In the sales comparison approach, a comparable sale that is superior to the subject property requires:
Correct Answer
B) A negative adjustment to the comparable's sale price
When a comparable property is superior to the subject, its sale price must be adjusted downward (negative adjustment) to reflect what it would have sold for if it were similar to the subject property. 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, its sale price includes value for those superior features. To make the comparable equivalent to the subject property, we must remove that extra value by making a negative (downward) adjustment to the comparable's sale price. This adjustment estimates what the superior comparable would have sold for if it were identical to the subject property. The adjusted sale price of the comparable then provides a better indication of the subject property's market value.
Why the Other Options Are Wrong
Option A: A positive adjustment to the comparable's sale price
A positive adjustment would increase the comparable's sale price, which would be incorrect when the comparable is already superior to the subject. This would make the comparable even more valuable and further away from the subject's characteristics, defeating the purpose of the adjustment process.
Option C: No adjustment to the comparable's sale price
No adjustment would leave the superior comparable's sale price unchanged, meaning we'd be comparing the subject to a property that sold for more due to its superior features. This would lead to an overestimation of the subject property's value since we're not accounting for the differences in quality or features.
Option D: A positive adjustment to the subject property
Adjustments are never made to the subject property in the sales comparison approach. The subject property is the unknown we're trying to value, so we adjust the known sale prices of comparables to match the subject's characteristics, not the other way around.
Superior Subtract Rule
Remember 'Superior Subtract' - when a comparable is Superior to the subject, you Subtract from (negatively adjust) the comparable's price. Think of it as removing the extra value that made it superior.
How to use: When you see a question about adjustments, first identify whether the comparable is superior or inferior to the subject. If superior, immediately think 'Superior Subtract' and look for the negative adjustment option. If inferior, you would add (positive adjustment) to bring it up to the subject's level.
Exam Tip
Always remember that adjustments flow in the opposite direction of the comparable's quality relative to the subject. Superior comparable = subtract (negative adjustment), Inferior comparable = add (positive adjustment). Never adjust the subject property itself.
Common Mistakes to Avoid
- -Confusing which direction to adjust based on comparable quality
- -Attempting to adjust the subject property instead of the comparable
- -Making positive adjustments when comparables are superior to the subject
Concept Deep Dive
Analysis
The sales comparison approach requires adjusting comparable properties to make them equivalent to the subject property for accurate valuation. All adjustments are made to the comparable sales, never to the subject property, because we're trying to determine what the subject is worth based on similar sales. When a comparable property has superior features (better condition, larger size, premium location, etc.), its sale price reflects that superiority and would be higher than what a property like the subject would sell for. Therefore, we must adjust the comparable's price downward to estimate what it would have sold for if it had the same characteristics as the subject property.
Background Knowledge
The sales comparison approach is based on the principle of substitution - a buyer will not pay more for a property than the cost of acquiring an equally desirable substitute. Adjustments are mathematical modifications made to comparable sale prices to account for differences between the comparable and subject properties. The goal is to estimate what each comparable would have sold for if it were identical to the subject property.
Real-World Application
In practice, if you're appraising a 3-bedroom, 2-bath home and find a comparable sale of a 4-bedroom, 3-bath home in the same neighborhood that sold for $350,000, you would subtract the value of that extra bedroom and bathroom (perhaps $25,000) to estimate that a 3-bedroom, 2-bath version would have sold for approximately $325,000, providing a better indication of your subject's value.
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