Valuation and appraisal on the Tennessee real estate exam

Price, cost, and value are three different things

Price is what someone paid. Cost is what it took to build. Value is what it is worth to a typical buyer under normal conditions. Exam questions swap these words deliberately.

The three approaches

Know which approach an appraiser leans on for which property type — that alone answers a surprising number of questions.

• —Sales comparison — the primary approach for residential resale.
• —Cost approach — used for new construction and special-purpose property with few comparables.
• —Income approach — used for income-producing property, built on net operating income and a capitalization rate.

The adjustment rule

You always adjust the comparable, never the subject. If the comparable is superior, subtract from it. If it is inferior, add to it. A tidy memory hook: CBS — Comparable Better, Subtract.

Depreciation and the income math

Depreciation comes in three forms: physical deterioration, functional obsolescence (bad layout, outdated systems), and external obsolescence (something off-site, and the only one that is always incurable). For income property, value equals net operating income divided by the cap rate. GRM is gross rent multiplier — sale price divided by gross rent.