Sales comparison indicates $405,000 from five close sales, cost indicates $468,000 for a 40-year-old home with weakly supported depreciation, and income indicates $372,000 from two rentals. What is the soundest reconciliation step?
Correct Answer
D) Weigh the reliability of each indication, relying most on sales comparison
The reliability of value indicators must be resolved in reconciliation. Five close sales are the strongest evidence; the cost indication rests on weak depreciation support and the income indication on two rentals, so sales comparison deserves the most weight.
Why This Is the Correct Answer
Option D is correct because the reliability of each indication must be resolved in reconciliation, and here sales comparison has the strongest support. Five close sales give direct market evidence, while the cost indication depends on weakly supported depreciation and the income indication on just two rentals. Relying most on sales comparison follows from that comparison of evidence.
Why the Other Options Are Wrong
Option A: Average the three indications equally, which gives a value of $415,000
Option A is wrong because averaging the three indications equally to get $415,000 ignores their very different reliability. ($405,000 + $468,000 + $372,000 = $1,245,000, divided by 3 = $415,000.) The arithmetic is correct, but equal weighting is not justified when one indication is far better supported.
Option B: Give most weight to the cost indication, since the depreciation estimate can be refined later
Option B is wrong because giving most weight to the cost indication places reliance on the weakest-supported depreciation estimate. The possibility of refining depreciation later does not make the current cost figure reliable for this conclusion.
Option C: Give equal weight to sales comparison and income, since both reflect market behavior
Option C is wrong because giving equal weight to sales comparison and income ignores that the income indication rests on only two rentals. Both may reflect market behavior, but the five close sales provide much stronger evidence.
Most evidence, most weight
Match the weight to the strength of the evidence: the indication with the best data support earns the greatest reliance.
How to use: Use this when a question lists indications along with notes on how well each is supported.
Exam Tip
When a stem describes the data behind each approach, the answer usually turns on those descriptions, not on the dollar figures. An average option can show correct arithmetic and still be the wrong reconciliation.
Common Mistakes to Avoid
- -Averaging indications equally because the arithmetic is simple
- -Relying on the cost approach for an older home with weakly supported depreciation
- -Treating an income indication based on two rentals as equal to strong sales evidence
Concept Deep Dive
Analysis
This question gives three indications with very different levels of support and asks for the soundest reconciliation step. Read the facts about evidence quality: five close sales are strong, the cost approach rests on weakly supported depreciation for a 40-year-old home, and the income approach uses only two rentals. The best answer weighs reliability and leans on the best-supported indication.
Background Knowledge
In reconciliation the appraiser considers the quantity and quality of data behind each indication. Depreciation in an older home is often difficult to measure, which can weaken the cost approach. Thin rental data can likewise weaken an income indication for a home.
Real-World Application
An appraiser values a 40-year-old ranch home in a busy subdivision with several recent nearby sales. Because depreciation is hard to estimate and only two comparable rentals exist, the appraiser gives primary weight to sales comparison and explains the limits of the other two approaches.
More Reconciliation Questions
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