Real Estate Appraisal Practice Exam

When appraising residential properties, what does the term 'income approach' primarily focus on?

1. Cost of replacement.

2. Potential income generation from the property.

3. Comparison with similar recent sales.

4. Local market trends and historical values.

The correct answer is: Potential income generation from the property.

The term 'income approach' in residential property appraisal emphasizes the potential income generation from the property. This method is primarily used for investment properties, where the appraiser assesses how much income the property could generate if rented out. By analyzing the expected cash flow, including rental income, operational expenses, and potential market growth, this approach helps in determining the property's value based on its ability to produce income rather than on costs related to construction or comparisons with similar properties. This focus on income potential distinguishes the income approach from other methods, such as the cost approach, which centers on the replacement cost of the property or the sales comparison approach, which evaluates recent sales of similar properties for value estimation. While understanding local market trends is important, it contextualizes but does not define the income-based valuation provided by this approach.