Mortgage Loan Originator (MLO) Licensing Practice Test

Which appraisal approach is most applicable for vacant land?

1. Cost Approach

2. Sales Comparison Approach

3. Income Approach

4. Replacement Cost Approach

The correct answer is: Sales Comparison Approach

The Sales Comparison Approach is the most applicable for vacant land because it relies on comparing the subject property to recently sold properties with similar characteristics in the same area. This approach is particularly effective for vacant land, where comparable sales data can give a clear picture of the market value based on what buyers are willing to pay for similar parcels. Utilizing the Sales Comparison Approach allows appraisers to account for factors such as location, size, zoning, and any other attributes that may impact the value of the land. It is grounded in the principle of substitution, which suggests that a buyer will not pay more for a property than the cost of acquiring a similar one with equivalent utility. While the other methods listed can be used in various contexts, they are less suitable for vacant land. The Cost Approach involves estimating the cost to build a similar property and adjusting for depreciation, which can be challenging for undeveloped land with no improvements. The Income Approach is primarily utilized for properties that generate income, such as rental properties, making it less relevant for vacant land. The Replacement Cost Approach focuses on determining the cost to replace an existing structure, which is also not applicable when there is no structure present.