Real Estate Appraisal Practice Exam

Why does the sales comparison approach depend on data from arm's length sales?

1. It shows forced sales prices

2. It includes prices influenced by special financing

3. It provides prices unaffected by special financing or sales concessions

4. It reflects high-pressure sales tactics

The correct answer is: It provides prices unaffected by special financing or sales concessions

The sales comparison approach relies on data from arm's length sales because these transactions provide prices that accurately reflect fair market value. An arm's length transaction is characterized by a sale between willing buyers and sellers, neither under undue pressure to complete the sale. This means the prices established in such transactions are not influenced by external factors like special financing arrangements or sales concessions, which could distort the true value of the property. Using data from arm's length sales ensures that the appraisal reflects what a typical buyer would pay in an open market situation, allowing appraisers to draw reliable comparisons between similar properties. This enhances the accuracy of the valuation, ensuring it aligns with the market conditions and buyer motivations typically observed in real estate transactions. Other options refer to circumstances like forced sales, special financing, and high-pressure sales tactics, which can skew the price outcomes and do not provide a clear understanding of property values in a normal market context. Therefore, relying on prices from arm's length transactions is fundamental for a valid and credible sales comparison approach.