A comparable in a neighborhood commanding 5% more than the subject's sold for $420,000. What is the location-adjusted price?
Correct Answer
D) $400,000 — $420,000 / 1.05, removing the 5% location premium
Why this is correct: The comparable's neighborhood commands 5% more than the subject's, so the comparable's $420,000 price already carries that premium: $420,000 = subject-location price x 1.05. Removing the premium means reversing the multiplication, not subtracting a percentage of the inflated figure: $420,000 / 1.05 = $400,000. Why the other choices are wrong: '$441,000, adding the location premium instead of removing it' moves in the wrong direction, adding a premium the comparable already has. '$399,000, deducting 5% of the comparable's own sale price' is the common shortcut ($420,000 x 0.95), but 5% of $420,000 is $21,000 while the premium built into that price is only $20,000, so it over-corrects by $1,000. '$420,000, since location is never adjusted' is false; location is one of the standard elements of comparison. Exam tip: A percentage described as what the comparable commands over the subject is a multiplier already inside the sale price. Divide by (1 + %) to take it out; multiply by (1 - %) only when the adjustment is expressed as a percentage of the comparable's own price.
Why This Is the Correct Answer
Let x be what the property would have sold for in the subject's neighborhood. The stem says the comparable's location adds 5%, so 1.05x = $420,000 and x = $400,000. Substituting back confirms it: $400,000 x 1.05 = $420,000. The comparable is superior in location, so the adjustment is downward, and $400,000 is below $420,000 as expected.
Why the Other Options Are Wrong
Option A: $441,000, adding the location premium instead of removing it
This adds the premium a second time. $420,000 x 1.05 = $441,000, which is what the comparable would fetch in a neighborhood 5% better still. Superior comparables are adjusted down toward the subject, never up.
Option B: $399,000, deducting 5% of the comparable's own sale price
$420,000 x 0.95 = $399,000 applies the 5% to the comparable's inflated price rather than to the subject-location base. The premium embedded in $420,000 is $20,000, not the $21,000 this method removes. The direction is right and the figure is close, which is exactly what makes it the trap.
Option C: $420,000, since location is never adjusted
Location is one of the standard elements of comparison and is adjusted whenever comparables come from a market area that prices differently. Leaving the price untouched abandons the adjustment the stem hands you. No appraisal convention treats location as unadjustable.
Premium in, divide it out
If the percentage describes how much more the comparable commands, the premium is already inside the price, so divide by one plus the rate. If the percentage describes an adjustment to apply to the comparable's price, multiply. In means divide, at means multiply.
How to use: Read the stem for the word the percentage attaches to. 'Commands 5% more' attaches to the comparison between locations, so divide $420,000 by 1.05. 'Apply a 5% downward adjustment' attaches to the sale price, so multiply.
Exam Tip
When two answer choices sit about 0.25% apart, the exam is testing divide versus multiply. Write the algebra as 1.05x = price and solve rather than reaching for the quicker product.
Common Mistakes to Avoid
- -Multiplying by 0.95 when the premium is stated as a percentage over the subject's location
- -Adjusting upward because the comparable is superior
- -Rounding $399,000 to $400,000 and assuming the two methods agree
Concept Deep Dive
Analysis
This item tests the direction and the mechanics of a percentage adjustment in the sales comparison approach. The stem describes a relationship between two locations: the comparable's neighborhood commands 5% more than the subject's. That is a statement that the comparable's price equals the subject-location price multiplied by 1.05, so the adjustment has to be undone by division. Multiplying by 0.95 answers a different question, namely what 5% off the comparable's own price would be, and the two operations do not give the same number because the base differs.
Background Knowledge
You need the elements of comparison and the rule that adjustments are always made to the comparable, never to the subject: a superior comparable is adjusted downward and an inferior one upward. You also need to be able to reverse a percentage that is stated as a premium over a base rather than as a percentage of the number in front of you.
Real-World Application
An appraiser pulling comparables from an adjacent subdivision that consistently sells at a 5% premium sets up the grid by dividing each comparable's price by 1.05 before any other adjustment, so the location factor is unwound on the same basis it was created.
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