Valuation study guide
Sales comparison and cost approaches
A comparable sold for more than the subject should sell for. Is that evidence of a higher value, or did the comparable have something the subject lacks? This lesson walks through that decision, then shows how to build a cost indication without depreciating land or counting an improvement twice.
Last reviewed:
The short answer
Sales comparison estimates value from competing property transactions, with supported adjustments to the comparables. The cost approach adds land value to the current cost of improvements after deducting accrued depreciation. Adjust the comparable toward the subject. In a cost calculation, identify what the cost figure includes before adding any separate site-improvement amount.
Reviewed October 26, 2026. PSI places sales comparison in National III.B.2 and cost in III.B.3. The whole Valuation domain has eight scored national broker questions, not eight on each approach. Original examples use stated assumptions and supplied amounts. They are not official PSI items or a professional appraisal.
Solve the sales comparison or cost problem step by step
- Identify the property interest, effective date and purpose. The subject is what you are valuing; comparables supply evidence. A leased interest, an unrestricted fee and a transaction including substantial personal property need not represent the same thing.
- Choose genuine competitors and verify the transactions. Consider the market, use, location, rights, size, condition, timing and terms. An asking price is not a closed sale. The nearest or newest address is not automatically the best substitute.
- Write the adjustment direction before doing the arithmetic. If the comparable lacks a benefit the subject has, add the supported contribution to the comparable. If it has a benefit the subject lacks, subtract it. The subject remains the benchmark.
- Use the stated adjustment basis. A feature’s construction cost need not equal its market contribution. A paired-sale exercise isolates a feature only when other relevant differences have been controlled. For percentage adjustments, identify the base and sequence rather than assume every percentage applies to the original price.
- Reconcile evidence instead of selecting a convenient answer. Explain the relevance and reliability of each indication. A small net adjustment can conceal large offsetting adjustments; the lowest net figure does not prove the best comparable.
- For cost, value land as if vacant and estimate the improvements at current replacement or reproduction cost. Include relevant construction and project costs once, checking any contractor or developer reward already included in the estimate. Subtract accrued improvement depreciation, then add the land. A separate site-improvement value is added only when it is outside those figures.
- Check the depreciation method and what it already covers. Wear, poor design and outside influences are different causes. A simplified age-life question uses effective age divided by total economic life. Do not divide by remaining life alone or deduct the same loss again under a second label.
- Keep an indicated value separate from a professional conclusion. Cost, price, market value and insurance coverage are different measures. Data and assignment requirements determine which approaches carry weight. Studying these methods does not confer an Illinois appraiser credential.
| Calculation | Relationship | Check |
|---|---|---|
| Adjusted comparable | Sale price + positive adjustments - negative adjustments | Comparable moves toward the subject |
| Net adjustment | Signed sum of adjustments | Opposite signs offset |
| Gross adjustment | Sum of absolute adjustment amounts | Opposite signs do not offset |
| Net or gross percentage | Corresponding adjustment total / stated sale-price base × 100 | Keep signed net distinct from absolute gross |
| Cost indication | Land + cost new of included improvements - accrued depreciation | No separate site amount if already included |
| Separate site amount | Add its present contributory value only if excluded above | Use present value, not cost new without adjustment |
| Simplified age-life ratio | Effective age / total economic life | Positive total life; not remaining life alone |
| Simplified depreciation amount | Age-life ratio × stated depreciable cost new | Exclude separately valued land |
| Improvement indication | Cost new - accrued improvement depreciation | Do not deduct a covered loss twice |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| Subject and comparable | The subject is the benchmark. Adjustments translate a comparable’s evidence toward the subject’s characteristics. | Which property gets the addition or deduction? |
