A registered valuer is conducting a market analysis for a residential property. Which of the following sales would be considered the most reliable comparable?
Correct Answer
B) An arm's-length sale of a similar property two months ago
An arms-length sale represents a transaction between unrelated parties acting independently and in their own best interests, providing the most reliable indication of market value. The recent timing and similar property characteristics make this comparable most representative of current market conditions without the distorting factors present in forced sales or family transfers.
Why This Is the Correct Answer
Market value assumes a willing buyer and seller acting at arm's length. A recent arm's-length sale of a similar property best meets that assumption.
Why the Other Options Are Wrong
Option A: A mortgagee sale of a similar property six months ago
A mortgagee sale is a forced sale, and six months is older evidence, so it is less reliable than a recent open-market sale.
Option C: A family transfer of an identical property last month
A transfer between family members is not at arm's length, so the price may not reflect market value even for an identical property.
Option D: A deceased estate sale of a similar property three months ago
An estate sale can be shaped by executors' need to sell promptly, and it is older than the two-month arm's-length sale.
Deep Analysis of This Valuation Question
Valuers screen sales before using them. Sales between related parties, forced sales and sales with unusual terms are either set aside or used with care, because the price may reflect the circumstances rather than the market. Recency matters too, because older sales need time adjustment.
Background Knowledge for Valuation
Market value is the price a property would fetch between a willing buyer and a willing seller in an arm's-length transaction after proper marketing, each acting knowledgeably and without compulsion. Comparable sales should match those conditions as closely as possible.
Memory Technique
Remember ARMS for reliable comparables: A - Arms-length transaction, R - Recent timing, M - Market conditions (normal), S - Similar property characteristics. Like buying a car from a stranger versus family - strangers negotiate true market price, family gives deals.
When evaluating comparable sales, apply the ARMS test. Check if it's arms-length (unrelated parties), recent, under normal market conditions, and involves similar properties. Eliminate options that fail any part of the test.
Exam Tip for Valuation
Look for 'arms-length' transactions between unrelated parties with recent timing. Avoid mortgagee sales, family transfers, and estate sales as they involve special circumstances that distort market value.
Real World Application in Valuation
A registered valuer is valuing a $800,000 family home for mortgage purposes. They find four recent sales: a mortgagee auction ($720,000), a family transfer ($650,000), an estate sale ($740,000), and an arms-length sale between strangers ($790,000). The valuer would rely primarily on the arms-length sale as it best represents what willing buyers actually pay in normal market conditions, supporting an $800,000 valuation for the bank.
Common Mistakes to Avoid on Valuation Questions
- •Choosing mortgagee sales because they're recent
- •Selecting family transfers because properties are identical
- •Picking estate sales due to similar characteristics
Related Topics & Key Terms
Key Terms:
More Valuation Questions
What is the primary purpose of a Rating Valuation (RV) in New Zealand?
What does the 'highest and best use' principle in property valuation refer to?
Which external factor would most significantly impact property values across an entire suburb?
A valuer is assessing a unique heritage building with no recent comparable sales. The replacement cost is $2,000,000, accumulated depreciation is estimated at $400,000, and the land value is $800,000. What is the indicated value using the cost approach?
Under the Rating Valuations Act 1998, what principle must valuers follow when determining rateable values?
- → What is the primary purpose of Land Value (LV) in New Zealand rating valuations?
- → When using the income approach for valuing a rental property, what is the most critical factor in determining accuracy?
- → A commercial property generates annual rental income of $120,000. After deducting operating expenses of $30,000, the net operating income is $90,000. Using a market-derived capitalization rate of 7.5%, what is the indicated value using the income approach?
- → A registered valuer is valuing a unique heritage building with no comparable sales available. The building would cost $2.5 million to construct today, but due to its age and condition, suffers from $800,000 in physical depreciation and $300,000 in functional obsolescence. The land value is assessed at $1.2 million. What is the total property value using the cost approach?
- → Which factor would have the LEAST impact on a residential property's market value?
- → A property's rating valuation shows a capital value of $800,000 and a land value of $500,000. What value of improvements does that imply?
- → A commercial property produces net annual income of $120,000. Using a capitalisation rate of 7.5%, what value does the income approach indicate?
- → When analyzing market trends for valuation purposes, which combination of factors would most strongly indicate a shift from a seller's market to a buyer's market?
- → In the sales comparison approach, which difference calls for an upward adjustment to the comparable's sale price?
- → Which factor would be considered an external factor affecting property value?
People Also Study
Property Law & Legislation
56 questions
Agency Practice
89 questions
Sale & Purchase Process
63 questions
Professional Conduct & Ethics
46 questions
Related Study Resources
Previous Question
A registered valuer is conducting a cost approach valuation on a 15-year-old commercial building. The replacement cost new is $2,000,000, and the total depreciation is estimated at 25%. The land value is $800,000. What is the total property value?
Next Question
A registered valuer is valuing a unique heritage building with no comparable sales available. The building would cost $2.5 million to construct today, but due to its age and condition, suffers from $800,000 in physical depreciation and $300,000 in functional obsolescence. The land value is assessed at $1.2 million. What is the total property value using the cost approach?