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Real Estate Salesperson Exam (National Portion): Value, Appraisal, and Estimating Value Concepts

Importance ★★★★★ · 100% (estimate)

Overview

This chapter covers what value means and how appraisers and licensees estimate it. Expect questions on the three approaches, depreciation, principles of value, and simple income calculations.

Market value is the most probable price in an open, competitive market; market price is what was actually paid. Value needs demand, utility, scarcity, and transferability. The principle of substitution says buyers will not pay more than the cost of an equal substitute, which supports the sales comparison approach. Regression lowers the value of the best house among poorer ones, and progression raises a modest home among better ones.

The sales comparison approach is best for homes. Adjustments are made to the comparables: if a comparable is better, subtract. The cost approach suits new and special-purpose buildings: cost new minus depreciation plus land value. Depreciation is physical deterioration, functional obsolescence (poor design), or external obsolescence (outside the property). The income approach divides net operating income by the cap rate; mortgage payments are not operating expenses. A licensee's CMA or BPO is not an appraisal.

Key concepts

  • Sales comparison approach

    Estimating value by comparing recent sales of similar properties and adjusting the comparables for differences.

    Memory tipComparable better, subtract

  • Cost approach

    Cost to replace or reproduce the building, minus depreciation, plus land value.

    Memory tipBest for new or special-purpose buildings

  • Income approach

    Value equals net operating income divided by the capitalization rate.

    Memory tipV = I ÷ R

  • Functional obsolescence

    Loss in value from poor design or outdated features inside the property.

    Memory tipFour bedrooms, one bath

  • External obsolescence

    Loss in value from factors outside the property, such as a new highway; usually incurable.

    Memory tipOutside the lot line

  • Gross rent multiplier

    A quick income method: value equals monthly rent times the GRM.

    Memory tip$1,500 × 120 = $180,000

  • CMA

    A licensee's comparison of recent sales and listings to help set a price; it is not an appraisal.

    Memory tipLicensee price opinion

Often tested

  • Value needs DUST: demand, utility, scarcity, transferability.
  • NOI = effective gross income minus operating expenses; debt service is not subtracted.
  • Adjust the comparable, never the subject.

3 sample questions

Verified practice questions from this unit.

Practice questionReviewedProperty Value and Appraisal › Value, Appraisal, and Estimating Value★★★★★

Question 1. Which appraisal approach is usually the most reliable for a single-family home?

  1. ① Gross rent multiplier
  2. ② Cost approach
  3. ③ Sales comparison approach
  4. ④ Income approach
▼ Show answer and explanation▲ Hide answer and explanation

Answer: ③ Sales comparison approach

Key point: Single-family homes → sales comparison approach

The sales comparison (market data) approach compares the subject home with similar homes that sold recently. Because buyers of homes compare homes this way, it is usually the most reliable approach for single-family homes.

Wrong choices

  • Income approach: The income approach is best for rental and investment property.
  • Cost approach: The cost approach is best for new or special-purpose buildings.
  • Gross rent multiplier: A GRM is a quick income method, mostly for rental homes.
Practice questionReviewedProperty Value and Appraisal › Value, Appraisal, and Estimating Value★★★★★

Question 2. In the sales comparison approach, a comparable has a garage worth $10,000, but the subject property has no garage. The appraiser should:

  1. ① Subtract $10,000 from the subject's value
  2. ② Subtract $10,000 from the comparable's sale price
  3. ③ Add $10,000 to the comparable's sale price
  4. ④ Add $10,000 to the subject's value
▼ Show answer and explanation▲ Hide answer and explanation

Answer: ② Subtract $10,000 from the comparable's sale price

Key point: Comp better → subtract; comp poorer → add (CBS)

Adjustments are always made to the comparable. Remember CBS: Comparable Better, Subtract. The comparable has a garage the subject lacks, so it is better, and $10,000 is subtracted from its sale price.

Wrong choices

  • Add $10,000 to the comparable's sale price: You add only when the comparable lacks a feature the subject has.
  • Add $10,000 to the subject's value: Adjustments are made to the comparables, never to the subject.
  • Subtract $10,000 from the subject's value: Adjustments are made to the comparables, not the subject.
Practice questionReviewedProperty Value and Appraisal › Value, Appraisal, and Estimating Value★★★★★

Question 3. A busy highway was built next to a residential street, lowering home values. This loss of value is:

  1. ① External (economic) obsolescence
  2. ② Curable depreciation
  3. ③ Physical deterioration
  4. ④ Functional obsolescence
▼ Show answer and explanation▲ Hide answer and explanation

Answer: ① External (economic) obsolescence

Key point: Loss from outside the property = external obsolescence

The three kinds of depreciation are physical deterioration, functional obsolescence (poor design, outdated features), and external (economic) obsolescence (factors outside the property, such as a new highway or a factory). External obsolescence is usually incurable.

Wrong choices

  • Physical deterioration: Physical deterioration is wear and tear on the building itself.
  • Functional obsolescence: Functional obsolescence is an outdated design or feature inside the property.
  • Curable depreciation: External obsolescence is almost always incurable because it is outside the owner's control.
Practice 5 questions from this unit →

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