| Market contribution and construction cost | An improvement costing $25,000 need not add $25,000 to a buyer’s price. Use the stated supported contribution. | Cost is not an automatic sales-grid adjustment. |
| Net and gross adjustments | Net is the signed total. Gross adds the absolute amounts, so positive and negative adjustments do not cancel. | A small net result can hide large differences. |
| Closed sale, pending contract and listing | A closed transaction, an unclosed agreement and an asking price have different evidentiary status. | Do not relabel an offering as a completed sale. |
| Replacement and reproduction | Replacement provides equivalent utility with current design and materials. Reproduction estimates a replica. | Modern substitute or duplicate? |
| Direct and indirect costs | Labor and materials are ordinary direct-cost examples. Fees, permits and construction financing are indirect-cost examples. Check what the supplied total already includes. | Avoid adding an included expense twice. |
| Physical, functional and external loss | Wear concerns condition; obsolete layout concerns utility; an outside nuisance concerns external influence. | Find the cause rather than classify every loss as age. |
| Effective age and chronological age | Chronological age measures elapsed time. Effective age reflects the improvement’s condition and utility in the analysis. | A renovated building need not have its calendar age as effective age. |
| Total and remaining economic life | In the simplified age-life model, total life equals effective age plus remaining life. The two denominators are not interchangeable. | Use the denominator the formula actually requires. |
| Land and depreciable improvements | Land is valued separately in this cost calculation. Its value can change, but an improvement depreciation ratio is not applied to it. | Not depreciated here does not mean its value cannot decline. |
| Appraisal depreciation and tax depreciation | Accrued appraisal loss is not an automatic tax deduction or a fall from the owner’s purchase price. Tax cost recovery follows separate rules. | Identify the purpose of the calculation. |
Work through the facts
Subtract a superior feature
A comparable sold for $410,000. Its garage contributes $18,000 more than the subject’s garage. No other adjustment is needed.
- The comparable has the superior feature, so subtract.
- $410,000 - $18,000 = $392,000.
Answer: Adjusted comparable indication: $392,000.
Net and gross tell different stories
A $500,000 comparable needs +$20,000 for inferior condition and -$12,000 for a superior site. Use the original sale price as the percentage base.
- Net: $20,000 - $12,000 = +$8,000; adjusted price: $508,000.
- Gross: $20,000 + $12,000 = $32,000. Net is +1.6%; gross is 6.4%.
Answer: A +$8,000 net adjustment does not mean only $8,000 of differences were considered.
Follow the percentage sequence supplied
A $320,000 sale requires a stipulated +4% time adjustment to the original price, followed by a $5,000 deduction. No other adjustments apply.
- $320,000 × 1.04 = $332,800.
- $332,800 - $5,000 = $327,800.
Answer: Adjusted indication: $327,800. The sequence is an assumption of this exercise, not a universal grid rule.
A controlled pair measures contribution
Two verified sales are alike in all relevant respects except one feature. The sale with the feature is $305,000; the one without is $290,000.
- The stipulated controlled difference is $15,000.
- It indicates contribution in this example, not the feature’s construction cost or a universal adjustment for other markets.
Answer: The exercise supports a $15,000 feature contribution.
Keep the site amount out of the formula twice
Land as if vacant is $140,000. Building cost new is $480,000 and building depreciation is $72,000. A $25,000 present site-improvement value is explicitly excluded from all three amounts.
- Building indication: $480,000 - $72,000 = $408,000.
- $140,000 + $408,000 + $25,000 = $573,000.
Answer: Cost indication: $573,000. If the $25,000 were already included in an input, it would not be added again.
Convert remaining life into total life
A simplified age-life problem gives $600,000 improvement cost new, effective age 12 years, remaining economic life 48 years and separate land of $150,000.
- Total life: 12 + 48 = 60 years; ratio: 12 / 60 = 20%.
- Depreciation: $120,000; improvements: $480,000. Add land for $630,000.
Answer: The indication is $630,000. Dividing 12 by 48 would answer a different calculation.
A practical cure also needs economic support
A correction costs $8,000 and the exercise stipulates a $12,000 increase in value, with no other costs or constraints.
- The stated benefit exceeds the correction cost by $4,000.
- These assumptions support economic feasibility. A repair being physically possible is not enough without the benefit and cost facts.
