Quick answer
Sales comparison values a property against recent sales of similar properties, and it leads for houses. The cost approach values the land plus the depreciated cost of the improvements, and it leads for new or special-purpose buildings with no comparables. The income approach converts income into value, and it leads for investment property.
Valuation is 8 percent of the national portion, and Georgia adds its own layer through property tax assessment. The definitions are easy marks. The judgment questions, which ask which approach an appraiser would give the most weight, are where the marks actually move.
Sales comparison
Find recent sales of similar properties, adjust for the differences, and reconcile to a value.
The adjustment rule causes more errors than anything else in this topic, so learn it as a sentence: adjust the comparable, never the subject.
- Comparable is better than the subject, so subtract from the comparable.
- Comparable is worse than the subject, so add to the comparable.
A memory hook that survives exam pressure: CBS, comp better subtract. Then the other direction follows.
A comparable sale is useful if it is recent, nearby, and genuinely similar, and if it was an arm's length transaction. A sale between relatives, a foreclosure, or a sale under duress is not arm's length and gets excluded rather than adjusted.
Exam trap
The question gives you the subject's features and three comparables, then asks for the adjusted value of one comp. Adjusting the subject instead of the comp produces an answer that is on the list, because the test writer put it there.
Cost approach
Land value, plus the cost to build the improvements today, minus depreciation.
Two costs, and the exam distinguishes them. Reproduction cost builds an exact replica, including the outdated features. Replacement cost builds something of equivalent utility using current materials and methods. Replacement is the one used more often, because nobody wants an exact replica of a 1958 kitchen.
Depreciation comes in three kinds, and the exam asks which are curable.
| Type | Source | Curable? |
|---|---|---|
| Physical deterioration | Wear, tear, age, deferred maintenance | Often curable |
| Functional obsolescence | Poor layout, outdated design, a bedroom you walk through | Sometimes curable |
| External obsolescence | Something outside the property line: a motorway, a closing factory | Never curable by the owner |
External obsolescence is never curable, because the owner cannot move the motorway. That single fact is a reliable exam question.
The cost approach leads when there is nothing to compare against: a new building, a church, a school, a library.
Income approach
For property bought for the income it produces.
The core relationship is worth memorising in all three forms, because the question can ask for any of the three:
- Value = Net Operating Income divided by capitalisation rate
- NOI = Value multiplied by cap rate
- Cap rate = NOI divided by Value
NOI is effective gross income minus operating expenses. It does not subtract debt service, income tax, or depreciation. A question that hands you a mortgage payment and expects you to subtract it is checking whether you know that.
A building with an NOI of $84,000 and a market cap rate of 7 percent is worth $84,000 divided by 0.07, which is $1,200,000.
The gross rent multiplier is the quick version used on small residential rentals. GRM = price divided by gross rent. It uses gross rent, not net, which is why it is a rule of thumb rather than an appraisal.
Worth knowing
Cap rate and value move in opposite directions. Same income, higher cap rate, lower value. A rising cap rate means buyers want more return for the same risk, which means they will pay less.
Reconciliation, and the words that mean specific things
An appraiser weights the approaches and reconciles them to a single opinion. Reconciliation is judgment, not an average. Averaging three approaches is the wrong answer whenever it appears.
Some vocabulary the exam leans on:
- Market value is what a property should sell for under normal conditions with a willing buyer and seller, neither under pressure. Market price is what it actually sold for. They differ whenever conditions are not normal.
- Value in use is worth to a particular owner for a particular purpose, which can be far from market value.
- Highest and best use is the legally permissible, physically possible, financially feasible and maximally productive use. All four tests, in that order.
- Progression is a modest house gaining value from better neighbours. Regression is a fine house losing value from worse ones.
The calculators run the income and value formulas, and the math formula sheet has the adjustment rule written out.
Check yourself
1. A comparable sold for $385,000 and has a garage the subject property lacks. The garage is worth $18,000. What is the adjusted value of the comparable?
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Answer: B. The comparable is better than the subject, so subtract from the comparable. $385,000 minus $18,000 is $367,000.
2. An appraiser is valuing a newly built elementary school. Which approach should carry the most weight?
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Answer: B. A new special-purpose building has few or no comparable sales and produces no income, so the cost approach leads.
3. A property produces net operating income of $96,000. Investors in the market expect an 8 percent return. What is the indicated value?
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Answer: C. Value equals NOI divided by cap rate. $96,000 divided by 0.08 is $1,200,000.
4. A new motorway is built alongside a residential subdivision and values fall. What kind of depreciation is this?
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Answer: C. The cause is outside the property line, which makes it external obsolescence, and the owner cannot cure it.
FAQ
Is a CMA the same as an appraisal?
No. A comparative market analysis is prepared by a licensee to help set a price. An appraisal is an opinion of value prepared by a licensed or certified appraiser under professional standards. Presenting a CMA as an appraisal is a problem in every state.
Does the appraiser average the three approaches?
No. The appraiser reconciles them, giving weight to whichever is most reliable for that property and that assignment. Averaging is a distractor.
Why is depreciation different in appraisal and accounting?
Accounting depreciation is a scheduled write-off for tax purposes. Appraisal depreciation is actual loss in value from any cause. The exam means the appraisal sense unless the question is clearly about taxes.
How does this connect to Georgia property tax?
Georgia assesses at 40 percent of fair market value, so the assessor's value is the starting point and the assessment is derived from it. The millage guide works through the calculation.