Certified Residential Appraiser Practice Exam

Market conditions can be adjusted for in which appraisal approach?

1. Cost Approach

2. Sales Comparison Approach

3. Income Capitalization Approach

4. Subdivision Development Analysis

The correct answer is: Sales Comparison Approach

Market conditions are best reflected in the Sales Comparison Approach due to its focus on comparable property sales. This approach involves analyzing recent sales data from properties that are similar in size, location, and features to the subject property. By making adjustments for differences between these comparable properties and the subject property, appraisers can account for market fluctuations, trends, and conditions that have affected property values over time. The Sales Comparison Approach is particularly sensitive to changes in market conditions because it directly utilizes actual sale prices, which are influenced by current buyer demand, inventory levels, and overall economic factors. For instance, if market conditions are changing—such as a rising or declining market—appraisers can adjust the comparable sales prices to reflect these conditions, providing a more accurate valuation for the subject property. In contrast, the Cost Approach focuses on estimating the cost to build a similar structure minus depreciation, which does not incorporate market trends directly. The Income Capitalization Approach is more suitable for investment properties, focusing on the income-generating potential rather than direct market comparisons. Subdivision Development Analysis evaluates the feasibility of developing a subdivision and typically operates on forecasts rather than current market data. Therefore, the Sales Comparison Approach is the most appropriate for adjusting for market conditions in property appraisal.