Answer: On these simplified facts, the correction is economically justified.
Do not subtract the roof twice
A building’s $500,000 cost new is reduced by a stated $100,000 total accrued depreciation that already includes the roof’s condition. A reader deducts another $15,000 for the same roof loss.
- The supplied total already includes that particular loss.
- The improvement indication is $400,000 before separate land; the extra deduction would duplicate the loss.
Answer: Use $400,000 for the improvement on these facts.
The cause matters more than the dollar amount
Three homes suffer equal stated losses: one has worn roofing, another an obsolete floor plan, and the third an adjacent traffic nuisance.
- Roof wear is physical deterioration; layout inadequacy is functional obsolescence.
- The outside nuisance is external obsolescence. Its duration and market effect need support; a temporary influence is not automatically curable by the owner.
Answer: Equal dollar losses can have different causes and treatment.
Cost does not promise a sale price
A project’s supported cost indication is $620,000. The best supported sales-comparison indication is $590,000. The owner demands $620,000 because that amount was spent.
- An expenditure does not compel buyers to pay the same amount.
- Reconciliation evaluates the assignment and evidence; it does not guarantee recovery of the owner’s costs.
Answer: The spending alone does not establish a $620,000 market value.
Build the supplied cost stack once
An exercise specifies 2,200 square feet at $180 per square foot. That amount excludes $24,000 in required project fees. Separate land is $100,000; total improvement depreciation is $42,000. No other additions are required.
- Building cost: 2,200 × $180 = $396,000; adding the excluded fees gives $420,000.
- $420,000 - $42,000 + $100,000 = $478,000.
Answer: Cost indication: $478,000. The $180 rate is a supplied exercise input, not an Illinois market quote.
Mistakes to avoid
- The newest or nearest sale must be best. Compare competitive characteristics, verification and timing rather than distance or recency alone.
- Add when the comparable has the better feature. Subtract a comparable’s supported superiority; add its supported inferiority.
- The feature’s receipt supplies its market adjustment. Use contribution supported by market evidence or the stated problem, not cost alone.
- A zero net adjustment means there were no differences. Opposite adjustments may cancel. Examine the gross amount and individual adjustments.
- Every outside influence is curable like a repair. External obsolescence is generally beyond the owner’s cure, even if its duration is temporary.
- An older building depreciates at its calendar age automatically. Effective age, life and the chosen method require stated support.
- Land receives the same depreciation ratio as the building. Separate land from the depreciable improvement calculation.
- Add site improvements after every cost calculation. First determine whether the supplied figures already include them.
- Every type of loss needs a second deduction. Do not count a loss again when the selected method already includes it.
- Average the approaches and call it reconciliation. Explain the evidence and weight. Do not use an unexplained arithmetic average as analysis.
Check your understanding
These are original teaching questions, not recalled or predicted PSI questions. Answer first, then explain why the other choices fail.
1. Which property is the benchmark when making comparable-sale adjustments?
- The most expensive listing
- The property with the largest mortgage
- The subject
- Every sale equally
Show answer and explanation
Answer: C. The subject
Adjust the comparable toward the subject. The sale’s extra benefits or deficiencies determine the appropriate direction under the stated facts.
2. A $410,000 comparable has a supported $18,000 advantage over the subject and no other differences. What is its adjusted indication?
- $392,000
- $428,000
- $410,000
- $18,000
Show answer and explanation
Answer: A. $392,000
Subtract the comparable’s superiority: $410,000 - $18,000 = $392,000. This is a comparable indication, not an automatic final appraisal.
3. A $500,000 sale needs +$20,000 and -$12,000 adjustments. What is the adjusted indication?
- $532,000
- $492,000
- $508,000
- $468,000
Show answer and explanation
Answer: C. $508,000
The signed adjustment is +$8,000. Adding that net amount to the original $500,000 gives $508,000.
