In the sales comparison approach, which adjustment sequence is generally considered most reliable?
Correct Answer
D) Property rights, financing terms, conditions of sale, market conditions, location, physical characteristics
Why this is correct: The recommended sequence adjusts for differences in the transaction itself first (property rights conveyed, financing terms, conditions of sale, market conditions), as these affect the price most directly and objectively. Property-specific adjustments (location, physical characteristics) are made last. Why the other choices are wrong: The other sequences mix transactional and property adjustments or put property-specific adjustments first, which is less reliable because transactional adjustments are often more quantifiable and should be addressed before comparing physical features. Exam tip: Remember the order: Transaction elements first (rights, financing, sale conditions, market), then property elements (location, physical).
Why This Is the Correct Answer
Option A follows the industry-standard sequence that begins with transactional adjustments (property rights, financing terms, conditions of sale, market conditions) before moving to property-specific adjustments (location, physical characteristics). This sequence is considered most reliable because transactional adjustments are typically more objective and can be verified through market data and documentation. The logic is that you first adjust for how the transaction occurred, then adjust for what was actually sold, ensuring that each step builds upon verified, objective information before moving to more subjective property comparisons.
Why the Other Options Are Wrong
PFLM-LP Sequence
Remember 'People Find Life More Livable with Physical fitness' - Property rights, Financing, Life of sale (conditions), Market conditions, Location, Physical characteristics
How to use: When you see adjustment sequence questions, recall the phrase and remember that it moves from transaction-focused (People Find Life More) to property-focused (Livable Physical) adjustments, maintaining the objective-to-subjective flow.
Exam Tip
Look for the sequence that starts with property rights and financing (transactional elements) and ends with location and physical characteristics (property elements) - this pattern indicates the correct industry-standard approach.
Common Mistakes to Avoid
- -Starting with physical characteristics before addressing transactional elements
- -Placing market conditions at the beginning instead of with other transactional adjustments
- -Mixing transactional and property-specific adjustments instead of keeping them grouped
Concept Deep Dive
Analysis
The sales comparison approach requires a systematic sequence of adjustments to ensure accuracy and reliability in the appraisal process. The adjustment sequence follows a logical hierarchy that moves from the most objective, market-driven factors to the more subjective, property-specific characteristics. This sequence is critical because each adjustment can affect subsequent adjustments, and starting with the most reliable data points helps minimize cumulative errors. The preferred methodology prioritizes transactional elements that can be verified through market data before moving to physical and locational factors that may require more subjective analysis.
Background Knowledge
The sales comparison approach is one of the three primary valuation methods in real estate appraisal, requiring systematic adjustments to comparable sales to account for differences between the subject property and comparables. The reliability of adjustments decreases as they become more subjective, which is why the sequence moves from objective transactional data to subjective property characteristics.
Real-World Application
When appraising a single-family home, an appraiser would first adjust comparable sales for any differences in property rights conveyed, then financing concessions, then unusual sale conditions, then market conditions (time), then location differences, and finally physical differences like square footage or condition.
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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