- Official section
- National III.C: Methods of Estimating Value
- Broker weight
- Part of 8% of the national portion
- Expected scored items
- The current PSI broker outline assigns about 8 of 100 scored national items to Valuation and Market Analysis
Valuation and Market Analysis exam concept
The three appraisal approaches to value
Compare, build, capitalize. Sales comparison asks what substitutes sold for. Cost asks what equivalent improvements would cost today after depreciation, plus land. Income asks what future economic benefits are worth now. Selection follows the property and assignment, while reconciliation follows the quality of evidence.
Last updated: August 1, 2026
What is the difference at a glance?
Short answer: Sales comparison applies the principle of substitution to verified market transactions, adjusts comparable properties for relevant differences, and reconciles adjusted indications. The cost approach values land separately, adds current replacement or reproduction cost of improvements, and subtracts accrued physical, functional, and external depreciation. The income approach analyzes a property's earning power through direct capitalization, a gross-income multiplier, or more detailed discounted cash-flow methods when appropriate. Owner-occupied homes often emphasize sales comparison, new or special-purpose improvements can strengthen cost analysis, and investor-purchased property often emphasizes income. No approach is automatically mandatory in every assignment, and reconciliation is reasoned weighting rather than averaging.
The three approaches are frameworks, not guaranteed formulas. Comparable adjustments, cost estimates, depreciation, rent forecasts, expenses, and capitalization rates must come from relevant evidence and logic. Current mortgage-agency policy can require particular approaches for certain property or loan types, but those policy requirements should not be generalized to every appraisal. The Appraisal Foundation still lists the 2024 USPAP as current on August 1, 2026.
What changes from one term to the next?
- Terms
- Sales comparison vs. cost approach
- Difference
- Sales comparison analyzes actual market transactions. Cost estimates land plus current depreciated improvement cost.
- Question cue
- Buy a substitute versus build a substitute.
- Terms
- Sales comparison vs. income approach
- Difference
- Sales comparison compares transaction prices. Income analysis converts expected property benefits into present value.
- Question cue
- Comparable sales versus earning power.
- Terms
- Cost approach vs. income approach
- Difference
- Cost focuses on production and depreciation. Income focuses on anticipated returns and investor-required rates.
- Question cue
- Creation cost versus financial benefits.
- Terms
- Replacement cost vs. reproduction cost
- Difference
- Replacement cost creates equivalent utility with current design. Reproduction cost creates an exact or near-exact duplicate.
- Question cue
- Same function versus same structure.
- Terms
- Physical deterioration vs. functional obsolescence
- Difference
- Physical deterioration is wear or damage. Functional obsolescence is lost utility from design, layout, features, or equipment.
- Question cue
- Condition problem versus usefulness problem.
- Terms
- Functional vs. external obsolescence
- Difference
- Functional obsolescence originates within the property. External obsolescence comes from influences outside it.
- Question cue
- Inside design versus outside influence.
- Terms
- NOI vs. cash flow after debt service
- Difference
- NOI is property income before mortgage payments. Cash flow after debt service reflects the particular financing arrangement.
- Question cue
- Property operation versus owner financing.
- Terms
- Capitalization rate vs. mortgage interest rate
- Difference
- A cap rate relates one period's property NOI to value. A mortgage rate prices borrowed money and is only one financing input.
- Question cue
- Property return ratio versus loan cost.
- Terms
- GRM vs. cap rate
- Difference
- GRM relates sale price to gross rent without deducting expenses. A cap rate relates value to NOI after operating expenses.
- Question cue
- Gross income multiplier versus net income rate.
- Terms
- Reconciliation vs. averaging
- Difference
- Reconciliation weighs relevance and reliability. Averaging gives each number a mathematical treatment that may ignore evidence quality.
- Question cue
- Reasoned weight versus equal arithmetic.
How does the distinction change the answer?
Comparable has an extra garage bay
Scenario: A comparable sold for $440,000 and has an extra garage bay worth $18,000 in this market. All other stated factors are equal to the subject.
- The comparable is superior because it has the extra bay.
- Adjust the comparable, not the subject.
- Subtract the market-supported $18,000 from the comparable's price.
Answer: The adjusted comparable indication is $422,000.
Cost approach calculation
Scenario: Land is worth $90,000, replacement cost new is $360,000, accrued depreciation is $70,000, and contributory site improvements are $15,000.
