Real Estate Appraisal Practice Exam

Which of the following is true regarding an appraiser's three approaches to value?

1. The cost approach is best for residential properties

2. The income approach is most applicable to rental properties

3. The sales comparison approach is only used for commercial properties

4. The market approach ignores property conditions

The correct answer is: The income approach is most applicable to rental properties

The assertion that the income approach is most applicable to rental properties is accurate because this method is specifically designed to evaluate the potential revenue that a property can generate. Appraisers utilize the income approach when assessing properties that generate income, such as apartments or commercial real estate, focusing on factors like rental income, expenses, and capitalization rates to determine value. This approach offers insight into how much income an investor might expect to earn from the property, making it particularly relevant for rental properties. In contrast, while the cost approach can indeed be applied to various types of properties, including residential ones, it is not exclusively best for them, as it also serves commercial properties based on construction costs. Furthermore, the sales comparison approach, which analyzes the sale prices of similar properties, is primarily used for residential properties and can also be applied to commercial properties under certain circumstances; it is not restricted to one type. Lastly, the market approach takes property conditions into account alongside market data, therefore it does not ignore these essential factors.