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

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.

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.

The three kinds of depreciation are physical deterioration, functional obsolescence (poor design, outdated features), and external (economic) obsolescence (factors outside the property, such as a new highway or a factory).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• Functional obsolescence: Functional obsolescence is an outdated design or feature inside the property.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.

Use the income formula:

1. Value = Net operating income ÷ Cap rate.
2. $45,000 ÷ 0.10 = $450,000.
3. Check: $450,000 × 0.10 = $45,000.

Wrong choices

• $4,500: This divides by 10 instead of 0.10.
• $49,500: This adds 10% to the income instead of capitalizing it.
• $405,000: This subtracts 10% from $450,000 by mistake.

The principle of substitution says a buyer will not pay more than the cost of an equally good substitute. It is the basis of the sales comparison approach.

Wrong choices

• Conformity: Conformity says value is highest when homes are similar to each other.
• Contribution: Contribution is about how much one feature adds to value.
• Regression: Regression is when a better home loses value among poorer homes.

Market value is the most probable price a property should bring in a competitive, open market with informed buyers and sellers acting without pressure. Market price is what was actually paid, which may be different.

Wrong choices

• They are always the same amount: They can differ, for example in a forced sale or a sale between relatives.
• Market value is the amount the seller asks: The asking price is the list price, not market value.
• Market price is set by the appraiser: An appraiser estimates value; buyers and sellers set the price.

A comparative market analysis (CMA) compares a home with recently sold, pending, and active listings to help set a price. It is not an appraisal, and licensees must not present it as one. A broker price opinion (BPO) is a similar estimate often requested by lenders.

Wrong choices

• Appraisal: An appraisal is done by a licensed or certified appraiser.
• Assessment: An assessment is the value set by the tax assessor.
• Title search: A title search examines ownership records.

The cost approach estimates the cost to replace or reproduce the building, subtracts depreciation, and adds the land value. It is best for new buildings and special-purpose properties that rarely sell and produce no income.

Wrong choices

• Sales comparison approach: Churches and fire stations rarely sell, so few comparables exist.
• Income approach: These buildings do not produce rental income.
• Gross rent multiplier: A GRM needs rental income.

Functional obsolescence is a loss in value from poor design or outdated features, such as too few bathrooms for the number of bedrooms, or a bedroom you can reach only through another bedroom.

Wrong choices

• External obsolescence: External obsolescence comes from outside the property.
• Physical deterioration: Physical deterioration is wear and tear, such as a worn roof.
• Economic life: Economic life is the period a building adds value; it is not a type of depreciation.

Under regression, a better property loses value when surrounded by lower-quality properties. Progression is the opposite: a modest home gains value from nicer homes around it.

Wrong choices

• Progression: Progression is when a lower-priced home gains value from better homes around it.
• Anticipation: Anticipation is value based on expected future benefits.
• Plottage: Plottage is the added value from combining lots.