A comparable’s cash-equivalent price is $425,000. Evidence supports a simple, noncompounded 0.5% upward adjustment per month, based on the original price, for a verified 8-month contract-to-effective-date interval. What adjusted price results?
Correct Answer
A) $442,000
425000 × [1 + (0.005 × 8)] = 442000. The signed change is 17000; compound growth is a different convention.
Why This Is the Correct Answer
Option A is correct because the simple adjustment is 0.5% × 8 months = 4% of the original price. The adjusted price is $425,000 × (1 + 0.005 × 8) = $425,000 × 1.04 = $442,000. The stem specifies a simple, noncompounded rate on the original price.
Why the Other Options Are Wrong
Option B: $442,300
Option B, $442,300, comes from compounding: $425,000 × (1.005)^8 is about $442,300. The stem specifies a simple rate on the original price, so the correct result is $425,000 × 1.04 = $442,000.
Option C: $408,000
Option C, $408,000, applies the 4% change downward: $425,000 - $17,000. The evidence supports an upward adjustment, giving $425,000 + $17,000 = $442,000.
Option D: $17,000
Option D, $17,000, is only the dollar amount of the adjustment ($425,000 × 0.04), not the adjusted price. The question asks for the adjusted price, $442,000.
Simple means multiply once
For simple growth, multiply the rate by the months, then apply that total once to the original price.
How to use: Use this to separate the simple answer from the slightly higher compound answer.
Exam Tip
When two answers differ by only a few hundred dollars, check whether the stem says simple or compound before choosing.
Common Mistakes to Avoid
- -Compounding when the stem specifies a simple rate
- -Reporting the dollar adjustment instead of the adjusted price
- -Applying an upward market trend as a downward adjustment
Concept Deep Dive
Analysis
This question tests a simple monthly time adjustment based on the original price. With simple growth, the monthly rate is multiplied by the number of months and applied once to the original price. The distractors reflect compounding, the wrong direction and reporting only the dollar change.
Background Knowledge
With simple growth, the change is earned only on the original amount, so the total change equals the rate times the number of periods. Compound growth applies each period's rate to the already adjusted amount. Fannie Mae requires that time adjustments, or the lack of them, be supported by evidence such as resales of the same property.
Real-World Application
Repeat sales in a neighborhood show prices rising about half a percent per month. A comparable sold 8 months before the effective date for $425,000. Using the supported simple rate, the appraiser adds $17,000 and reports an adjusted price of $442,000.
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