pool. What is the adjusted price?
Using GLA $36/sf, garage $3,500 per car and pool/spa $12,500: a 2,600 sf comparable with a 2-car garage and a pool/spa sold for $264,000. The subject is 2,800 sf with a 3-car garage and no pool. What is the adjusted price?
In a neighborhood with declining values and marketing times over six months, what must Fannie Mae lenders confirm about the sales comparison analysis?
A house is a 4,000 square foot home in an area of 2,000 square foot homes. How must the appraiser treat this over-improvement in the sales comparison grid?
According to the Interagency Appraisal and Evaluation Guidelines, which items should an appraisal’s market conditions discussion include?
A comparable listed at $420,000 and sold for $399,000. What sale-to-list price ratio (sale price ÷ list price) does this indicate?
An appraiser wants to describe the neighborhood boundaries in a Fannie Mae report. Which approach is acceptable?
Which of these is listed by Fannie Mae as a sales or financing concession?
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A house sold for $280,000 in March and resold in December (nine months later) for $296,800 with no physical change. Using the paired-resale method, what simple monthly rate applies to comparables?
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