Property Valuation
Real Estate Appraisal Explained for Exam Students
Appraisals are performed by licensed appraisers to estimate market value. The exam heavily tests the three approaches to value — here's how each works with sample calculations.
What Is a Real Estate Appraisal?
A real estate appraisal is a professional opinion of value prepared by a licensed or certified appraiser. Lenders require an appraisal before funding a mortgage to ensure the property value supports the loan amount.
Appraisals follow Uniform Standards of Professional Appraisal Practice (USPAP). The appraiser is an independent third party — they cannot advocate for the buyer, seller, or lender's preferred outcome.
The Three Approaches to Value
Sales Comparison Approach
Estimates value by comparing the subject property to recently sold comparable properties (comps). Adjustments are made for differences. Best for: residential properties where comps exist.
Income Approach
Value = NOI ÷ Cap Rate. Estimates value based on the income the property generates. Best for: income-producing properties — apartments, commercial, retail.
Cost Approach
Value = Land Value + Depreciated Improvement Cost. Best for: new construction, special-purpose properties, and insurance purposes.
Appraisal Exam Questions
Question 1
A comparable home sold for $350,000. It has a garage worth $10,000 that the subject property lacks. It also lacks a pool that the subject has (pool value: $15,000). What is the adjusted sale price of the comp?
Start with $350,000. Subtract $10,000 for the garage (comp has it, subject doesn't) → $340,000. Add $15,000 for the pool (comp lacks it, subject has it) → $355,000. Rule: if the comp is superior to the subject, subtract. If inferior, add.
Question 2
A 20-unit apartment building generates $240,000 in annual NOI. Market cap rates are 6%. What is the estimated value using the income approach?
Value = NOI ÷ Cap Rate = $240,000 ÷ 0.06 = $4,000,000.
Appraisal FAQ for the Exam
What is the difference between market value and market price?
Market price is what a property actually sold for — a historical fact. Market value is an estimate of what a property should sell for under normal conditions. Appraisers estimate market value.
What is depreciation in the cost approach?
Loss in value from any cause. Three types: physical deterioration (wear and tear), functional obsolescence (outdated features), and external/economic obsolescence (outside the property's control).
Who pays for the appraisal and who owns it?
The buyer typically pays the appraisal fee at closing, but the lender orders the appraisal. The appraisal report is technically the property of the lender. The buyer has the right to receive a copy under ECOA.