Hawaii Pre-Licensing National Practice Exam

For which type of property situation is the direct sales comparison approach most suitable?

1. A 2-year-old luxury apartment

2. A 20-year-old commercial building

3. A 5-year-old single-family house

4. A newly constructed mixed-use facility

The correct answer is: A 5-year-old single-family house

The direct sales comparison approach is primarily suitable for properties that have a number of comparable sales in the market, which helps to determine an accurate value based on what buyers are willing to pay in the current market conditions. This approach is most effective for residential properties, particularly single-family houses, where there are often many similar homes that have sold recently. In the case of a 5-year-old single-family house, it is likely to find many comparables that allow for a solid basis of comparison. Typically, single-family homes in residential neighborhoods experience regular turnover, and their values can be easily assessed against recent sales of similar properties in the vicinity. This leads to a more reliable and meaningful valuation because real estate markets for residential properties tend to remain active with a sufficient number of comparables. For other types of properties, such as a luxury apartment, commercial building, or mixed-use facility, the market may not have as many direct comparables due to their unique characteristics or limited sale transactions. Consequently, these types of properties often require alternative valuation methods, such as income approaches or the cost approach, rather than relying solely on the direct sales comparison.