Valuation and Appraisal Principles
This domain tests valuation principles and the three approaches appraisers use, plus adjustments that reconcile comparable sales. North Carolina questions stress market value, highest and best use, and depreciation.
Core rules
- Market value is the most probable price in an arm's-length transaction, with both parties informed and acting without undue pressure.
- The sales comparison approach adjusts comparables for differences. If the comparable is superior, subtract; if inferior, add. Direction matters more than memorizing a formula.
- The cost approach uses replacement or reproduction cost minus depreciation plus land value. Depreciation includes physical deterioration, functional obsolescence, and external obsolescence.
- The income approach uses value equal to net operating income divided by the capitalization rate. The gross rent multiplier equals price divided by gross rent.
- Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive.
Worked example
A comparable sold for $300,000 and has a garage the subject lacks, worth $15,000. The comparable is superior, so subtract $15,000, indicating $285,000 before other adjustments. If the comparable lacks a feature the subject has, add the feature's value to the comparable price.
Traps that cost marks
Adding when the comparable is superior; using gross income instead of net operating income in a capitalization problem; treating land as depreciable; ignoring external obsolescence because it is off-site; and using a comparable outside the competitive market.