- $360,000 cost new minus $70,000 depreciation equals $290,000 depreciated improvement value.
- Add $90,000 land value.
- Add $15,000 contributory site-improvement value.
Answer: The cost-approach indication is $395,000.
Direct capitalization
Scenario: An investment property has stabilized annual NOI of $72,000, and comparable market evidence supports an 8% overall capitalization rate.
- Use value equals income divided by rate.
- Convert 8% to 0.08.
- $72,000 divided by 0.08 equals $900,000.
Answer: The direct-capitalization indication is $900,000.
Gross rent multiplier
Scenario: A house rents for $2,400 per month, and comparable rental sales support a monthly GRM of 145.
- Use monthly rent because the multiplier was derived from monthly rents.
- Multiply $2,400 by 145.
- Do not deduct expenses when applying this gross multiplier.
Answer: The GRM indication is $348,000.
New custom public building
Scenario: A recently completed special-purpose building has few comparable sales and no meaningful private rental market, but reliable land and construction records exist.
- Sales comparison is weakened by scarce competitive transfers.
- Income is weakened by the absence of relevant rent and investor data.
- The recent cost evidence can make the cost approach comparatively useful, subject to depreciation and market checks.
Answer: The cost approach is likely to receive substantial weight on these facts.
Reconciling an apartment appraisal
Scenario: An apartment appraisal produces $4.9 million by sales comparison, $5.0 million by income, and $5.8 million by cost. Income and sales data are strong, while depreciation estimates are weak.
- Apartment buyers focus heavily on income and compare investment sales.
- The cost result depends on less reliable depreciation evidence.
- A simple average would give the weak result unjustified influence.
Answer: Reconcile near the supported income and sales indications, with less weight on cost.
The S-C-I-R approach test
- Subject and assignment: define property rights, effective date, intended use, physical characteristics, legal use, occupancy, and market participants.
- Sales: verify competitive transactions, adjust each comparable to the subject, analyze the range, and reconcile the best market evidence.
- Cost: value land, estimate replacement or reproduction cost new, subtract supported depreciation, and add contributory site improvements.
- Income: stabilize revenue, deduct vacancy and operating expenses, calculate NOI, select a supported rate or multiplier, and convert benefits to value.
- Reliability: test every sale, cost source, depreciation estimate, rent, expense, rate, and assumption for date and market fit.
- Reconciliation: explain which approaches best reflect buyer behavior and which inputs deserve the most weight, with no automatic average.
- Approach
- Sales comparison
- Core question
- What did substitutes sell for?
- Basic exam method
- Adjust comparable sales
- Strong fit
- Active transaction market
- Approach
- Cost
- Core question
- What would a substitute cost?
- Basic exam method
- Land + cost new - depreciation
- Strong fit
- New or unique improvements
- Approach
- Income
- Core question
- What are benefits worth now?
- Basic exam method
- NOI / cap rate
- Strong fit
- Income-producing property
Where do similar terms create traps?
- Trap
- Using the nearest sale automatically
- Correction
- Select sales that compete for the same buyers and have similar legal and physical characteristics, with explainable differences.
- Trap
- Adjusting the subject property
- Correction
- The comparable sale price is adjusted toward the subject's characteristics.
- Trap
- Reversing adjustment direction
- Correction
- Subtract for a superior comparable and add for an inferior comparable.
- Trap
- Adjusting by construction cost without market support
- Correction
- Sales comparison adjustments reflect market reaction, which can differ from feature cost.
- Trap
- Depreciating the land in the building formula
- Correction
- Value land separately and subtract accrued depreciation from the improvement cost estimate.
- Trap
- Calling all depreciation physical wear
- Correction
- Accrued depreciation also includes functional and external obsolescence.
- Trap
- Putting mortgage payments in NOI
- Correction
- NOI is calculated before debt service because financing is owner-specific.
- Trap
- Using gross rent in the cap-rate formula
- Correction
- Direct capitalization uses NOI with the overall rate; gross rent belongs with a matching gross multiplier.
- Trap
- Mixing monthly rent and annual multiplier
- Correction
- Keep the rent period consistent with the market-derived multiplier.
- Trap
- Calling cap rate the mortgage rate
- Correction
- The cap rate measures property return relative to value, while the mortgage rate prices debt.