4. For +$20,000 and -$12,000 adjustments to a $500,000 sale, what are the gross dollars and gross percentage?
- $32,000 and 1.6%
- $8,000 and 6.4%
- $8,000 and 1.6%
- $32,000 and 6.4%
Show answer and explanation
Answer: D. $32,000 and 6.4%
Gross uses absolute amounts: $20,000 + $12,000 = $32,000. Dividing by the stated $500,000 base gives 6.4%.
5. A controlled pair sells for $305,000 with a feature and $290,000 without. What is indicated under the stated otherwise-alike assumption?
- $15,000 contribution in this example
- No comparison is possible
- $305,000 construction cost
- A universal $15,000 adjustment for every property
Show answer and explanation
Answer: A. $15,000 contribution in this example
The difference is $15,000. The stipulated control isolates the feature for this exercise; actual paired analysis must address other relevant differences.
6. A $320,000 sale receives +4% on the original price, then -$5,000 as instructed. What is the indication?
- $302,200
- $327,800
- $332,800
- $307,800
Show answer and explanation
Answer: B. $327,800
First $320,000 × 1.04 = $332,800. Then deduct $5,000 to get $327,800. Follow the stated base and sequence.
7. Which is the soundest comparable-selection reason?
- Its seller wants the highest price
- It is the nearest address regardless of rights
- It is the newest sale regardless of use
- It competes with the subject and has relevant, verifiable characteristics
Show answer and explanation
Answer: D. It competes with the subject and has relevant, verifiable characteristics
Competitive characteristics and reliable evidence matter. Proximity or recency alone does not establish suitability.
8. What distinguishes replacement cost from reproduction cost?
- Reproduction ignores original design
- Replacement always includes land; reproduction never does
- Replacement is always the original purchase price
- Replacement provides equivalent utility; reproduction estimates a replica
Show answer and explanation
Answer: D. Replacement provides equivalent utility; reproduction estimates a replica
The distinction concerns the improvement being created. The land and applicable depreciation still require separate treatment.
9. Land is $100,000, included improvement cost new is $500,000 and accrued depreciation is $80,000. Nothing else must be added. What is the indication?
- $480,000
- $680,000
- $520,000
- $420,000
Show answer and explanation
Answer: C. $520,000
$100,000 + $500,000 - $80,000 = $520,000. Do not depreciate land or invent an additional site-improvement amount.
10. Building cost new is $480,000, building depreciation $72,000, land $140,000 and an expressly separate present site-improvement value $25,000. What is the total?
- $620,000
- $573,000
- $717,000
- $548,000
Show answer and explanation
Answer: B. $573,000
The building contributes $408,000. Add separate land $140,000 and the explicitly excluded site-improvement value $25,000 for $573,000.
11. Effective age is 12 years and remaining economic life 48 years. Which is the simplified age-life ratio?
- 60 / 12 = 500%
- 48 / 60 = 80%
- 12 / 48 = 25%
- 12 / 60 = 20%
Show answer and explanation
Answer: D. 12 / 60 = 20%
Total economic life in this stipulated model is 12 + 48 = 60 years. The ratio uses effective age divided by total life.
12. At a stipulated 20% age-life ratio, what depreciation applies to $600,000 improvement cost new?
- $150,000
- $480,000
- $30,000
- $120,000
Show answer and explanation
Answer: D. $120,000
Multiply $600,000 by 0.20 for $120,000 depreciation. The remaining improvement indication is $480,000 before adding separate land.
13. Which loss is functional obsolescence?
- A neighboring external nuisance
- An unpaid mortgage balance
- A value loss caused by an obsolete floor plan
- Ordinary paint wear
Show answer and explanation
Answer: C. A value loss caused by an obsolete floor plan
A design or layout inadequacy concerns utility within the property. Physical wear and outside influences belong to different categories.
14. A correction costs $8,000 and produces a stipulated $12,000 increase in value, with no other constraints. What supports cure?
- The original owner wants it done
- The building is old
- The stated value benefit exceeds the correction cost
- Every repair is curable
Show answer and explanation
Answer: C. The stated value benefit exceeds the correction cost
The simplified benefit exceeds cost by $4,000. Economic feasibility requires relevant benefits, costs and practical conditions.
