- Official section
- National III: Valuation
- Broker weight
- 8% of the national broker portion
- Expected scored items
- Valuation accounts for about 8 of 100 items
Valuation topic guide
Sales comparison and cost approaches
The two approaches ask different substitution questions. Sales comparison asks what buyers paid for competing properties. Cost asks what buyers would pay compared with acquiring land and creating an equally useful improvement.
What does this exam area cover?
Short answer: Know comparable selection, sale verification, units of comparison, property-rights, financing, conditions, expenditures, market-conditions, location and physical adjustments, paired data, qualitative analysis, reconciliation, land valuation, replacement and reproduction cost, direct and indirect costs, entrepreneurial incentive, physical deterioration, functional and external obsolescence, curable and incurable depreciation, effective age, economic life, and cost-approach math.
The current national outline tests the sales comparison and cost approaches. Exam calculations simplify real appraisal work. Actual adjustments, cost estimates, depreciation, and reconciliation require verified market evidence and an appropriately credentialed professional when an appraisal is required.
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What is on the official outline?
- Topic
- Comparable selection
- What to know
- Same property rights, use, buyer pool, location, market area, design, quality, condition, size, age, site, amenities, sale date, exposure, financing, and data reliability
- Best exam move
- Choose the most competitive and verifiable sales, not merely the closest addresses.
- Topic
- Sale verification
- What to know
- Buyer, seller, broker, deed, multiple listing service, public record, contract, concessions, financing, personal property, motivation, relationship, exposure, condition, closing date, and unusual terms
- Best exam move
- Confirm what the price represents before using it as market evidence.
- Topic
- Elements of comparison
- What to know
- Real-property rights, financing terms, conditions of sale, expenditures after purchase, market conditions, location, physical characteristics, economic characteristics, use, and nonrealty components
- Best exam move
- Adjust transactional differences before property differences.
- Topic
- Adjustment direction
- What to know
- Comparable inferior, positive adjustment, comparable superior, negative adjustment, dollar, percentage, sequence, net adjustment, gross adjustment, consistency, market support, and subject benchmark
- Best exam move
- Add to an inferior comparable and subtract from a superior comparable.
- Topic
- Adjustment support
- What to know
- Paired sales, grouped data, statistical analysis, sensitivity, capitalization of rent difference, depreciated cost, allocation, extraction, market interviews, listings, qualitative ranking, and bracketing
- Best exam move
- The adjustment must reflect buyer behavior, not an unsupported rule of thumb.
- Topic
- Units of comparison
- What to know
- Total price, price per square foot, price per unit, room, acre, front foot, rentable area, gross building area, net rentable area, income multiplier, and consistency
- Best exam move
- Use the unit market participants use and apply the same definition throughout.
- Topic
- Sales-comparison reconciliation
- What to know
- Adjusted indication, similarity, data quality, verification, adjustment size, number of adjustments, bracketing, range, weighting, outlier, listing evidence, pending sales, and final indication
- Best exam move
- Give greatest weight to the most comparable, credible evidence rather than the highest result.
- Topic
- Land value in cost approach
- What to know
- Sales comparison, allocation, extraction, subdivision development, land residual, ground rent capitalization, highest and best use as vacant, excess land, site improvements, and entrepreneurial factors
- Best exam move
- Value land separately under its highest and best use before adding improvements.
- Topic
- Replacement and reproduction cost
- What to know
- Equivalent utility, current design, replica, historic detail, functional obsolescence, square-foot method, unit-in-place, quantity survey, index trending, local cost, direct cost, indirect cost, and date
- Best exam move
- Replacement usually avoids reproducing obsolete design, while reproduction copies it.
- Topic
- Entrepreneurial incentive and profit
- What to know
- Developer coordination, risk, market reward, cost versus value, incentive expectation, profit realized, development time, financing, lease-up, contingency, and market evidence
- Best exam move
- Total project cost can include a market-supported reward for undertaking development risk.