- Trap
- Requiring all three approaches every time
- Correction
- Develop the approaches necessary for credible results and explain the relevance or omission of each under the assignment.
- Trap
- Averaging the approach indications
- Correction
- Reconcile based on evidence quality, data fit, and buyer behavior rather than equal arithmetic.
Can you separate the terms in a new fact pattern?
These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.
1. Which approach is usually most directly supported by recent competitive sales of similar owner-occupied homes?
- Sales comparison
- Cost only
- Income only
- Book value
Show answer and explanation
Answer: Sales comparison
The sales comparison approach reflects how typical buyers compare substitutes when reliable transaction data exist.
2. A comparable is inferior to the subject by $12,000 for a market-supported feature difference. What adjustment is made?
- Subtract $12,000 from the subject
- Add $12,000 to the comparable
- Subtract $12,000 from the comparable
- No adjustment can ever be made
Show answer and explanation
Answer: Add $12,000 to the comparable
The comparable is worse, so its price is adjusted upward to represent the subject's superior feature.
3. Which formula states the cost approach most accurately for a basic exam question?
- Land value + cost new - accrued depreciation
- NOI / capitalization rate
- Monthly rent x GRM only
- Sale price - land value
Show answer and explanation
Answer: Land value + cost new - accrued depreciation
The cost approach adds separately supported land value to depreciated improvement cost, with qualifying site improvements handled consistently.
4. A property has annual NOI of $54,000 and a market-supported cap rate of 6%. What is its direct-capitalization indication?
- $324,000
- $900,000
- $3,240,000
- $57,446
Show answer and explanation
Answer: $900,000
$54,000 divided by 0.06 equals $900,000.
5. Three approaches produce different indications. What should the appraiser do?
- Always average all three
- Choose the highest
- Reconcile based on relevance and reliability
- Discard all data
Show answer and explanation
Answer: Reconcile based on relevance and reliability
Reconciliation weighs the approaches according to market participant behavior and the quality of assignment-specific evidence.
Where do these ideas appear on the outline?
- Topic
- Principle of substitution
- What to know
- Rational buyer, comparable alternative, similar utility, no overpayment, competitive supply, market choice, delay, construction alternative, rent alternative, price ceiling, and buyer behavior
- Best exam move
- Connect all three approaches to substitution: buy a comparable, build a substitute, or purchase competing income.
- Topic
- Sales comparison sequence
- What to know
- Define subject, identify market area, research transactions, verify data, select comparables, compare rights and terms, adjust differences, analyze range, bracket features, reconcile, and report
- Best exam move
- Do not jump from three nearby sale prices to value without verification and comparison.
- Topic
- Comparable selection
- What to know
- Competitive property, same buyer pool, legal characteristics, physical characteristics, location, site, room count, finished area, style, quality, condition, age, use, market area, sale date, and data reliability
- Best exam move
- The best comparable is the sale needing the most supportable analysis, not automatically the closest or newest sale.
- Topic
- Comparable verification
- What to know
- Buyer, seller, broker, deed, public record, settlement statement, listing service, financing, concession, personal property, condition, arms-length status, exposure, motivation, and sale date
- Best exam move
- Verify what transferred and on what terms before treating the reported amount as comparable real-property evidence.
- Topic
- Sales comparison adjustment order
- What to know
- Property rights, financing, concessions, conditions of sale, expenditures after purchase, market conditions, location, physical features, economic characteristics, use, and non-realty components
- Best exam move
- Analyze transaction terms and time before adjusting the real estate's location and physical differences.
- Topic
- Direction of adjustments
- What to know
- Comparable superior, subtract, comparable inferior, add, adjust comparable, subject baseline, paired-data support, grouped-data support, market extraction, qualitative ranking, and no automatic cost adjustment
- Best exam move
- Say better comp, subtract; worse comp, add, always adjusting the comparable toward the subject.
- Topic
- Sales comparison reconciliation
- What to know
- Adjusted range, net adjustment, gross adjustment, similarity, data quality, verification, bracketing, market conditions, consistency, outlier, weighting, no average requirement, and final indication
- Best exam move
- Give greatest consideration to the most comparable and reliable evidence, not the sale with the smallest unadjusted price difference.
