A commercial property analysis shows three recent sales: $2.1M, $2.3M, and $1.9M for similar properties. However, the $1.9M sale was a distressed sale due to foreclosure. For valuation purposes, how should this data be treated?
Correct Answer
A) Exclude the distressed sale and focus on the $2.1M and $2.3M sales
Distressed sales typically don't represent fair market value conditions and should generally be excluded from valuation analysis. The $2.1M and $2.3M sales better represent arm's length transactions between willing buyers and sellers under normal market conditions.
Why This Is the Correct Answer
Distressed sales like foreclosures do not represent fair market value conditions as they involve motivated sellers under duress. These transactions typically sell below market value and don't reflect what willing buyers and sellers would agree upon in normal circumstances. Excluding the $1.9M foreclosure sale and focusing on the $2.1M and $2.3M arm's length transactions provides a more accurate representation of true market value for valuation purposes.
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A commercial property analysis shows three different value indications: $2,400,000 (income approach), $2,200,000 (comparison approach), and $2,600,000 (cost approach). Given that this is a 15-year-old office building in an active rental market, which approach should receive the greatest weight in the final value conclusion?
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An appraiser's income approach produces a value well below the cost approach for a 15-year-old, well-maintained commercial building. Local rents have fallen since the area's largest employer closed. What most likely explains the gap?