Certified Pennsylvania Evaluator Practice Exam

Which analysis compares the selling prices of similar properties to derive value?

1. Cost Approach

2. Income Approach

3. Sales Comparison Approach

4. Market Analysis

The correct answer is: Sales Comparison Approach

The Sales Comparison Approach is a method used in real estate appraisal to determine the value of a property by comparing it to similar properties that have recently sold in the same area. This approach operates under the principle of substitution, which suggests that a buyer will not pay more for a property than the cost of purchasing an equivalent substitute. By analyzing the sale prices of comparable properties—also known as "comps"—appraisers can derive a fair market value for the subject property. This method is frequently employed in residential real estate appraisals, as it effectively reflects current market conditions and buyer preferences. The adjustments made to account for differences between the subject property and the comparables sold help provide a more accurate estimate of value. In contrast, the Cost Approach evaluates value based on the cost to replace or reproduce the property, minus depreciation. The Income Approach focuses on the income generated from investment properties and is especially relevant for commercial real estate. Market Analysis, while important for understanding broader trends and dynamics in the real estate market, does not specifically focus on deriving value through comparable sales in the same targeted way as the Sales Comparison Approach.