Valuation and Market Analysis
This domain tests valuation principles and the market analysis process: highest and best use, the three approaches, adjustment logic, and income capitalization.
Approaches and use
Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive. Sales comparison is standard for residential and focuses on recent, arm's-length comparable sales, then adjustments. Cost approach adds land value to replacement or reproduction cost and subtracts depreciation; it is useful for new or unique improvements. Income approach capitalizes net operating income (NOI) or applies a gross rent multiplier (GRM).
Adjustment rules
Adjust the comparable to the subject. If the comparable is superior, subtract; if inferior, add. Do not adjust the subject. Physical deterioration, functional obsolescence, and external obsolescence are forms of depreciation; external obsolescence is often incurable because it is outside the property.
Worked example
A subject duplex has a two-car garage; the best comparable sold for $320,000 with no garage. The market shows a garage contributes $15,000. The comparable is inferior, so add $15,000: indicated value is $335,000 before other adjustments. If another comparable had a finished basement the subject lacks, and basements contribute $25,000, subtract $25,000 from that comparable.
Income example: NOI is $36,000 and the market cap rate is 9%. Value = $36,000 ÷ 0.09 = $400,000. If the cap rate rises to 10%, value falls to $360,000, showing that higher risk or lower growth expectations reduce value.
Traps
Reversing adjustments is the most common error. A CMA is not a full appraisal. Do not use the subject's asking price as market value. Cap rates already reflect risk and income growth; do not add separate growth to NOI and then use an unrelated cap rate.