When is the sales comparison approach most applicable?
Correct Answer
D) When the market is active and verified sales are adequate
The approach applies when there is an active market for the property type and an adequate amount of verified, reliable comparable sales data. It is hard to apply to special-purpose properties, and income properties may be valued mainly by the income approach.
Why This Is the Correct Answer
Option D is correct because the sales comparison approach is applicable when there is an active market for the property type and an adequate amount of verified, reliable comparable sales data. With enough good sales, the appraiser can draw value conclusions directly from what buyers actually paid. Without such data, the approach loses reliability.
Why the Other Options Are Wrong
Option A: When the property is special purpose, with few or no sales
Option A, a special-purpose property with few or no sales, describes the situation where the sales comparison approach is hardest to apply. Without comparable sales there is little market evidence to compare against, so other approaches often carry more weight.
Option B: When the property is new and its cost is known precisely
Option B, a new property whose cost is known precisely, points toward the cost approach, which relies on cost data. Knowing the cost does not supply the comparable sales evidence that makes the sales comparison approach applicable.
Option C: When the property produces rent and investors buy for income
Option C, a rent-producing property bought by investors for income, describes conditions where the income approach is often given primary weight. Income motivation does not by itself make the sales comparison approach the most applicable method.
Sales approach needs sales
The sales comparison approach is only as good as its sales: active market plus verified data. Few sales means weak support.
How to use: Use this when asked which conditions favor one approach to value over another.
Exam Tip
Match each approach to its data: sales for the sales comparison approach, costs for the cost approach, and income for the income approach.
Common Mistakes to Avoid
- -Thinking a known construction cost makes the sales comparison approach strongest
- -Relying on the sales comparison approach for special-purpose properties with no sales
- -Assuming income-producing property is best valued by sales comparison alone
Concept Deep Dive
Analysis
This question tests when the sales comparison approach is most reliable. The approach depends on market evidence, so its strength rises with the number and quality of verified comparable sales. Look for the option that describes an active market with adequate, verified sales data.
Background Knowledge
Each approach to value works best under certain conditions. The sales comparison approach relies on prices paid for similar properties, so it needs an active market and adequate, verified sales. Special-purpose properties and investment properties may be valued mainly by the cost or income approach.
Real-World Application
An appraiser valuing a typical single-family home in a busy subdivision finds many verified recent sales and gives the sales comparison approach the most weight. For a nearby church with no comparable sales, the same appraiser would lean on other approaches.
More Sales Comparison Questions
Supported adjustments are: non-market financing $10,000, GLA $36/sf, garage $3,500 per car, pool/spa $12,500. A comparable identical to the 2,800 sf subject sold for $267,000 with non-market financing. What is its adjusted price?
Using GLA $36/sf and non-market financing $10,000: a 3,100 sf comparable sold for $277,000 with non-market financing; the subject has 2,800 sf. Bath count differences are not adjusted. What is the adjusted price?
Using garage $3,500 per car and pool/spa $12,500: a comparable with a 2-car garage and a pool/spa sold for $268,000. The subject has a 3-car garage and no pool. What is the adjusted price?
Using GLA $36/sf, garage $3,500 per car and pool/spa $12,500: a 2,600 sf comparable with a 2-car garage and a pool/spa sold for $264,000. The subject is 2,800 sf with a 3-car garage and no pool. What is the adjusted price?
In a neighborhood with declining values and marketing times over six months, what must Fannie Mae lenders confirm about the sales comparison analysis?
A house is a 4,000 square foot home in an area of 2,000 square foot homes. How must the appraiser treat this over-improvement in the sales comparison grid?
According to the Interagency Appraisal and Evaluation Guidelines, which items should an appraisal’s market conditions discussion include?
A comparable listed at $420,000 and sold for $399,000. What sale-to-list price ratio (sale price ÷ list price) does this indicate?
An appraiser wants to describe the neighborhood boundaries in a Fannie Mae report. Which approach is acceptable?
Which of these is listed by Fannie Mae as a sales or financing concession?
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Previous Question
A lender has ordered an appraisal of a two-bedroom condominium unit on the 6th floor of a mid-rise building, with a partial lake view and south exposure. Four units with the same floor plan in the same building sold in the last four months: Unit 302 (3rd floor, no lake view, south exposure) for $455,000; Unit 609 (6th floor, partial lake view, north exposure) for $461,000; Unit 704 (7th floor, partial lake view, south exposure) for $472,000; and Unit 1103 (11th floor, full lake view, south exposure) for $498,000. Buyers in the building pay more for higher floors, better lake views, and south exposure. Which two sales most narrowly bracket the subject?
Next Question
Adjusted comparable prices are $402,000, $409,000 and $415,000. Under Fannie Mae guidance, which indicated value from the sales comparison approach would be unacceptable?