Which valuation method compares a property to similar properties that have recently sold?
Correct Answer
D) Sales comparison approach
The sales comparison approach values a property by comparing it to similar properties that have recently sold in the same area. This method is most commonly used for residential properties and relies on analyzing comparable sales data.
Why This Is the Correct Answer
The sales comparison approach values a property from recent sales of similar properties, adjusted for differences.
Why the Other Options Are Wrong
Option A: Income approach
The income approach capitalises rental income rather than comparing sales.
Option B: Cost approach
The cost approach adds land value to the depreciated cost of the improvements.
Option C: Profits approach
The profits approach values property from the trading profits of a business run on it, such as a hotel.
Deep Analysis of This Valuation Question
Each approach answers a different question: what similar properties sold for (sales comparison), what the income is worth (income), or what it would cost to replace (cost). Knowing which question each answers makes them easy to tell apart.
Background Knowledge for Valuation
The sales comparison approach is the main method for residential property in New Zealand. It relies on sales data, such as REINZ and council sales records, and adjusts each comparable for time, location, size, condition and features.
Memory Technique
Remember 'SIC' - Sales comparison looks at Similar properties, Income approach focuses on Investment returns, Cost approach calculates Construction expenses. Sales comparison is like shopping - you compare prices of similar items before buying. Just as you'd check what similar houses sold for before making an offer, the sales comparison approach does exactly that.
When you see a valuation question, think 'SIC' and match the description to the right letter: S for comparing Similar sales, I for Investment income, C for Construction costs. If the question mentions 'recently sold' or 'similar properties', it's always sales comparison.
Exam Tip for Valuation
Look for key phrases: 'recently sold', 'similar properties', 'comparable sales', or 'market data' - these always indicate sales comparison approach. Avoid overthinking - this is the most straightforward valuation method.
Real World Application in Valuation
A real estate agent is preparing a market appraisal for sellers in Ponsonby, Auckland. They research recent sales of similar three-bedroom villas within 500 meters, built in the same era, with comparable land sizes and conditions. They find three sales from the past three months, adjust for differences like renovations or views, and arrive at a recommended listing price. This practical application of the sales comparison approach helps sellers set realistic expectations and positions the property competitively in the current market.
Common Mistakes to Avoid on Valuation Questions
- •Confusing sales comparison with cost approach when construction is mentioned
- •Thinking income approach applies to all properties rather than just investment properties
- •Assuming depreciation is a standalone valuation method rather than a component
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 registered valuer is conducting a market analysis for a residential property. Which of the following sales would be considered the most reliable comparable?
- → 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?
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