A buyer assumed the seller’s existing loan, which carries an interest rate above the current market rate. Absent other differences, which cash equivalent adjustment does this indicate?
Correct Answer
B) An upward adjustment, since the seller likely reduced the price to compensate
When the loan’s interest rate is higher than the market rate, the seller is assumed to have compensated the buyer by reducing the sale price. The recorded price therefore understates market value, and an upward cash equivalent adjustment is needed.
Why This Is the Correct Answer
Option B is correct because when the assumed loan's rate exceeds the market rate, the seller is assumed to have compensated the buyer by reducing the sale price. The recorded price is therefore below the cash-equivalent price, requiring an upward cash equivalent adjustment.
Why the Other Options Are Wrong
Option A: A downward adjustment, since the buyer took on the seller’s debt
Option A, a downward adjustment because the buyer took on the seller's debt, gets the direction wrong. Assuming debt is part of paying the price; the issue is that the above-market rate is unfavorable to the buyer, which pushes the price down and calls for an upward adjustment.
Option C: No adjustment, since an assumed loan is a private matter between the parties
Option C, no adjustment because an assumed loan is private between the parties, ignores that financing terms affect price. Financing terms are an element of comparison, and nonmarket terms call for a cash equivalent adjustment.
Option D: A downward adjustment equal to the full remaining loan balance
Option D, a downward adjustment equal to the full remaining loan balance, confuses the loan balance with its effect on price. The adjustment reflects the difference between market and contract financing, not the entire balance, and its direction here is upward.
Bad loan, lower price
A buyer stuck with a high-rate loan pays less for the house, so the appraiser adjusts that sale up to its cash-equivalent price.
How to use: Use this when deciding the direction of a cash equivalent adjustment for assumed financing.
Exam Tip
Ask who benefited from the financing: if the buyer was burdened, the price was likely lower, so the adjustment is upward.
Common Mistakes to Avoid
- -Adjusting downward for an above-market assumed loan
- -Ignoring financing terms because the loan was assumed
- -Using the loan balance as the adjustment amount
Concept Deep Dive
Analysis
This question tests cash equivalency for an assumed loan with an above-market interest rate. A buyer who assumes a loan at a rate higher than the market is taking on a burden, so the seller is assumed to have offset it with a lower price, which means the recorded price understates market value.
Background Knowledge
Cash equivalency converts a sale price with nonmarket financing to what it would have been with typical market financing. Below-market financing tends to inflate the price and calls for a downward adjustment, while above-market financing tends to depress the price and calls for an upward adjustment. The amount is based on the value difference of the financing, not the loan balance.
Real-World Application
A comparable sold with the buyer assuming the seller's loan at a rate above current market rates. The appraiser confirms the terms with the agents, analyzes the financing difference, and makes an upward cash equivalent adjustment to reflect the price reduction the seller accepted.
More Sales Comparison Questions
Supported adjustments are: non-market financing $10,000, GLA $36/sf, garage $3,500 per car, pool/spa $12,500. A comparable identical to the 2,800 sf subject sold for $267,000 with non-market financing. What is its adjusted price?
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?
Using garage $3,500 per car and pool/spa $12,500: a comparable with a 2-car garage and a pool/spa sold for $268,000. The subject has a 3-car garage and no pool. What is the adjusted price?
Using GLA $36/sf, garage $3,500 per car and pool/spa $12,500: a 2,600 sf comparable with a 2-car garage and a pool/spa sold for $264,000. The subject is 2,800 sf with a 3-car garage and no pool. What is the adjusted price?
In a neighborhood with declining values and marketing times over six months, what must Fannie Mae lenders confirm about the sales comparison analysis?
A house is a 4,000 square foot home in an area of 2,000 square foot homes. How must the appraiser treat this over-improvement in the sales comparison grid?
According to the Interagency Appraisal and Evaluation Guidelines, which items should an appraisal’s market conditions discussion include?
A comparable listed at $420,000 and sold for $399,000. What sale-to-list price ratio (sale price ÷ list price) does this indicate?
An appraiser wants to describe the neighborhood boundaries in a Fannie Mae report. Which approach is acceptable?
Which of these is listed by Fannie Mae as a sales or financing concession?
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