15. A $100,000 total depreciation deduction already includes a $15,000 roof loss. How should the same roof loss be treated?
- Apply it to the mortgage instead
- Add it to land
- Do not deduct it again from the same cost basis
- Deduct it twice because it has a separate name
Show answer and explanation
Answer: C. Do not deduct it again from the same cost basis
An expressly included component loss is already covered by the total. A second deduction would understate the improvement indication.
16. Which statement about land in this cost calculation is correct?
- It is worth its historic purchase price forever
- It always uses the building’s age-life ratio
- It is valued separately rather than subjected to improvement depreciation
- Its market value can never fall
Show answer and explanation
Answer: C. It is valued separately rather than subjected to improvement depreciation
Land can lose value for market or site reasons. That does not justify applying the building’s accrued-depreciation ratio to it.
17. A tax depreciation schedule is offered as proof of accrued appraisal depreciation. What is missing?
- The separate market, condition and current-cost analysis
- A photograph of the tax return envelope
- Only the owner’s desired asking price
- A larger mortgage
Show answer and explanation
Answer: A. The separate market, condition and current-cost analysis
Tax cost recovery and accrued appraisal value loss serve different purposes. A tax schedule alone does not establish the appraisal deduction.
18. What is the best response when a sales grid and cost analysis describe the same condition inconsistently?
- Always delete the cost approach
- Always average the numbers
- Ignore the inconsistency if the totals are close
- Investigate the cause and reconcile the analysis
Show answer and explanation
Answer: D. Investigate the cause and reconcile the analysis
Consistent facts and supported methods matter. Different approaches can produce different indications, but unexplained contradictory treatment needs investigation.
19. An exercise gives 2,200 square feet at $180 per square foot, plus $24,000 of expressly excluded project fees. What is the improvement cost new before depreciation?
- $444,000
- $420,000
- $520,000
- $396,000
Show answer and explanation
Answer: B. $420,000
The area-based cost is $396,000. Add the expressly excluded $24,000 once for $420,000. Do not add it again if a different problem states that fees are already included.
20. Which statement best distinguishes external obsolescence from an owner’s repairable condition?
- Every outside influence is a curable building repair
- A temporary outside influence creates no value loss
- Only physical wear can affect value
- External means outside the property; temporary duration does not itself establish an owner’s economic cure
Show answer and explanation
Answer: D. External means outside the property; temporary duration does not itself establish an owner’s economic cure
The location of the cause and the owner’s ability to remedy it matter. External obsolescence is generally beyond the individual owner’s cure; its duration and impact still require support.
Common questions
What is the sales comparison approach?
It uses transactions involving competing properties as evidence, accounts for relevant differences and develops a supported indication for the subject. A listing, pending contract and closed sale should retain their distinct status.
Do I adjust the subject or the comparable?
The comparable is adjusted toward the subject. Add for a comparable’s supported inferiority; subtract for its supported superiority. State which feature is better before calculating.
What makes a sale comparable?
Competitive physical and legal characteristics, a relevant market and useful verified terms. The closest or newest transaction is not automatically the best. Explain important differences and the evidence used.
Can a seller concession be deducted dollar for dollar?
Under the cited Fannie Mae policy, use its effect on price rather than automatically subtracting the seller’s expense. A full-dollar deduction is acceptable when the analysis supports that full market effect. Positive concession adjustments are not permitted in that policy.
What period matters for a Fannie Mae time adjustment?
Analyze relevant market changes from the comparable’s contract date to the appraisal’s effective date. Support an adjustment or its absence. An overall annual trend does not automatically describe that particular interval.
What are net and gross adjustments?
Net adds signed adjustments; gross adds their absolute amounts. For +$20,000 and -$12,000, net is +$8,000 and gross is $32,000. Divide the applicable total by the stated sale-price base when asked for a percentage.
What does paired-sales analysis show?
A controlled comparison can help isolate market reaction to a feature. The exercise must address other relevant differences; two unequal properties do not make every dollar of price difference attributable to one feature.
