Humber/Ontario Real Estate Course 3 Exam Practice

What is a key component in the direct comparison approach to property valuation?

1. It involves thorough cost analysis.

2. Comparable sales from similar properties.

3. The land value only.

4. Total renovation costs.

5. The future market value forecast.

6. Adjusted replacement costs.

The correct answer is: Comparable sales from similar properties.

The direct comparison approach to property valuation relies on the principle of substitution, where the value of a property is determined based on the selling prices of similar properties, known as comparables. This method provides a straightforward way to assess market value by comparing a subject property with others that have recently sold in the same area. Using comparable sales from similar properties is critical because it reflects current market conditions and allows appraisers and real estate professionals to understand what buyers are willing to pay for properties with similar characteristics, such as location, size, and amenities. This empirical data serves as a benchmark, which can then be adjusted for differences between the properties to arrive at a more accurate value for the subject property. Other options mention various aspects of real estate valuation, such as cost analysis or future forecasts, but these do not directly align with the essence of the direct comparison approach, which specifically focuses on relevant sales data from similar properties. Thus, identifying comparables is the cornerstone of this valuation technique, making it an integral part of the process.