CHAPTER 7
Valuation Using the Sales Comparison and Cost Approaches
Test Problems
1. The final price for each comparable property reached after all adjustments have
been made is termed the:
2. Which of the following is not included in accrued depreciation when applying the
cost approach to valuation?
3. In the sales comparison approach, the value obtained after reconciliation of the
final adjusted sales prices from the comparable sales is termed the
4. A new house in good condition that has a poor floor plan would suffer from which
type of accrued depreciation?
5. To reflect a change in market conditions between the date on which a comparable
property sold and the date of appraisal of a subject property, an adjustment must
be made for which of the following?
6. Under the Cost Approach to appraisal, the estimated expenditure required to
construct a building with equal utility as the one being appraised is termed the
________.
7. You find two properties that have sold twice within the last two years. Property A
sold 22 months ago for $98,500; it sold last week for $108,000. Property B sold
20 months ago for $105,000; it sold two weeks ago for $113,500. Assuming no
compounding, what is the average monthly rate of change in sale prices?
Property A: $108,000/$98,500 = 1.096447
Average monthly increase with no compounding:
Property A: 0.096447/22 = 0.00438
Property B: 0.08095/20 = 0.00405
Average monthly increase with compounding:
Property A: 1.096447(1/22) = 1.004194 or 0.004194
Property B: 1.08095(1/20) = 1.00390 or 0.00390
8. A comparable property sold 10 months ago for $98,500. If the appropriate
adjustment for market conditions is 0.30% per month (with compounding), what
would be the adjusted price of the comparable property?
Without compounding:
With compounding:
9. A comparable property sold six months ago for $150,000. The adjustments for the
various elements of comparison have been calculated as follows:
Location: -5 percent
Market conditions: +8 percent
Physical characteristics: +$12,500
Financing terms: -$2,600
Conditions of sale: 0
Property rights conveyed: 0
Use: None
Nonrealty items: -$3,000
Making the adjustments in the order suggested in Exhibit 7-6, what is the
comparable’s final adjusted sale price?
Transaction price $150,000
Adjustment for financing terms Minus $2,600
Adjusted price $147,400
Adjustment for location Minus
5%
$7,959.60
Adjusted price $151,232.40
Adjustment for physical characteristics Plus $12,500
10. A property comparable to the single-family home you are appraising sold three
months ago for $450,700. You have determined that the adjustments required for
differences in the comparable and subject property are as follows:
What is the final adjusted sale price of the comparable? Make the adjustments in
the order suggested by Exhibit 7-6.
Study Questions
1. What is the theoretical basis for the direct sales comparison approach to the market
valuation?
Solution: The direct sales comparison approach to the market valuation relies on value
judgments made by willing buyers and sellers. Therefore, this method uses
2. What main difficulty would you foresee in attempting to estimate the value of a
30-year old property by means of the cost approach?
Solution: The cost approach assumes that the market value of a new building is similar to
that of constructing the building today, minus accrued depreciation. Calculating an
3. The cost approach to market valuation does not work well in markets that are overbuilt.
Explain.
Solution: In an overbuilt market, the market value of an existing property is frequently
4. What is meant by functional obsolescence? Could a new building suffer from
functional obsolescence?
Solution: Functional obsolescence refers to a building’s loss in value resulting from
changes in tastes, technical innovations, or market standards. Typically, functional
5. Why is an estimate of the developer’s fair market profit included in the costs estimate?
Solution: In practice, developers and contractors frequently include their profit in the
6. Replacement costs have been estimated as $350,000 for a property with a 70-year
economic life. The current effective age of the property is 15 years. The value of the land
is estimated to be $55,000. What is the estimated market value of the property using the
cost approach, assuming no external or functional obsolescence?
Solution:
Replacement cost 350,000
Less: Depreciation (75,000) [$350,000 x 15/70]
7. What is a self-contained appraisal report?
Solution: A self-contained appraisal report is the document prepared by the fee appraiser
to covey the client his opinion of value. This report contains the appraiser’s final estimate
8. What is the difference between market value and investment value?
Solution: Market value is the most probable selling price; investment value is the value to
9. Contrast self-contained appraisal reports, summary appraisal reports, and restricted
appraisal reports.
Solution: A self-contained appraisal report includes all the detail and information that
were used by the appraiser to derive his or her estimate of market value or the other
10. How would you go about estimating the current market value of a publically-traded
common stock? Would this take more or less time than most real estate appraisals?
Solution: I would simply observe the price at which the stock is currently selling or the
11. How would you define the highest and best use of a property?
Solution: The highest and best use of a property is defined as that use found to be (1)
legally permissible, (2) physically possible, (3) financially feasible, and (4) maximally
12. In the sales comparison approach, if the comparable property is superior to the subject
property in some way, is an upward or downward adjustment to the sale price of the
comparable required? Explain.
Solution: If the comparable property is superior to the subject property in some way, a
13. A comparable property sold recently for $250,000. The comparable contained an
estimated $3,000 in non-reality items. In addition, the appraiser estimates that market
values (conditions) have increased a total of 2 percent since the sale of the comparable.
What is the adjusted price of the comparable if the dollar adjustment for non-reality items
is made before the market conditions adjustment? What is the adjusted price of the
comparable if the percentage adjustment for market conditions is made before the
adjustment for non-reality items?
Solution:
Adjusted price of the comparable if the dollar adjustment for non-reality items is made
before the market conditions adjustment.
Sale price of comparable $250,000
Adjustment for non-realty items – 3,000
Adjusted price 247,000
Adjusted price of the comparable if the percentage adjustment for market conditions is
made before the adjustment for non-reality items.
Sale price of comparable $250,000
Adjusted price 255,000
#14
You are appraising a single-family residence located in the Huntington neighborhood at
4632 NW 56th Drive. The property is being acquired by a mortgage applicant and you
The elements of comparison you used to compare and adjust the sale prices of the
comparable properties are listed in the market data grid below. The property rights being
conveyed in the acquisition of the subject property are fee-simple absolute. Conventional
Comparable 1 sold three months ago, while comparables 2 and 3 sold six months ago.
Based on your knowledge of recent price appreciation in this market, you have decided
that comparable 2 would sell for 2 percent more if sold today and that comparables 2 and
In these neighborhoods, an incremental square foot of lot size or living area is worth
about $20 per square foot and $80 per square foot respectively. Each year of effective age
reduces the value of properties in this market by about $3,000 per year. You experience
Based on the above discussion of the elements of comparison, complete an adjustment
grid for the three comparable properties. What is the final adjusted price (indication of the
subject’s value) for comparable 1, 2, and 3?
#11
Assume the market value of the subject site (land only) is $120,000. You estimate that the
cost to replicate the improvements to the subject property would be $428,000 today. In
addition, you estimate that accrued depreciation on the subject is $60,000. What is the
indicated value of the subject using the cost approach?