In the cost approach, market extraction from three improved sales indicates total depreciation of 31%, 42% and 44%. The sale indicating 31% is closest to the subject in age, design and condition; the other two are older and less similar. How should the appraiser select the depreciation rate for the subject?
Correct Answer
D) Select a rate based on relative comparability, giving most weight to the 31% sale.
Reconciliation also happens within a single step of an approach, and market-extracted depreciation rates are reconciled according to the relative comparability of the sales to the subject. The 31% sale is most like the subject, so it should carry the most weight. The simple average (117 / 3 = 39%) and the median (42%) ignore comparability, and picking the highest rate is a conservative bias rather than an analysis.
Why This Is the Correct Answer
Option D is correct because extracted depreciation rates are reconciled based on the relative comparability of the sales and the subject. The sale indicating 31% is closest to the subject in age, design and condition, so it should carry the most weight in the selected rate.
Why the Other Options Are Wrong
Option A: Use 39%, the simple average, so that each sale counts equally in the estimate.
Option A uses 39%, the simple average of 31%, 42% and 44% (117 / 3 = 39%). A simple average treats each sale as equally valid even though the stem says one sale is far more comparable.
Option B: Use 42%, the median, because it limits the influence of the outlying sale.
Option B uses 42%, the median, to limit the outlier. The 31% sale is not an error to be discounted; it is the most comparable sale, and the median ignores that.
Option C: Use 44%, the highest rate, to avoid overstating the cost indication.
Option C uses 44%, the highest rate, to avoid overstating the cost indication. Choosing a rate to push value in one direction is a conservative bias, and the least comparable older sales do not describe the subject best.
Closest sale sets the rate
When extracted rates differ, lean on the sale most like the subject. Averages and medians ignore which sale is the best match.
How to use: Use this when a question gives several extracted rates and says which sale is most comparable.
Exam Tip
When a stem identifies the most comparable sale, expect the answer to give it the most weight rather than use an average or median.
Common Mistakes to Avoid
- -Averaging extracted rates without considering comparability
- -Choosing the highest or lowest rate to be conservative
- -Treating the most comparable sale as an outlier
Concept Deep Dive
Analysis
This question shows that reconciliation is not limited to the final step. When market extraction produces several depreciation rates, the appraiser chooses among them by judging which sales are most comparable to the subject. The sale closest in age, design and condition is the best guide.
Background Knowledge
Market extraction estimates depreciation from sales of improved properties by subtracting site value from price and comparing the remainder to cost new. Results from several sales are reconciled into one rate for the subject. Each choice among alternatives in an appraisal is a form of reconciliation and follows the same reasoning about comparability and reliability.
Real-World Application
An appraiser extracts depreciation from three sales in a tract, one of which is the same model and age as the subject. The appraiser selects a rate close to that sale's result and explains that the older sales show more wear than the subject.
More Reconciliation Questions
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