Real Property (RP)
What the RP candidate must know
Real property valuation rests on the three approaches - sales comparison (most reliable for residential), cost (new or special-purpose construction), and income (commercial/investment). Know the sales comparison adjustment grid: adjust the comparables to the subject (never the subject to the comparables), applying paired-sales analysis and recognizing that net adjustments should be smaller than gross adjustments for credibility.
Concepts to hold
For the income approach, master NOI ÷ cap rate = value, GIM, and DCF for lease-up or multi-tenant properties. Understand direct capitalization vs. yield capitalization. For the cost approach: replacement/reproduction cost new less physical deterioration, functional obsolescence, and economic obsolescence, plus land value. Know highest and best use (legally permissible, physically possible, financially feasible, maximally productive) - it frames every approach. Understand easements, encroachments, and title issues and that market conditions adjustments reflect time.
Traps in questions
- Adjusting the subject to the comparables (backwards).
- Using contract rent instead of market rent in NOI without disclosure.
- Forgetting to add land value in the cost approach.
- Ignoring highest and best use when selecting comparables.
Worked rule of thumb
NOI $120,000; market cap rate 8% → value = $120,000 ÷ 0.08 = $1,500,000. If the property is below stabilized occupancy, switch to DCF rather than applying a stabilized cap rate.