Module 3 of 13 / National concepts
Value and appraisal
Choose an appropriate valuation method, make directional adjustments and distinguish price from value.
Outline allocation: 11 of 80 scored questions. Reviewed October 15, 2026.
What you will learn
- Apply sales comparison, cost and income approaches.
- Recognize depreciation and value principles.
- Separate appraisal, CMA and BPO uses.
Price, value and highest and best use
Price is what a buyer actually pays. Market value is an opinion under a defined set of market assumptions and an effective date. Cost is an expenditure; it need not equal either price or value. Highest and best use analysis considers uses that are legally permissible, physically possible, financially feasible and maximally productive. The principle of substitution limits what a typical buyer pays when a comparable alternative is available. Contribution measures what a feature adds to value, not its construction bill. Source note: California DRE chapters support general concepts only; use the Pennsylvania modules and linked Pennsylvania authorities for state-specific rules.
Work through an example
A $70,000 pool may contribute only $20,000 to market value in a neighborhood where few buyers want pools.
Remember: Cost spent is not value created.
Sales comparison and reconciliation
Select genuinely comparable transactions and verify sale conditions, property rights, financing, location, timing and physical features. Adjust the comparable sale to the subject, not the subject to the comparable. If the comparable is superior, subtract the supported difference; if inferior, add it. Reconcile the adjusted indications based on relevance and reliability rather than automatically averaging every number. Distress, family transfers or unusual concessions can distort a raw sale price.
Work through an example
A comparable sold for $310,000 and has a garage worth $18,000 more than the subject’s parking. Its garage-adjusted indication is $292,000.
Remember: Adjust the comparable: superior subtract; inferior add.
Cost and depreciation
The cost approach combines land value with the current cost of improvements, less accrued depreciation. Replacement cost builds equivalent utility with current materials; reproduction cost duplicates the existing structure. Physical deterioration is wear; functional obsolescence is a design or utility problem; external obsolescence comes from outside the property. Whether a defect is curable depends on economic feasibility, not merely whether a repair is technically possible. Land and improvements must not be depreciated indiscriminately together.
Work through an example
A worn roof is physical deterioration; a layout requiring passage through a bedroom may be functional obsolescence; nearby industrial noise is external.
Remember: For a basic cost problem: land + improvement cost − depreciation.
Income, multipliers and appropriate scope
The income approach links income-producing property to investor expectations. Effective gross income accounts for vacancy and other income; net operating income subtracts operating expenses before debt service and income taxes. Direct capitalization uses value = NOI ÷ capitalization rate. Gross rent multipliers use gross rent rather than NOI, so units and time periods must match. A CMA or BPO is not automatically an appraisal; Pennsylvania limits BPO uses and requires specific qualifications and disclosures.
Work through an example
Annual NOI of $36,000 capitalized at 8% gives $450,000. A monthly rent multiplier must be multiplied by monthly rent.
Remember: Debt service is not an operating expense in standard NOI calculations.
Check your understanding
Close your notes and explain the rule in your own words. Change one fact in an example: does the answer change? Use topic practice in the study room, then return to any rule you missed.
Sources and further reading
California DRE references support general national concepts only. Their California-specific rules are not Pennsylvania law; use the PA sources for state requirements.
Supplemental study only. State rules and transaction details matter; consult the linked official sources for the complete requirements. This lesson provides no prelicensing credit.