Study guide

Valuation & Market Analysis — Key Facts

Valuation questions ask which appraisal approach fits which property: sales comparison for homes, cost for new or unusual buildings, income capitalization for rentals. The other favorite is depreciation — physical deterioration, functional obsolescence, and external obsolescence, which is always incurable because the cause lies outside the property. Keep a CMA (a licensee's pricing tool) distinct from a formal appraisal, and know the value principles like substitution and highest and best use.

Three Appraisal Approaches

Sales comparison — most reliable for typical single-family homes.
Cost approach — best for new construction or unique/special-purpose properties (reproduction/replacement cost minus depreciation, plus land value).
Income capitalization — used for income-producing property (value = NOI ÷ cap rate).

Depreciation Types

Physical deterioration — wear and tear (curable or incurable).
Functional obsolescence — outdated design/layout within the property.
External (economic) obsolescence — caused by factors OUTSIDE the property; always incurable by the owner.

Value Principles

Substitution — buyers won't pay more than the cost of an equally desirable substitute.
Highest and best use — legally permissible + physically possible + financially feasible + maximally productive.
CMA is an informal pricing tool by a licensee; only a licensed appraiser can perform a formal appraisal.

Key vocabulary: Valuation & Market Analysis glossary (25 terms)

Practice Valuation & Market Analysis

Every Freehold question shows why the right answer is right — and cites its source.

Market value is best defined as:

The price the seller originally paid for the property
The assessed value used for property taxation
The replacement cost of the improvements less depreciation
The most probable price a property should bring in an open, competitive market

Show answer & explanation

The most probable price a property should bring in an open, competitive market — Market value is the most probable price a property should bring in a competitive and open market, with informed buyer and seller acting prudently and without undue stimulus. Price paid and assessed value can differ substantially.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

Which appraisal approach is generally most reliable for valuing an owner-occupied single-family home?

Sales comparison approach
Cost approach
Income capitalization approach
Gross rent multiplier method

Show answer & explanation

Sales comparison approach — The sales comparison approach values a home by analyzing recent sales of comparable properties, making it the most reliable method for single-family residences where good comparable data exists.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

Which of the following is the clearest example of functional obsolescence?

A cracked foundation needing repair
A five-bedroom home with only one bathroom
A neighborhood in economic decline
Peeling exterior paint on the siding

Show answer & explanation

A five-bedroom home with only one bathroom — Functional obsolescence is a loss in value from outdated or poor design within the property itself, such as too few bathrooms for the bedroom count. Physical wear is deterioration, and neighborhood decline is external obsolescence.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

A buyer refuses to pay more for a home than the cost of a similar home nearby. This illustrates which principle of value?

Principle of anticipation
Principle of conformity
Principle of substitution
Principle of contribution

Show answer & explanation

Principle of substitution — The principle of substitution holds that a buyer will not pay more for a property than the cost of acquiring an equally desirable substitute. It underlies the sales comparison approach to value.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

A comparative market analysis (CMA) prepared by a real estate licensee is:

A certified appraisal of market value
A federally regulated valuation report
Required to be performed by a licensed appraiser
An informal estimate used to help set a listing price

Show answer & explanation

An informal estimate used to help set a listing price — A CMA is an informal pricing tool licensees prepare from comparable sales to help sellers choose a listing price. It is not an appraisal, which must be performed by a licensed or certified appraiser.

Source: PSI National Real Estate Exam Content Outline §3 Valuation & Market Analysis

Freehold is an independent study resource and is not affiliated with, endorsed by, or sponsored by PSI, Pearson VUE, or any state real estate licensing board or commission. Freehold does not guarantee passage of any licensing exam.