In the sales comparison approach, which adjustment should typically be made FIRST?
Correct Answer
A) Property rights conveyed
Why this is correct: The proper sequence for adjustments in the sales comparison approach follows a logical hierarchy. Adjustments for property rights conveyed (e.g., fee simple vs. leasehold) are made first because they fundamentally define what is being sold. This ensures all comparables are placed on a consistent ownership basis before other adjustments. Why the other choices are wrong: 'Physical characteristics' are adjusted later in the sequence. 'Location adjustment' is also made after rights, financing, and conditions of sale. 'Market conditions (time)' is typically adjusted after property rights, financing, and conditions of sale. Exam tip: Use the sequence: 1. Rights, 2. Financing, 3. Conditions of Sale, 4. Market Conditions, 5. Property Characteristics.
Why This Is the Correct Answer
Property rights conveyed must be adjusted first because it establishes the fundamental legal basis for comparison between properties. Different property rights (fee simple, leasehold, life estate, etc.) represent fundamentally different ownership interests that affect all other aspects of value. Without first normalizing the property rights being compared, subsequent adjustments for financing, market conditions, and physical characteristics cannot be accurately calculated. This adjustment creates the foundation upon which all other adjustments are built.
Why the Other Options Are Wrong
PFCMP Adjustment Sequence
Remember 'Please Find Comparable Market Properties' - Property rights, Financing terms, Conditions of sale, Market conditions (time), Property characteristics. Property rights always comes first as the foundation.
How to use: When you see any question about adjustment sequence in sales comparison, immediately think 'Please Find Comparable Market Properties' and identify where the given options fall in this sequence - property rights will always be first.
Exam Tip
If you see adjustment sequence questions, look for 'property rights conveyed' as it will almost always be the first adjustment - don't get distracted by other important-sounding adjustments like location or market conditions.
Common Mistakes to Avoid
- -Making market conditions adjustments before property rights adjustments
- -Assuming location adjustments come first because they seem most important
- -Confusing the order and making physical characteristic adjustments before normalizing transaction elements
Concept Deep Dive
Analysis
This question tests knowledge of the proper sequence of adjustments in the sales comparison approach, which is fundamental to accurate property valuation. The order of adjustments follows a logical hierarchy where each adjustment builds upon the previous one, starting with the most fundamental property rights and moving toward more specific physical characteristics. Understanding this sequence is critical because making adjustments out of order can compound errors and lead to inaccurate valuations. The sequence reflects the principle that basic legal and market factors must be normalized before physical property differences can be meaningfully compared.
Background Knowledge
The sales comparison approach requires a specific sequence of adjustments to ensure accuracy: property rights conveyed, financing terms, conditions of sale, market conditions (time), and finally property characteristics (location, physical features, etc.). This sequence follows the principle of moving from fundamental legal and transaction elements to specific property features.
Real-World Application
When appraising a fee simple property and using a leasehold sale as a comparable, the appraiser must first adjust for the difference in property rights (leasehold vs. fee simple) before making any other adjustments, as this fundamental difference affects the entire value calculation and all subsequent adjustments.
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?
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In the cost approach, economic obsolescence is characterized as:
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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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