California Real Estate Practice Exam

What type of adjustment is necessary in the sales comparison approach if the subject property is located in a neighborhood deemed inferior to the comparable?

1. Positive to the comparable

2. Negative to the comparable

3. No adjustment is necessary

4. Adjustment is irrelevant to neighborhood quality

The correct answer is: Negative to the comparable

In the sales comparison approach, making an adjustment for neighborhood quality is crucial for accurately determining the value of a subject property in comparison to its comparable properties. If the subject property is located in a neighborhood considered inferior to the neighborhoods where the comparable properties are situated, a negative adjustment is necessary for the comparable properties. This negative adjustment reflects the fact that the comparable properties are likely overselling in value due to their superior location. By applying a negative adjustment to the value of the comparables, the appraiser helps account for the difference in desirability related to the neighborhood. Essentially, this increases the likelihood of drawing a more accurate and fair comparison, ensuring that the subject property’s value is effective based on its placement in a less desirable area. The other choices, such as a positive adjustment or no adjustment, do not appropriately address the value difference created by neighborhood quality. Adjustments must always happen when significant differences in property characteristics, including location, exist to achieve a valid comparison. Thus, understanding when and how to apply these adjustments is a fundamental principle in real estate valuation.