A buyer paid a cash down payment and borrowed the rest of the purchase price from a bank at market terms, and the seller received the full price at closing. For cash equivalency, how should the appraiser view this sale?
Correct Answer
B) As a cash sale, because the seller received the full price in cash
Cash equivalency looks at what the seller received, not at the buyer's obligations to outside lenders. A market-rate loan from a third party still delivers the full price to the seller in cash, so the sale is treated as a cash sale needing no adjustment. The distractors wrongly treat the buyer's bank loan or interest cost as part of the seller's consideration.
Why This Is the Correct Answer
Option B is correct because the seller received the whole purchase price in cash at closing. The buyer's debt to the bank is the buyer's obligation to an outside party and does not change what the seller got for the property.
Why the Other Options Are Wrong
Option A: As a financed sale needing a downward adjustment for the bank loan
Option A calls for a downward adjustment for the bank loan. A market-rate loan from a third party is the buyer's obligation and the seller still received the full price in cash, so nothing about the loan reduces the cash-equivalent price.
Option C: As a sale needing an upward adjustment for the buyer's interest cost
Option C adds an upward adjustment for the buyer's interest cost. The buyer's interest is paid to the lender, not the seller, and a market-rate loan does not change the price the seller received.
Option D: As a partly cash sale, with the loan portion treated as non-cash
Option D treats the loan portion as non-cash, counting just the down payment as cash. The loan proceeds were also paid to the seller in cash, so the full price is cash to the seller.
Stand in the seller's shoes
Ask what landed in the seller's hands. If the bank paid the seller in full, the sale is cash to the seller.
How to use: Use this to screen any comparable for whether its financing calls for a cash-equivalence adjustment.
Exam Tip
Market-rate loans from banks or other outside lenders are cash to the seller; look for seller financing, seller-paid points or non-cash items before adjusting.
Common Mistakes to Avoid
- -Adjusting every financed sale simply because a loan was involved
- -Counting only the down payment as cash
Concept Deep Dive
Analysis
This question tests the viewpoint used in cash-equivalence analysis. The appraiser asks what the seller received for the property. When a third-party lender funds the balance at market terms, the seller is paid in full in cash, so no adjustment is needed.
Background Knowledge
Market value assumes payment in cash or in financial arrangements comparable to cash. Ordinary third-party mortgage financing at market terms is the normal way buyers pay, and it does not distort the price the seller receives. Cash-equivalence adjustments are aimed at non-market financing and non-cash consideration accepted by the seller.
Real-World Application
An appraiser verifies a comparable bought with a conventional mortgage at market terms and no seller credits. She records it as a cash-equivalent sale and makes no financing adjustment.
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