Property Valuation, Appraisal, and Market Analysis
Three approaches to value
Candidates must know the cost approach (replacement or reproduction cost less depreciation plus land value), the direct comparison approach (adjusting comparable sales for differences), and the income approach (capitalizing net operating income at a market-derived rate). Understand when each applies: comparison for residential resale, cost for special-purpose or new construction, and income for revenue property. Know the difference between market value, assessed value, and price, and that assessed value is a taxation concept, not an appraisal.
Market analysis
Understand supply and demand, absorption rate, months of inventory, and how they indicate a buyer's, seller's, or balanced market. Know the difference between a comparative market analysis prepared by a licensee and a formal appraisal by a designated appraiser. Recognize that a CMA is an opinion of likely sale price, not a lending appraisal.
Traps
A common trap is using the cost approach for an older home where depreciation is hard to measure, or capitalizing gross income instead of net operating income. Questions also test whether a licensee may call a CMA an "appraisal" - generally not, given reserved practice. Another trap is treating a hot market as a reason to ignore comparables.
Rule of thumb
Value is driven by net operating income divided by the capitalization rate for income property. If NOI is $60,000 and the cap rate is 6%, value is $1,000,000. A 0.5% change in cap rate moves value by roughly 8%, so small rate changes matter.