What is the cost approach formula?
Land value plus the current cost new of the included improvements, minus their accrued depreciation. Add a separate present site-improvement value only when it was excluded from those inputs. Keep every amount on a consistent basis.
Does the cost approach depreciate land?
Not through the improvement depreciation calculation. Land is separately valued. Contamination, access, legal limits and market changes can affect that land value without turning it into a building age-life calculation.
How do replacement and reproduction cost differ?
Replacement estimates equivalent utility using current design and materials. Reproduction estimates a replica. Neither term means the owner’s historical purchase price or guarantees recovery of construction spending.
How do cost-estimating methods differ?
A square-foot method applies a relevant unit cost to building area. Unit-in-place develops installed component costs. A quantity survey examines detailed labor and material quantities. Check local, current inputs and which fees, overhead or profit are included; these method names do not establish a fixed Illinois construction price.
What is accrued depreciation?
It is the improvement’s value loss recognized as of the valuation date. Physical, functional and external causes need to be distinguished. A tax deduction and the change in the entire property’s sale price are separate concepts.
Is external obsolescence always a curable repair?
No. It comes from outside the property and is generally beyond the individual owner’s cure. The influence may be temporary or lasting; that duration does not itself make the loss an economically curable building repair.
Do I use effective age or actual age?
Use the inputs and method specified. A simplified age-life problem commonly uses effective age and total economic life. Renovation or deterioration can make effective age different from elapsed calendar age.
What if only remaining economic life is given?
In the simplified model, add effective age to remaining economic life to obtain total life. Then divide effective age by that total. Do not divide by remaining life alone. Real assignments require support for those estimates.
Should I always average comparable indications?
No unexplained average substitutes for analysis. In the cited Fannie Mae reconciliation policy, a properly explained weighted average is an express exception. That program’s final opinion stays within the range of the approaches used; its sales-comparison indication also has its own adjusted-comparable range rule.
When is the cost approach useful?
It can help when credible site, current-cost and depreciation data are available, including new or unusual improvements. Older property can make depreciation harder to estimate. Its usefulness depends on the assignment; market value and insurance coverage are different objectives.
Does this guide authorize me to prepare an appraisal?
No. Illinois appraiser licensing and the separate rules for compliant broker price opinions or CMAs need their own review. Learning the arithmetic does not authorize use of a protected credential or remove restrictions on a report’s purpose.
Keep practising
Your next practice step
Put valuation into practice
Choose the approach or value principle that fits the facts, then check your reasoning.
These web resources are free. The app has a separate free starter tier and optional paid full access.
Official sources and scope
The identified PSI outline and Fannie Mae passages were checked October 26, 2026. Prior actual Illinois licensing, cost/depreciation and glossary readings are explicitly reused in the evidence. Fannie Mae rules are program examples, not rules for every appraisal; UAD 3.6 reporting has its own supplement. California reference material supplies general concepts, not Illinois licensing law. All amounts in the worked examples are stipulated teaching inputs.
- PSI June 24, 2026: national Valuation outline
- Fannie Mae B4-1.3-10: cost and income approach
- California DRE Reference Book, chapter 15, printed pages 406-412: general cost approach, depreciation and age-life teaching
- Fannie Mae B4-1.3-08: comparable selection
- Fannie Mae B4-1.3-09: market-supported comparable adjustments
- Fannie Mae B4-1.3-07: comparison evidence and data verification
- Fannie Mae B4-1.3-11: reconciliation and explained weighting
- 225 ILCS 458/5-5: appraisal licensing and selected exceptions
- 225 ILCS 454/10-45: permitted uses and complete written-report contents
- IAAO Glossary, third edition: depreciation, functional and external obsolescence, effective age and superadequacy
- IRS Publication 946, 2025 edition, chapter 1: tax depreciation as cost recovery; used only for that distinction
This is exam preparation, not advice for a specific transaction. State law and the applicable facts control. Our editorial and corrections process explains how to report an issue.