In analyzing a comparable sale, an appraiser determines that the comparable is superior to the subject property due to a better location. The appropriate adjustment would be:
Correct Answer
B) A negative adjustment to the comparable sale
When a comparable is superior to the subject, a negative adjustment is made to the comparable's sale price to reflect what it would have sold for if it had the subject's characteristics. Adjustments are always made to the comparable, not the subject.
Why This Is the Correct Answer
Option B is correct because when a comparable property is superior to the subject property, we must make a negative (downward) adjustment to the comparable's sale price. This adjustment accounts for the fact that the comparable sold for more money partly due to its superior characteristics. By reducing the comparable's price, we estimate what it would have sold for if it had the same (inferior) location as the subject property. This fundamental principle ensures that all comparables are adjusted to reflect the subject's characteristics, not the other way around.
Why the Other Options Are Wrong
Option A: A positive adjustment to the subject property
Option A is incorrect because adjustments are never made to the subject property. The subject property serves as the baseline or standard against which all comparables are measured and adjusted. Making adjustments to the subject would defeat the purpose of the sales comparison approach, which is to determine the subject's value based on what similar properties have sold for.
Option C: A positive adjustment to the comparable sale
Option C is incorrect because when a comparable is superior to the subject, we need a negative adjustment, not a positive one. A positive adjustment would increase the comparable's sale price, which would be appropriate only if the comparable were inferior to the subject. Since the comparable has a better location, it likely sold for more than it would have with the subject's location, so we must adjust downward.
Option D: No adjustment is needed
Option D is incorrect because an adjustment is definitely needed when there are differences between the comparable and subject properties. The whole purpose of the sales comparison approach is to account for differences between properties through adjustments. Ignoring a significant difference like location would result in an inaccurate valuation of the subject property.
The CATS Rule
CATS = Comparable Adjustments To Subject level. Remember: 'Superior Comparable = Subtract' and 'Inferior Comparable = Increase.' The comparable is like a cat that needs to be brought down to the subject's level - if the cat (comparable) is sitting high (superior), you pull it down (negative adjustment).
How to use: When you see a question about adjustments, immediately identify: (1) Is the comparable superior or inferior? (2) Apply CATS - adjust the comparable to the subject's level. Superior = Subtract (negative adjustment), Inferior = Increase (positive adjustment). Never adjust the subject property itself.
Exam Tip
Always remember that adjustments flow in the opposite direction of the difference. If the comparable is better (superior), the adjustment is negative (downward). If the comparable is worse (inferior), the adjustment is positive (upward). The subject property is never adjusted.
Common Mistakes to Avoid
- -Adjusting the subject property instead of the comparable
- -Making positive adjustments when the comparable is superior
- -Forgetting that superior comparables need negative adjustments
Concept Deep Dive
Analysis
This question tests the fundamental principle of comparable sales adjustments in the sales comparison approach. The key concept is that adjustments are always made TO the comparable properties, never to the subject property, because we're trying to determine what the comparables would have sold for if they had the same characteristics as the subject. When a comparable is superior to the subject in any aspect (location, condition, features, etc.), we must reduce (negatively adjust) the comparable's sale price to account for that superiority. This process helps normalize all comparables to the subject property's level, creating an accurate indication of the subject's market value.
Background Knowledge
The sales comparison approach requires appraisers to adjust comparable sales to account for differences between the comparables and the subject property. All adjustments are made to the comparable properties' sale prices, never to the subject property, because the goal is to estimate what the comparables would have sold for if they were identical to the subject. When a comparable is superior in any aspect, a negative adjustment reduces its sale price; when inferior, a positive adjustment increases it.
Real-World Application
In practice, an appraiser might find a comparable sale that sold for $300,000 but is located on a busy street while the subject is on a quiet residential street. The appraiser would make a negative adjustment (perhaps -$10,000) to the comparable, bringing its adjusted price to $290,000, reflecting what it likely would have sold for if it had the subject's quieter location.
More Valuation Principles Questions
Which of the following best describes the bundle of rights theory in real estate?
Market value is best defined as:
The principle of substitution states that:
A comparable sale occurred 8 months ago for $450,000. Market conditions analysis shows property values have increased 0.5% per month. What is the adjusted sale price?
What is the difference between reproduction cost and replacement cost?
People Also Study
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam
Report Writing & Compliance
10% of exam