In the sales comparison approach, which adjustment should be made first?
Correct Answer
D) Market conditions (time) adjustments
Why this is correct: The standard adjustment sequence in the sales comparison approach is to first adjust for market conditions (time) to bring all comparables to a current market basis. This establishes a common reference point before making adjustments for physical differences, location, or financing terms. Why the other choices are wrong: Location, physical characteristic, and financing adjustments are all made after the time adjustment. Making them first would distort the analysis because you'd be adjusting a sale price that is not yet expressed in current dollars. Exam tip: Remember 'Time First.' Always adjust comparables for market changes before adjusting for property differences.
Why This Is the Correct Answer
Market conditions (time) adjustments establish the comparable sale at current market value levels, which is essential before making any other adjustments. This creates the proper baseline because all other property characteristics and their value impacts should be measured against current market conditions, not historical ones. Making time adjustments first ensures that subsequent adjustments for location, physical features, and financing are applied to current market values rather than outdated sale prices. This sequential approach prevents the compounding of errors that would occur if adjustments were made to historical values.
Why the Other Options Are Wrong
TIME First Rule
Remember 'TIME comes before SPACE and PLACE' - Time adjustments must come first, then you can adjust for physical characteristics (space) and location (place).
How to use: When you see adjustment sequence questions, immediately think 'TIME First' and look for the market conditions/time adjustment option as the correct answer for what comes first.
Exam Tip
If you see a question about adjustment sequence in sales comparison, always remember that time/market conditions adjustments establish the foundation - they bring the sale to 'today's dollars' before any other adjustments can be meaningfully applied.
Common Mistakes to Avoid
- -Making physical adjustments before time adjustments, which applies current feature values to historical market conditions
- -Assuming all adjustments can be made simultaneously without considering their interdependence
- -Forgetting that market conditions affect the value impact of all other property characteristics
Concept Deep Dive
Analysis
The sales comparison approach requires systematic adjustments to comparable sales to make them equivalent to the subject property. The sequence of adjustments is critical because each adjustment builds upon the previous one, and making them out of order can compound errors. Market conditions (time) adjustments must be made first because they establish what the comparable sale would sell for in today's market, creating a baseline from which all other adjustments can be accurately calculated. This temporal adjustment is fundamental because market values fluctuate over time, and without establishing current market value first, subsequent adjustments for location, physical characteristics, and financing would be applied to outdated price levels.
Background Knowledge
The sales comparison approach involves adjusting comparable sales to account for differences between the comparables and the subject property. These adjustments must follow a specific sequence to ensure accuracy and prevent compounding errors in the valuation process.
Real-World Application
An appraiser analyzing a comparable sale from 6 months ago would first adjust that $300,000 sale price for market appreciation (perhaps to $310,000 in today's market), then adjust for the fact that the comparable has one more bedroom (+$15,000), then adjust for inferior location (-$5,000), resulting in an indicated value of $320,000.
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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