- Topic
- Accrued depreciation
- What to know
- Physical deterioration, functional obsolescence, external obsolescence, curable, incurable, deferred maintenance, short-lived item, long-lived item, age-life, breakdown, market extraction, and capitalization of income loss
- Best exam move
- Depreciation is value loss from any cause, not just physical wear.
- Topic
- Cost-approach reconciliation
- What to know
- Land value, site improvements, cost new, depreciation, contributory value, effective date, data quality, building age, special purpose, functional adequacy, market conditions, and approach weight
- Best exam move
- Add land to depreciated improvements and assess whether the result fits market evidence.
Which distinctions produce the most mistakes?
- Terms
- Subject vs. comparable
- Difference
- The subject is the property being valued. A comparable is market evidence adjusted to reflect the subject.
- Question cue
- Benchmark versus evidence.
- Terms
- Positive vs. negative adjustment
- Difference
- Add when the comparable is inferior. Subtract when the comparable is superior.
- Question cue
- Bring the comparable toward the subject.
- Terms
- Net vs. gross adjustment
- Difference
- Net adjustment is the algebraic total after positives and negatives offset. Gross adjustment is the sum of absolute adjustment amounts.
- Question cue
- Signed total versus total movement.
- Terms
- Quantitative vs. qualitative analysis
- Difference
- Quantitative analysis applies supported numbers. Qualitative analysis ranks or compares direction and magnitude when precise support is insufficient.
- Question cue
- Dollar or percent versus superior, similar, or inferior.
- Terms
- Replacement vs. reproduction cost
- Difference
- Replacement creates equivalent utility with current design. Reproduction creates a replica of the subject.
- Question cue
- Modern substitute versus exact duplicate.
- Terms
- Direct vs. indirect cost
- Difference
- Direct costs are labor and materials incorporated in construction. Indirect costs include professional fees, permits, financing, insurance, and other project overhead.
- Question cue
- Build the structure versus support the project.
- Terms
- Physical vs. functional depreciation
- Difference
- Physical deterioration comes from wear, age, damage, or deferred maintenance. Functional obsolescence comes from design, layout, capacity, or feature inadequacy.
- Question cue
- Condition problem versus utility problem.
- Terms
- Functional vs. external obsolescence
- Difference
- Functional loss originates within the property. External loss comes from outside economic, environmental, or locational influences.
- Question cue
- Obsolete floor plan versus nearby nuisance.
- Terms
- Chronological vs. effective age
- Difference
- Chronological age is time since construction. Effective age reflects observed condition, utility, maintenance, and market reaction.
- Question cue
- Calendar age versus apparent market age.
How should you solve a comparison or cost question?
- Define the subject, rights appraised, effective date, highest and best use, and relevant unit of comparison.
- Select and verify the most competitive sales, then identify transactional and property differences.
- Adjust each comparable toward the subject using market-supported evidence and consistent units.
- Reconcile adjusted indications by similarity, verification, adjustment size, and relevance rather than averaging.
- For cost, value land separately, estimate replacement or reproduction cost new, and include relevant direct, indirect, and entrepreneurial components.
- Identify all physical, functional, and external depreciation and decide whether each loss is curable or incurable.
- Subtract accrued depreciation from cost new, add land and site-improvement value, then test the result against market evidence.
- Method
- Sales comparison
- Core relationship
- Sale price plus or minus adjustments
- Exam anchor
- Adjust comparable to subject
- Method
- Inferior comparable
- Core relationship
- Add market-supported amount
- Exam anchor
- Comp lacks subject benefit
- Method
- Superior comparable
- Core relationship
- Subtract market-supported amount
- Exam anchor
- Comp has extra benefit
- Method
- Cost approach
- Core relationship
- Land plus cost new minus depreciation
- Exam anchor
- Separate land
- Method
- Age-life depreciation
- Core relationship
- Effective age divided by economic life
- Exam anchor
- Apply ratio to depreciable cost
- Method
- Improvement value
- Core relationship
- Cost new minus accrued depreciation
- Exam anchor
- Land is added afterward
How do the rules work in scenarios?
