Certified Residential Appraiser Practice Exam

The principle of anticipation is fundamental to which appraisal approach?

1. Cost Approach

2. Market Value Approach

3. Income Approach

4. Sales Comparison Approach

The correct answer is: Income Approach

The principle of anticipation, which is crucial in the valuation of properties, asserts that the value of a property is driven by the expectations of future benefits or income it will generate. This principle is particularly vital in the Income Approach to appraisal, as this method directly evaluates the potential revenue that can be derived from a property, such as rental income, over time. Consequently, the appraiser focuses on estimating future cash flows, including income and expenses, and discounts these to present value. This approach helps capture the intrinsic value based on anticipated financial performance rather than simply looking at physical characteristics or comparisons with similar properties. In contrast, the other approaches may emphasize different aspects. For instance, the Cost Approach is more about the cost of creating a property from scratch, while the Sales Comparison Approach relies on analyzing sales of similar properties for valuation. The Market Value Approach generally encompasses market dynamics and may not singularly focus on future income potential but rather on current market conditions and comparable sales data. Therefore, the Income Approach is distinctly attentive to future expectations, making it the correct choice when discussing the principle of anticipation in appraisal.