Property Valuation, Appraisal and Market Analysis
What this domain tests
This domain tests how value is defined and estimated: the three approaches, the adjustment grid, capitalization, and the market forces that drive prices. Expect questions that ask you to choose the right approach for a property type and to apply a simple adjustment or cap rate calculation.
Core rules and concepts
- Market value is the most probable price in a competitive, open market with informed, willing parties, neither under duress, with reasonable exposure time. It is not the same as price or cost.
- Cost approach: value = replacement or reproduction cost − depreciation + land value. Best for new or special-purpose buildings with few comparables.
- Sales comparison approach: adjust comparable sales for differences (location, size, condition, time). Adjust the comparable toward the subject: if the comparable is superior, subtract; if inferior, add.
- Income approach: value = net operating income ÷ capitalization rate. Used for income-producing property. NOI is effective gross income minus operating expenses, excluding debt service and income tax.
- Gross rent multiplier: value = gross rent × multiplier, a quick check for small residential income property.
- Highest and best use is the reasonably probable, legally permissible, physically possible, financially feasible use that produces the highest value.
- Market analysis distinguishes a buyer's market (high inventory, longer days on market, downward pressure) from a seller's market.
Worked example
A fourplex produces effective gross income of $96,000 and operating expenses of $36,000. The market cap rate is 6%. What is the indicated value?
Reasoning: NOI = 96,000 − 36,000 = $60,000. Value = NOI ÷ cap rate = 60,000 ÷ 0.06 = $1,000,000. Do not subtract mortgage payments; debt service is a financing cost, not an operating expense. If the cap rate compressed to 5%, value would rise to $1,200,000, showing the inverse relationship between cap rate and value.
Traps that cost marks
- Subtracting debt service or income tax when computing NOI.
- Adjusting the subject instead of the comparable in the grid.
- Adding an adjustment when the comparable is superior (should be subtracted).
- Confusing cost with value; a building can cost more than it is worth.
- Using a cap rate from a different property class or risk profile.