Comparable adjustment
Scenario: A comparable sold for $410,000 and has a garage worth $18,000 more than the subject's garage. No other differences are stated.
- The comparable is superior on garage utility.
- A superior comparable receives a negative adjustment.
- $410,000 minus $18,000 equals $392,000.
Answer: The adjusted comparable indication is $392,000.
Two adjustments
Scenario: A comparable sold for $500,000. It is $20,000 inferior in condition but $12,000 superior in site value.
- Add $20,000 for inferior condition.
- Subtract $12,000 for superior site.
- $500,000 + $20,000 - $12,000 = $508,000.
Answer: The adjusted indication is $508,000.
Age-life depreciation
Scenario: An improvement has a $600,000 replacement cost new, a 12-year effective age, and a 60-year total economic life.
- The age-life ratio is 12 ÷ 60 = 20%.
- Estimated depreciation is 20% × $600,000 = $120,000.
- Depreciated improvement value is $480,000.
Answer: The age-life method indicates $120,000 depreciation and $480,000 improvement value.
Complete cost approach
Scenario: Land is worth $150,000, cost new is $700,000, and accrued depreciation is $140,000. No separate site-improvement amount is stated.
- Depreciated improvement value is $700,000 - $140,000 = $560,000.
- Land is not depreciated in this calculation.
- $560,000 + $150,000 = $710,000.
Answer: The cost approach indicates $710,000.
What are the common exam traps?
- Trap
- The nearest sale is always the best comparable.
- Correction
- Market competition, rights, use, timing, characteristics, and verification matter.
- Trap
- Adjust the subject to match the comparables.
- Correction
- Adjust each comparable toward the subject.
- Trap
- Add for every feature the comparable has.
- Correction
- If the comparable is superior, subtract; if inferior, add.
- Trap
- A large net adjustment always means a poor comparable.
- Correction
- Positive and negative adjustments can offset, so examine gross adjustment and individual differences.
- Trap
- A recorded sale price proves an arm's-length market transaction.
- Correction
- Verify motivation, relationship, exposure, financing, concessions, and condition.
- Trap
- Replacement cost means an exact replica.
- Correction
- Reproduction copies; replacement provides equivalent utility.
- Trap
- Depreciation means only wear and tear.
- Correction
- It includes physical, functional, and external value loss.
- Trap
- Every defect is curable.
- Correction
- Correction must be practical and economically justified.
- Trap
- Apply improvement depreciation to land.
- Correction
- Land is valued separately in the cost approach.
- Trap
- The cost approach is automatically strongest for an old building.
- Correction
- Older improvements can make depreciation harder to estimate reliably.
Can you answer these original practice questions?
These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.
1. A comparable lacks a feature the subject has. What is the usual adjustment direction?
- Add to comparable
- Subtract from comparable
- Adjust subject
- Ignore every difference
Show answer and explanation
Answer: A
The comparable is inferior, so add the feature's market-supported contribution to its sale price.
2. Which cost estimates a modern building with utility equivalent to the subject?
- Reproduction cost
- Replacement cost
- Historical cost only
- Assessed cost
Show answer and explanation
Answer: B
Replacement cost uses current design and materials to provide equivalent utility.
3. A poor floor plan causes value loss. What category is it?
- Physical deterioration
- Functional obsolescence
- External obsolescence
- Land depreciation
Show answer and explanation
Answer: B
Layout and design inadequacy arise within the property and are functional.
4. A nearby industrial nuisance reduces residential value. What category is it?
- External obsolescence
- Curable physical wear
- Reproduction cost
- Entrepreneurial profit
Show answer and explanation
Answer: A
The value influence comes from outside the property.
