In a paired sales analysis, two similar properties sold for $425,000 and $445,000. The only significant difference was that the higher-priced property had a swimming pool. What adjustment should be made for a swimming pool?
Correct Answer
A) $20,000
Paired sales analysis isolates the value of specific features by comparing two similar properties that differ in only one significant aspect. The $20,000 difference ($445,000 - $425,000) represents the market's valuation of the swimming pool.
Why This Is the Correct Answer
The $20,000 adjustment represents the direct market evidence of what buyers are willing to pay for a swimming pool feature. Since the two properties are described as similar in all other significant aspects, the $20,000 difference in sale prices ($445,000 - $425,000) can be directly attributed to the presence of the swimming pool. This is the fundamental principle of paired sales analysis - isolating the value contribution of a single feature by comparing otherwise identical properties.
Why the Other Options Are Wrong
Option B: $445,000
The $445,000 represents the total sale price of the property with the swimming pool, not the value contribution of the pool itself. Using the entire sale price would ignore the fact that most of the property's value comes from the land, structure, and other improvements, with only a portion attributable to the swimming pool feature.
Option C: $425,000
The $425,000 represents the sale price of the property without the swimming pool, which is the baseline comparison property. This figure tells us the value of the property excluding the pool feature, but it doesn't represent the pool's contribution to value.
Option D: Cannot be determined from this information
The information provided is sufficient to determine the swimming pool adjustment because we have two truly comparable properties that differ only in the presence of the pool feature. Paired sales analysis specifically requires this type of data - two similar properties with one significant difference - which is exactly what this scenario provides.
The Subtraction Solution
Remember 'PAIR and SUBTRACT': In Paired sales analysis, you PAIR two similar properties and SUBTRACT the lower price from the higher price to find the feature's value contribution.
How to use: When you see a paired sales question, immediately identify the two sale prices, determine which property has the additional feature, and subtract the lower price from the higher price to find the adjustment amount.
Exam Tip
Always look for the key phrase 'only significant difference' in paired sales questions - this tells you that simple subtraction will give you the adjustment amount.
Common Mistakes to Avoid
- -Using the total sale price instead of the price difference as the adjustment
- -Applying paired sales analysis when properties have multiple significant differences
- -Forgetting to verify that the sales are recent and from the same market area
Concept Deep Dive
Analysis
Paired sales analysis is a fundamental appraisal technique used to isolate and quantify the market value of specific property features or characteristics. This method requires finding two properties that are nearly identical except for one significant difference, allowing the appraiser to attribute the price difference directly to that specific feature. The technique is most effective when the sales are recent, the properties are truly comparable in all other aspects, and the difference being measured is the only significant variation between the properties. This approach provides empirical market evidence for adjustments used in the sales comparison approach to valuation.
Background Knowledge
Paired sales analysis is one of the most reliable methods for developing adjustments in the sales comparison approach to real estate valuation. The technique requires careful selection of comparable properties that are truly similar except for the feature being analyzed, and the sales should be relatively recent to reflect current market conditions.
Real-World Application
Appraisers regularly use paired sales analysis to develop adjustment grids for features like pools, garages, fireplaces, or lot size differences. The resulting adjustments are then applied to comparable sales when appraising a subject property with or without these features.
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