- Topic
- Cost approach sequence
- What to know
- Land value, highest and best use as vacant, replacement cost, reproduction cost, direct cost, indirect cost, entrepreneurial incentive, accrued depreciation, site improvements, contributory value, and indicated property value
- Best exam move
- Keep land separate, estimate improvement cost new, subtract depreciation, then assemble the indication.
- Topic
- Land value
- What to know
- Sales comparison, allocation, extraction, subdivision development, land residual, ground rent capitalization, legal use, physical possibility, financial feasibility, maximum productivity, site utility, and no building depreciation
- Best exam move
- Land can lose market value but is not depreciated as a building component in the cost-approach formula.
- Topic
- Replacement and reproduction cost
- What to know
- Equivalent utility, modern substitute, exact duplicate, current materials, original materials, current code, historical feature, square-foot method, unit-in-place, quantity survey, cost service, local multiplier, and date
- Best exam move
- Replacement means same usefulness; reproduction means a near-exact copy.
- Topic
- Direct and indirect costs
- What to know
- Labor, material, equipment, contractor, permit, architect, engineer, legal, financing, insurance, taxes during construction, overhead, marketing, developer expense, profit, entrepreneurial incentive, and no double count
- Best exam move
- Total cost new includes more than visible labor and materials when the selected method calls for full production cost.
- Topic
- Accrued depreciation
- What to know
- Physical deterioration, functional obsolescence, external obsolescence, curable, incurable, deferred maintenance, short-lived item, long-lived item, age-life method, market extraction, breakdown method, and cost to cure
- Best exam move
- Depreciation is loss in value from all causes, not only physical wear.
- Topic
- Cost approach fit
- What to know
- New construction, proposed construction, renovation, unique improvement, special use, limited sales, insurance support, functional issue, manufactured housing policy, older building, difficult depreciation, obsolete design, and land-data quality
- Best exam move
- Cost evidence is strongest when cost new and depreciation can be estimated credibly.
- Topic
- Income approach sequence
- What to know
- Potential gross income, vacancy and collection loss, other income, effective gross income, operating expenses, reserves where applicable, net operating income, capitalization rate, value, and reconciliation
- Best exam move
- Build property-level NOI before applying a market-supported capitalization method.
- Topic
- Net operating income
- What to know
- Market rent, contract rent, vacancy, credit loss, parking, laundry, reimbursements, taxes, insurance, management, maintenance, utilities, replacement reserves, debt service exclusion, income-tax exclusion, depreciation exclusion, and owner-specific cost exclusion
- Best exam move
- NOI is income before mortgage principal and interest, income taxes, and accounting depreciation.
- Topic
- Direct capitalization
- What to know
- V equals I divided by R, I equals V times R, R equals I divided by V, stabilized NOI, overall capitalization rate, comparable extraction, investor survey, band of investment, risk, growth, and no interest-rate substitution
- Best exam move
- Use the IRV relationship and keep the income period consistent with the rate.
- Topic
- Gross income multipliers
- What to know
- Gross rent multiplier, gross income multiplier, sale price divided by rent, value equals rent times multiplier, monthly rent, annual income, market comparables, no expense deduction, similar expense pattern, and unit consistency
- Best exam move
- Do not mix a monthly GRM with annual rent or call a gross multiplier a capitalization rate.
- Topic
- Approach selection and reconciliation
- What to know
- Intended use, property type, buyer motivation, data availability, relevance, reliability, quality, quantity, market participant behavior, approach omission, explanation, weighting, consistency, final value, and no mechanical average
- Best exam move
- Use the approach buyers rely on most, supported by the best assignment-specific evidence, and explain the final weighting.
How do you make the distinction stick?
- Session
- Session 1
- Focus
- Own compare, build, capitalize
- Proof you are ready
- Explain the core question and best property fit for all three approaches without notes.
- Session
- Session 2
- Focus
- Master comparable adjustment direction
- Proof you are ready
- Complete 20 superior and inferior comparable adjustments with a one-line reason for every sign.
- Session
- Session 3
- Focus
- Build the cost formula
- Proof you are ready
- Solve 12 land, replacement, reproduction, site-improvement, and depreciation calculations.
- Session
- Session 4
- Focus
- Build NOI correctly
- Proof you are ready
- Classify 24 income and expense items and calculate stabilized NOI in eight scenarios.
- Session
- Session 5
- Focus
- Control IRV and GRM
- Proof you are ready
- Solve 10 capitalization and 10 multiplier questions while checking rate and time-period units.