5. Land is $100,000, cost new is $500,000, and depreciation is $80,000. What is the cost indication?
- $420,000
- $480,000
- $520,000
- $680,000
Show answer and explanation
Answer: C
$500,000 - $80,000 + $100,000 = $520,000.
How should you study this area?
- Session
- 1. Comparable selection
- Focus
- Rights, market area, use, buyer pool, date, location, design, size, condition, site, exposure, and verification
- Proof you are ready
- Rank eight candidate comparables and justify the top three.
- Session
- 2. Adjustment sequence
- Focus
- Rights, financing, conditions, expenditures, market time, location, physical, economic, use, and nonrealty components
- Proof you are ready
- Order every adjustment in six sale grids.
- Session
- 3. Adjustment math
- Focus
- Inferior, superior, dollar, percent, paired sales, unit comparison, net, gross, and reconciliation
- Proof you are ready
- Complete ten adjustment calculations without reversing direction.
- Session
- 4. Cost new
- Focus
- Land value, replacement, reproduction, direct, indirect, entrepreneurial incentive, square-foot, unit-in-place, and quantity survey
- Proof you are ready
- Build a complete cost stack for four properties.
- Session
- 5. Depreciation
- Focus
- Physical, functional, external, curable, incurable, effective age, economic life, age-life, and market extraction
- Proof you are ready
- Classify and calculate ten value-loss examples.
- Session
- 6. Reconciliation
- Focus
- Data quality, similarity, adjustment size, special purpose, building age, approach reliability, and final indication
- Proof you are ready
- Score at least 90% and explain the weight given to every result.
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.
Sales Comparison and Cost Approaches FAQ
What is the sales comparison approach?
It estimates value by comparing the subject with recently sold properties that buyers consider substitutes, then applying market-supported adjustments for material differences and reconciling the adjusted indications.
Which property is adjusted in the sales comparison approach?
The comparable is adjusted toward the subject. If the comparable is inferior on a value-relevant feature, add to its price. If it is superior, subtract from its price.
What makes a good comparable sale?
A good comparable competes with the subject in property rights, market area, use, physical characteristics, buyer pool, and timing, and has verifiable arm's-length terms. Proximity alone does not make a sale comparable.
What is paired-sales analysis?
It compares sales that are similar except for one value-relevant feature, so the price difference can indicate the market's reaction to that feature. Clean pairs are uncommon, and other differences must be controlled.
What is the cost approach formula?
A common form is value equals land value plus replacement or reproduction cost new of improvements, minus accrued depreciation, plus any contributory value of site improvements. The exact treatment follows the assignment.
What is the difference between replacement and reproduction cost?
Reproduction cost estimates a replica using the same design and materials. Replacement cost estimates a building with equivalent utility using current design, materials, and standards.
What are the three categories of depreciation?
Know physical deterioration, functional obsolescence, and external or economic obsolescence. Each loss can be curable or incurable depending on whether correction is economically justified and practically possible.
Does land depreciate in the cost approach?
Land is valued separately and is not depreciated as an improvement. Site contamination, legal limits, access, externalities, or market decline can reduce land value, but the improvement depreciation calculation is not applied to land.
When is the cost approach most useful?
It can be persuasive for newer construction, special-purpose property, proposed improvements, or insurance-oriented analysis when cost and land data are credible. Estimating depreciation in older property can reduce reliability.
Are these questions copied from PSI?
No. Every practice item is original and aligned to the public valuation outline.
Primary sources
- PSI Illinois Candidate Information Booklet dated June 24, 2026
- Illinois Department of Financial and Professional Regulation, real estate appraisal
- The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice
- U.S. Department of Justice, Uniform Appraisal Standards for Federal Land Acquisitions
- U.S. Department of Housing and Urban Development, FHA Single Family Housing Policy Handbook
- Fannie Mae Selling Guide, comparable-sale adjustments
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.