Which principle is the primary theoretical basis of the sales comparison approach?
Correct Answer
B) Substitution
The sales comparison approach rests mainly on substitution: an informed buyer would not pay more for a property than the cost of acquiring a substitute of equal utility.
Why This Is the Correct Answer
Option B is correct because the primary theoretical basis of the sales comparison approach is substitution. An informed market participant would not pay more for a property than the cost of acquiring a substitute of equal utility. Comparable sales show what those substitutes cost.
Why the Other Options Are Wrong
Option A: Contribution
Option A names contribution. Contribution explains how much an individual feature adds to value and underlies individual adjustments, but it is not the primary basis of the approach as a whole.
Option C: Anticipation
Option C names anticipation. Anticipation, the idea that value reflects expected future benefits, is most closely tied to the income approach.
Option D: Conformity
Option D names conformity. Conformity relates to how compatibility with surrounding properties supports value, not to the core logic of comparing sales.
Sales compare substitutes
Sales comparison literally compares substitutes, so its principle is substitution.
How to use: Use this to match the sales comparison approach with its primary principle.
Exam Tip
Contribution is a common distractor because it relates to adjustments; the approach as a whole rests on substitution.
Common Mistakes to Avoid
- -Choosing contribution because adjustments are part of the approach
- -Linking anticipation to sales comparison instead of the income approach
- -Confusing conformity with substitution
Concept Deep Dive
Analysis
This question tests the theoretical foundation of the sales comparison approach. The approach assumes informed buyers compare available alternatives and will not pay more than the cost of an equally useful substitute. That is the principle of substitution.
Background Knowledge
Appraisal principles support each approach to value. Substitution is the core of sales comparison, contribution guides individual adjustments, and anticipation underlies income capitalization. Knowing which principle drives which approach helps with theory questions.
Real-World Application
A buyer choosing between three similar homes on the same street will not pay much more for one than the others. The appraiser uses those sales to show what buyers pay for substitutes of equal utility.
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
The subject home backs onto a four-lane arterial road. A comparable sale is on a quiet interior street. Market rents for similar homes are $2,400 per month on interior streets, $2,250 on collector streets and $2,150 backing onto the arterial. Recent sales of rented homes in the area were: Sale 1, $375,000, rented at $2,500 per month; Sale 2, $330,000, rented at $2,200 per month; Sale 3, a sale between relatives, $276,000, rented at $2,300 per month. By how much should the comparable's sale price be reduced for the road influence?
Next Question
Adjustments for property rights conveyed, cash equivalence (financing) and non-real property items are usually made to the total sale price. How are these adjustments typically expressed?