When using paired sales analysis, the appraiser should:
Correct Answer
D) Find sales that are identical except for one characteristic
Why this is correct: Paired sales analysis is a technique used in the sales comparison approach to isolate the value contribution of a single property characteristic. It requires identifying two properties that sold at different prices but are nearly identical in all aspects except one (e.g., one has a pool and the other does not). The price difference is then attributed to that single differing feature. Why the other choices are wrong: "Only use sales from the same subdivision" is too restrictive; while similar location helps, paired sales can come from comparable neighborhoods if the characteristics match. "Use sales from different time periods" introduces market condition differences, complicating the isolation of a single characteristic's value impact. "Find sales that differ in multiple characteristics" defeats the purpose, as you cannot determine which difference caused the price variation. Exam tip: The core of paired sales is control—all variables except one must be held constant to measure its effect.
Why This Is the Correct Answer
Option C is correct because paired sales analysis depends on the ability to isolate the value impact of a single characteristic. When two sales are identical except for one feature (such as a pool, garage, or additional bedroom), the difference in their sale prices can be directly attributed to that one characteristic. This isolation allows the appraiser to make precise adjustments when applying the sales comparison approach. The technique would be meaningless if multiple variables were different, as it would be impossible to determine which factor caused the price difference.
Why the Other Options Are Wrong
The PAIR Method
P - Properties must be identical, A - Analyze one difference, I - Isolate the variable, R - Reliable adjustment results. Think of a 'pair' of twins who are identical except for one feature.
How to use: When you see paired sales analysis questions, immediately think 'PAIR' and remember that like twins, the properties must be nearly identical except for one distinguishing characteristic that you're trying to value.
Exam Tip
Look for answer choices that emphasize 'one difference' or 'single characteristic' when dealing with paired sales analysis questions, and eliminate any options suggesting multiple variables or unnecessary restrictions.
Common Mistakes to Avoid
- -Trying to analyze sales with multiple differing characteristics
- -Using sales from significantly different time periods without market adjustments
- -Restricting analysis to too narrow a geographic area and missing good comparable data
Concept Deep Dive
Analysis
Paired sales analysis is a fundamental technique in the sales comparison approach that allows appraisers to quantify the value impact of specific property characteristics. The method relies on the principle of substitution and requires finding two comparable sales that are nearly identical in all respects except for one variable feature. By isolating a single difference between otherwise similar properties, the appraiser can determine how much that specific characteristic contributes to or detracts from property value. This technique is essential for making accurate adjustments when comparing the subject property to sales that differ in various features.
Background Knowledge
Paired sales analysis is based on the principle of substitution, which states that a buyer will not pay more for a property than the cost of acquiring an equally desirable substitute. The technique requires understanding of market behavior and the ability to identify truly comparable properties that differ in only one measurable characteristic.
Real-World Application
An appraiser needs to determine the value of a swimming pool. They find two recent sales in the same neighborhood: both are 3-bedroom, 2-bath ranch homes built in 1995 with similar lot sizes and conditions, but one has a pool and sold for $15,000 more. This $15,000 difference represents the pool's contributory value.
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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