A comparable sold at a cash-equivalent price of $300,000 exactly 8 months before the effective date. Market prices have increased at a simple, non-compounded rate of 6% per year. No other adjustments apply. What is the dollar time adjustment?
Correct Answer
A) $12,000
300000×(1+0.06×(8/12))−300000=12000. Common errors: applying the full annual rate to an 8-month interval gives $18,000; treating the annual rate as monthly gives $144,000; reporting the adjusted price instead of the adjustment gives $312,000.
Why This Is the Correct Answer
Option A is correct because 8 months is 8/12 of a year, so the change is 6% × 8/12 = 4%. Applied to $300,000, that gives $300,000 × 0.04 = $12,000. Because the market change is an increase, the signed adjustment is +$12,000.
Why the Other Options Are Wrong
Option B: $18,000
Option B is wrong because $18,000 applies the full annual rate to an 8-month interval: $300,000 × 0.06 = $18,000. Only 8/12 of the year passed, so the correct adjustment is $300,000 × 0.06 × 8/12 = $12,000.
Option C: $144,000
Option C is wrong because $144,000 treats the 6% annual rate as a monthly rate: $300,000 × 0.06 × 8 = $144,000. The rate is annual, so it must be prorated to 8/12 of a year, giving $12,000.
Option D: $312,000
Option D is wrong because $312,000 is the adjusted price, $300,000 × (1 + 0.06 × 8/12) = $312,000, not the adjustment. The question asks for the signed dollar adjustment, which is $12,000.
Rate Times Fraction of Year
For simple time adjustments, multiply the annual rate by months over 12, then by the price.
How to use: Use this formula whenever a time adjustment covers less or more than a full year at a simple annual rate.
Exam Tip
Check whether the question wants the adjustment or the adjusted price, and convert months to a fraction of a year before multiplying.
Common Mistakes to Avoid
- -Applying a full year's rate to a partial year
- -Treating an annual rate as monthly
- -Reporting the adjusted price when the adjustment is asked for
Concept Deep Dive
Analysis
This question tests a simple market conditions (time) adjustment over part of a year. The annual rate must be prorated to the 8-month interval, and the question asks for the dollar adjustment, not the adjusted price. Simple interest means the rate applies only to the original amount.
Background Knowledge
Market conditions adjustments account for price changes between the comparable's sale date and the effective date. Fannie Mae states that time adjustments, or the lack of them, must be supported by evidence. With simple change, the rate applies only to the original amount and is prorated by time.
Real-World Application
An appraiser uses a comparable that closed 8 months before the effective date in a market rising about 6% a year. Supported by resale and listing trends, she applies a simple 4% time adjustment. She enters +$12,000 on the market conditions line.
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