Ch9. Common Exam Mistakes — High-Frequency Error Points for the Appraiser Exam

Appraisal Practice — Common Error Points

① Three Approaches — Reconciliation Requirement
   → USPAP requires the appraiser to consider all three
     approaches; omitting one requires written justification

② V = NOI / R
   → NOI is before income taxes and before depreciation
     (it is a property-level operating measure, not
      an equity or accounting measure)

③ Sales Comparison Adjustment Sequence
   → Conditions of Sale → Market Conditions (Time)
     → Location → Physical Characteristics

④ Cost Approach Application
   → Depreciation categories: Physical, Functional, External
   → Land is NOT depreciated — only improvements are

⑤ Assessed Value vs. Market Value
   → Assessed value (for property tax) may differ
     significantly from market value
   → Appraisers must state clearly which value type applies

Appraisal Theory — Common Error Points

⑥ Highest and Best Use — Four Tests in Sequence
   → Legally permissible is the first filter
   → Goal is maximum productivity, not merely highest price

⑦ Market Analysis before Property Analysis
   → Establish neighborhood standard first,
     then quantify individual differences

⑧ Principle of Substitution — Foundation of All Three Approaches
   → Value converges toward the cost of the best available substitute

⑨ Effective Demand vs. Latent Demand
   → Effective demand = purchasing power + desire to buy
   → Latent demand = desire without purchasing power
     (does NOT support market value)

⑩ Cobweb Theory
   → Supply lag creates cyclical price oscillations

Law & Encumbrances — Common Error Points

⑪ Mechanic's Lien = Unpaid work + property connection
   (priority vs. mortgage depends on state law / relation-back)
⑫ Leasehold vs. Fee Simple — know the difference
   (leasehold is a personal property interest in many tax contexts)
⑬ Mortgage = voluntary lien, no possession transfer,
   foreclosure remedy for default
⑭ Easement Appurtenant runs with the land;
   Easement in Gross does not (generally)
⑮ Adverse Possession = continuous, open, notorious,
   hostile, actual use for statutory period (varies by state)

Economics — Common Error Points

⑯ Inelastic short-run supply → demand surge causes
   sharp short-run price spikes
⑰ NPV > 0 = accept; IRR > required rate of return = accept
   (same investment decision from two perspectives)
⑱ Leverage = amplifies returns AND risk
   (positive leverage only when cap rate > loan constant)
⑲ Hedonic Pricing = isolates the contribution of
   individual property attributes to total value
⑳ Externalities = off-site factors that affect value
   (positive: new park; negative: highway noise)

Key Concept Cards

Adjustment Sequence: Conditions → Time → Location → Physical ★★★★★ : Apply each adjustment type in this order for defensible, non-compounding results. Memory hook: C-T-L-P

No Depreciation of Land ★★★★★ : Only improvements depreciate; land retains its value under the cost approach. Memory hook: Land = no depreciation

HBU = Legal → Physical → Financial → Maximum ★★★★☆ : All four tests applied in sequence; first filter eliminates legally impermissible uses. Memory hook: L-P-F-M

Practice Questions

Q. When is an appraiser permitted to rely on only one approach to value?

USPAP requires consideration of all three approaches; however, an appraiser may exclude an approach when it is not applicable or when sufficient data is unavailable — provided the reasoning is clearly explained in the report. Examples: the cost approach may be inapplicable for older income properties where depreciation estimates are unreliable; the sales comparison approach may be inapplicable for highly specialized single-purpose properties with no comparable sales. The omission must be justified, not simply ignored.

Q. What is the difference between market value and assessed value for appraisal purposes?

Market value is the most probable price a property would bring in a competitive, open market under conditions requisite to a fair sale. Assessed value is the value established by a taxing authority for ad valorem tax purposes, typically a percentage of market value and often lagged by one or more years. Appraisers must clearly define the value type in every assignment. Using assessed value as a proxy for market value without reconciliation is a USPAP violation.