A comparable includes an assumed loan at a below-market rate. Which detailed element of comparison directly concerns that term?
Correct Answer
C) Financing terms.
A below-market loan assumption concerns financing terms. Conditions of sale concern transaction motivations and circumstances, a distinct comparison element in the stated taxonomy. Investigate the actual terms and supported price effect rather than applying a fixed adjustment from the label alone.
Why This Is the Correct Answer
Option C is correct because an assumed loan with a below-market interest rate reflects non-market financing terms. When a note's rate differs from the market rate for similar notes, an adjustment for financing terms is necessary. The appraiser investigates the actual terms and the supported price effect rather than applying a fixed amount.
Why the Other Options Are Wrong
Option A: Location of the property.
Option A is wrong because location of the property concerns where the property sits and the influences of its surroundings. A below-market assumed loan is a financing feature, not a location feature.
Option B: Physical characteristics.
Option B is wrong because physical characteristics cover features such as size, condition and quality of the improvements. A loan assumption does not change the physical property.
Option D: Market conditions over time.
Option D is wrong because market conditions over time address price changes between the sale date and the effective date. A below-market loan rate is a term of this particular transaction, which falls under financing terms.
Loan Terms Mean Financing
If the feature is about how the buyer paid, such as a loan rate or assumption, it belongs under financing terms.
How to use: Use this test to sort transaction features into the correct element of comparison.
Exam Tip
Separate transaction elements, such as financing and conditions of sale, from property elements, such as location and physical features.
Common Mistakes to Avoid
- -Classifying a favorable loan as a physical or location feature
- -Treating financing as a market conditions issue
- -Applying a fixed adjustment without checking the actual loan terms
Concept Deep Dive
Analysis
This question tests sorting a transaction feature into the correct element of comparison. An assumed loan at a below-market rate is a feature of how the purchase was paid for, not of the property itself. That places it under financing terms.
Background Knowledge
Elements of comparison include property rights, financing terms, conditions of sale, market conditions, location and physical characteristics. Atypical financing, such as assumed loans at non-market rates, can raise the price a buyer is willing to pay. The appraiser adjusts for the supported price effect to reach a cash-equivalent basis.
Real-World Application
A comparable buyer assumed the seller's existing mortgage at a rate well below current market rates. The appraiser confirms the loan terms with the parties. She then analyzes whether the favorable rate raised the price and adjusts on the financing terms line if supported.
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