The appraisal approach that estimates value by comparing a property to similar recently sold properties is the:
Question & Answer
Review the question and all answer choices
Cost approach
The cost approach (Answer A) estimates value by calculating the cost to replace or reproduce the improvements (buildings) plus the land value, minus depreciation — it does not involve comparing recent sales of similar properties and is most useful for unique or special-use properties.
Income approach
The income approach (Answer B) estimates value based on the income a property generates, using capitalization rates or discounted cash flow analysis — it is used primarily for income-producing commercial and investment properties, not for comparing recent residential sales.
Sales comparison approach
Gross rent multiplier approach
The gross rent multiplier (GRM) approach (Answer D) is a simplified income-based method that divides a property's sale price by its gross monthly or annual rent — while it uses sales data, it measures income potential rather than directly comparing physical property characteristics, and it is not the same as the sales comparison approach.
Why is this correct?
The sales comparison approach (Answer C) is the correct method because it directly analyzes recently sold, similar properties — called comparables or 'comps' — and adjusts their sale prices to account for differences between each comp and the subject property. This method is preferred by appraisers and lenders for single-family residential properties because it most directly reflects what buyers are actually willing to pay in the current market. The Federal Housing Administration (FHA) and conventional lenders require this approach in residential appraisals, making it the dominant valuation method in the residential sector.
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