An investment property trades primarily on income, and its market NOI and capitalization inputs are more reliable than the other approach inputs. Which reconciliation is best supported?
Correct Answer
D) Give income primary weight for its stronger relevance and evidence.
Investor demand for income and well-supported income inputs make income capitalization most persuasive under these facts. Buyer motivation alone would not cure weak inputs. Review the other approaches and explain why their evidence deserves less reliance.
Why This Is the Correct Answer
Option D is correct because the income approach is both the most relevant to how this property trades and the best supported by reliable data. When the appraiser has adequate and reliable data, the greatest reliance should go to the indicator that best measures the type of benefits the property is expected to yield. The other approaches still deserve review, with an explanation of why they receive less weight.
Why the Other Options Are Wrong
Option A: Give equal thirds, since three approaches were developed.
Option A is wrong because giving equal thirds simply because three approaches were developed ignores relevance and data quality. The number of approaches does not decide their weights.
Option B: Give cost all weight because investment value equals reproduction cost.
Option B is wrong because investment value does not equal reproduction cost, and giving cost all of the weight ignores how this property trades. Investors buying for income focus on NOI and capitalization, not on what it would cost to reproduce the building.
Option C: Omit income, since sales comparison was also developed.
Option C is wrong because developing sales comparison is no reason to omit the income approach. Income is the most relevant and best-supported indication here, so omitting it would discard the strongest evidence.
Follow the buyer's math
Give the most weight to the approach that matches how typical buyers price the property, as long as its data are reliable.
How to use: Use this to identify which approach should lead for investment, owner-occupied or special-purpose properties.
Exam Tip
Look for two elements in the best answer: relevance to how the property trades and strength of the supporting data. An option that cites only one of these may be incomplete.
Common Mistakes to Avoid
- -Weighting approaches equally because three were developed
- -Assuming reproduction cost equals investment value
- -Dropping the income approach for an income property because sales were also analyzed
Concept Deep Dive
Analysis
This question tests the principle that the greatest reliance goes to the indicator that best measures the benefits the property produces, provided the data are adequate and reliable. An investment property that trades on income, with reliable NOI and capitalization inputs, points toward the income approach. Wrong choices rely on counting approaches, a false equation, or omitting the most relevant approach.
Background Knowledge
Income-producing properties are usually bought for the income stream they generate, so the income approach often mirrors buyer reasoning. That relevance must be backed by reliable market rent, expense and capitalization data. Buyer motivation alone does not make an approach reliable if its inputs are weak.
Real-World Application
An appraiser values a fully leased fourplex. Market rents, expenses and capitalization rates from recent investor sales of similar buildings are well documented, so the appraiser gives the income approach primary weight while using sales comparison as a check and explaining why the cost approach is less persuasive.
More Reconciliation Questions
In a cost approach for an improved property, an appraiser estimates site value by sales comparison, allocation and extraction, then settles on one site-value figure before final reconciliation. How is this step best described?
An extraordinary assumption was reasonably supported, properly used and disclosed in an appraisal report. Later, the assumed information is found to be false. Which conclusion is best supported?
An otherwise applicable valuation approach cannot be developed reliably from the available data. The remaining scope can produce credible assignment results. What should the appraiser do?
May an appraiser use a hypothetical condition in any assignment?
An appraisal has a current effective date and permits an extraordinary assumption if its requirements are met. Which situation involves uncertain information rather than a fact known to be contrary to reality on that date?
Why must a report identify any real property interest that is being excluded from the value opinion?
Which review best helps explain divergent cost, sales-comparison and income indications?
Two value indications are $340,000 and $392,000. What is the difference as a percentage of the lower indication, rounded to one decimal place?
An unauthorized third party requests a lender-client’s report. No due-process or other permitted disclosure exception applies. How should the appraiser respond?
An appraiser proposes to assume there are no hidden defects. Which fact would characterize that assumption as extraordinary under the USPAP 2024 definition, rather than justify dismissing it as routine boilerplate?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
For a Fannie Mae dwelling appraisal requiring an area-support exhibit, which exhibit most directly documents the area calculation?
Next Question
As of today’s effective date, residential zoning is known to remain in force. An analysis is requested as if commercial rezoning had already occurred. Which statement describes an acceptable use of that premise?