A builder paid 2 discount points on a $300,000 buyer loan through a buydown program, and the house sold for $375,000. Market analysis shows the points raised the price by their full amount. What price indicates cash-equivalent value?
Correct Answer
A) $369,000
Two points are 2% of the loan: $300,000 × 0.02 = $6,000. When the market reaction equals the full amount, the seller received $6,000 less than the nominal price, so the indicated price is $369,000. Basing the points on the sale price, or adding them, is incorrect.
Why This Is the Correct Answer
Option A is correct because 2 points equal 2% of the $300,000 loan, or $6,000. When points are paid by the seller, the seller receives less than the nominal price by the amount of the points, and here the market reaction equals that full amount. The cash-equivalent price is $375,000 - $6,000 = $369,000.
Why the Other Options Are Wrong
Option B: $375,000
Option B, $375,000, makes no adjustment. The market analysis shows the points raised the price by their full amount, so the nominal price overstates cash-equivalent value; the correct figure is $375,000 - $6,000 = $369,000.
Option C: $381,000
Option C, $381,000, adds the points: $375,000 + $6,000. Seller-paid points inflated the sale price, so they should be subtracted, giving $369,000.
Option D: $367,500
Option D, $367,500, bases the points on the sale price: $375,000 × 0.98, a $7,500 deduction. Points are a percentage of the loan amount, so the deduction is $300,000 × 0.02 = $6,000, giving $369,000.
Points come from the loan
One point equals 1% of the loan, never of the price. Seller paid it, so subtract it if the market reacted fully.
How to use: Use this to compute point amounts and their direction in cash equivalency problems.
Exam Tip
Check the base for points carefully; a distractor almost always applies the percentage to the sale price instead of the loan.
Common Mistakes to Avoid
- -Calculating points on the sale price instead of the loan amount
- -Adding seller-paid points to the sale price
- -Deducting the points without market analysis of the price reaction
Concept Deep Dive
Analysis
This question tests cash equivalency for seller-paid discount points. Points are a percentage of the loan amount, not the sale price, so 2 points on a $300,000 loan equal $6,000. Because the market raised the price by the full amount of the points, the seller effectively received $6,000 less, and the cash-equivalent price is $369,000.
Background Knowledge
A discount point equals 1% of the loan amount and is paid to reduce the borrower's interest rate. When the seller pays the points, the seller nets less than the stated price, and the price may be inflated by the financing benefit. A cash equivalency adjustment removes the portion of the price supported by market analysis as attributable to the points.
Real-World Application
A builder offers a rate buydown by paying 2 points on buyers' loans. A comparable sold for $375,000 with a $300,000 loan, and paired sales show prices rose by the full cost of the buydown. The appraiser deducts $6,000 to reach a cash-equivalent price of $369,000.
More Sales Comparison Questions
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Using GLA $36/sf and non-market financing $10,000: a 3,100 sf comparable sold for $277,000 with non-market financing; the subject has 2,800 sf. Bath count differences are not adjusted. What is the adjusted price?
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