- Session
- Session 6
- Focus
- Run the S-C-I-R test
- Proof you are ready
- Score at least 90% and state subject, sales, cost, income, reliability, and reconciliation for every miss.
Do not count recognition as mastery. Close the notes and explain the rule, apply it to a new fact pattern, and identify why each distractor fails.
Turn the comparison into a test-day decision
From concept to decision
Drill this topic, then review the explanation
Pass Illinois gives you original national and Illinois questions, topic-by-topic study, clear explanations, timed practice, flashcards, progress tracking, and Math Coach. Start free, find the weak distinction, and focus the next session there.
Questions students ask about Sales Comparison vs. Cost vs. Income Approach
What are the three approaches to value?
The three traditional approaches are sales comparison, cost, and income capitalization. Sales comparison compares the subject with market transactions. Cost estimates land value plus depreciated improvement cost. Income converts anticipated economic benefits into value. The appraiser develops the approaches necessary for credible assignment results and reconciles their indications.
When is the sales comparison approach most useful?
It is usually strongest when enough recent, verified, competitive sales exist and buyers in that market compare alternatives. It is commonly central for owner-occupied residential property, vacant land, and other property types with active transaction evidence. Similarity and market appeal matter more than simple physical proximity.
How are comparable sales adjusted?
The appraiser analyzes relevant differences such as property rights, financing, concessions, market conditions, location, site, design, quality, condition, size, rooms, amenities, and other value factors. Adjustments are applied to the comparable sale, not the subject. If a comparable is superior, its price is generally adjusted downward; if inferior, upward.
What is the cost approach formula?
A basic exam formula is land value plus current replacement or reproduction cost of improvements, minus accrued depreciation, plus contributory value of qualifying site improvements. Land is valued separately because it is not depreciated in the same way as buildings.
When is the cost approach most useful?
It can be especially useful for new or proposed construction, recently renovated property, special or unique improvements, properties with limited comparable sales, and assignments needing a check on functional or physical depreciation. Reliability depends on good land, cost, and depreciation evidence.
What are the three types of depreciation?
Physical deterioration is wear or damage. Functional obsolescence is loss caused by the improvement's design, layout, equipment, or utility. External obsolescence comes from influences outside the property, such as adverse land use, market decline, or environmental conditions. Each can be curable or incurable depending on economics and facts.
What is the income approach formula?
For direct capitalization, value equals net operating income divided by the capitalization rate: V = I / R. The income must be property-level NOI before debt service, income tax, depreciation, and owner-specific financing. A gross rent multiplier is a simpler market ratio using gross rent rather than NOI.
When is the income approach most useful?
It is usually most relevant when buyers purchase for income and reliable rent, vacancy, expense, and rate data are available. Apartment buildings, offices, retail, industrial, and leased investment property are common examples. It can also support small residential rental analysis where a meaningful rental market exists.
Does an appraiser average the three approaches?
No. Reconciliation weighs the relevance and reliability of each developed indication for the assignment. An approach with excellent evidence can receive more weight than one built on weak inputs. The final opinion can equal one indication, fall between them, or differ after supported reconciliation; it is not a mechanical average.
Are these official PSI questions?
No. They are original questions aligned to the national Valuation and Market Analysis outline effective June 24, 2026. The current USPAP edition and Fannie Mae and Freddie Mac appraisal guidance available through August 1, 2026 were reviewed for approach selection, evidence, and reconciliation.
Primary sources
- PSI Illinois Candidate Information Booklet dated June 24, 2026
- The Appraisal Foundation, current 2024 Uniform Standards of Professional Appraisal Practice
- Fannie Mae Selling Guide B4-1.3-08, current comparable-sales guidance
- Fannie Mae Selling Guide B4-1.3, current appraisal approach and reconciliation sections
- Fannie Mae Selling Guide B4-1.3-10, current cost and income approach guidance
- Freddie Mac Guide 5605.7, current cost, income, and reconciliation guidance effective February 4, 2026
The current official outline controls the tested scope. Statutes, regulations, and official agency materials control when a general study rule and a jurisdiction-specific rule differ.
Editorial status
Checked against primary sources
The Pass Illinois editorial team last checked this guide on August 1, 2026. Every practice question is an original study item, and the source links above let you verify the rules that support the lesson.