In the sales comparison approach, when a comparable property has a feature that is superior to the subject property, the appraiser should:
Correct Answer
B) Subtract the adjustment amount from the comparable's sale price
Why this is correct: When a comparable property is superior to the subject, you subtract an adjustment amount from the comparable's sale price. The logic is to answer: 'What would this superior comparable have sold for if it were like the subject (i.e., if it lacked that superior feature)?' The answer is a lower price, hence a downward adjustment. Why the other choices are wrong: Using the comparable without any adjustment would incorrectly treat the superior feature as if it had no value. Adding the adjustment amount to the comparable's sale price would make an already high price even higher, moving it further from the subject's value. Adding the adjustment amount to the subject property value reverses the logic; adjustments are made to the comparables to make them resemble the subject, not the other way around. Exam tip: Remember the phrase: 'If the comp is better, make it worse (subtract). If the comp is worse, make it better (add).' Always adjust the comparable's price toward 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 a valid comparison, we must remove that extra value by subtracting the adjustment amount from the comparable's sale price. This adjustment estimates what the comparable would have sold for if it were similar to the subject property, creating an accurate basis for valuing the subject.
Why the Other Options Are Wrong
Option A: Use the comparable without any adjustment
Adding the adjustment amount to a superior comparable's sale price would make the comparable even more valuable, moving it further away from the subject property rather than making them equivalent for comparison purposes.
Option C: Add the adjustment amount to the comparable's sale price
Adjustments are never made to the subject property value in the sales comparison approach - all adjustments are made to the comparable properties to make them equivalent to the subject.
Option D: Add the adjustment amount to the subject property value
Using a superior comparable without adjustment would result in an inflated value estimate for the subject property since the comparable's sale price reflects features that the subject doesn't have.
Superior Subtract Rule
Remember 'Superior = Subtract' - when the comparable is Superior to the subject, you Subtract from the comparable's price. Think of it as 'taking away' the extra value that makes it superior.
How to use: When you see a question about adjustments, first identify whether the comparable is superior or inferior to the subject, then apply 'Superior = Subtract' or 'Inferior = Add' to determine the direction of adjustment.
Exam Tip
Always remember that adjustments are made TO the comparables, never to the subject property, and the adjustment direction depends on whether the comparable is superior (subtract) or inferior (add) to the subject.
Common Mistakes to Avoid
- -Adding adjustment amounts when the comparable is superior to the subject
- -Making adjustments to the subject property instead of the comparables
- -Confusing the direction of adjustments based on whether features are superior or inferior
Concept Deep Dive
Analysis
The sales comparison approach requires adjusting comparable properties to make them equivalent to the subject property for accurate valuation. The fundamental principle is that all adjustments are made TO the comparable properties, never to the subject. When a comparable has superior features, its sale price reflects that superiority and must be adjusted downward to estimate what it would have sold for without those superior features. This creates an apples-to-apples comparison that reveals the subject property's market value.
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. All adjustments are made to comparable properties to make them equivalent to the subject property, creating a reliable basis for estimating the subject's market value.
Real-World Application
If you're appraising a 3-bedroom home and find a comparable 4-bedroom home that sold for $300,000, you would subtract the value of that extra bedroom (say $15,000) from the comparable's sale price, resulting in an adjusted price of $285,000 for comparison purposes.
More Sales Comparison Questions
A property generates $85,000 in Net Operating Income and sells for $1,062,500. What is the overall capitalization rate?
A property has potential gross income of $180,000, vacancy and collection loss of $15,000, and operating expenses of $65,000. What is the Net Operating Income?
A comparable sale occurred 8 months ago for $425,000. Market conditions indicate property values have increased 0.5% per month since that time. What is the adjusted sale price?
A property generates $150,000 in potential gross income. Market data indicates a 7% vacancy rate and operating expenses of 35% of effective gross income. If the cap rate is 9.5%, what is the indicated value?
A property sold for $320,000 one year ago. If market conditions have improved by 6% since that sale, what is the time-adjusted sale price for comparison purposes?
A commercial building cost $2,500,000 to construct. The land value is $600,000. If the building has suffered 15% physical deterioration and 8% functional obsolescence, what is the depreciated cost of the improvements?
A building's gross rent multiplier (GRM) is 120. If the monthly rent is $2,500, what is the indicated value?
In the cost approach, economic obsolescence is characterized as:
The concept of regression in property values means that:
A commercial property has potential gross income of $120,000, vacancy and collection loss of 8%, and operating expenses of $35,000. Using a cap rate of 9.5%, what is the indicated value?
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