A comparable sold for $300,000 with the seller carrying a loan 2 points below market, a benefit worth $8,000. What is its cash-equivalent price?
Correct Answer
B) $292,000, deducting the benefit's value
Why this is correct: The cash-equivalent price removes the value of any favorable financing concessions from the sale price. The comparable's $300,000 sale price includes an $8,000 benefit for the below-market loan. To find the price for the real estate alone, you deduct that benefit: $300,000 - $8,000 = $292,000. Why the other choices are wrong: Adding the financing benefit ($308,000) incorrectly treats the favorable loan as a property feature to be added. Stating financing never alters price ($300,000) ignores the principle that special financing can inflate the nominal sale price. Deducting one point per $7,500 ($285,000) uses an arbitrary, unsupported calculation not based on the given $8,000 benefit. Exam tip: For cash equivalency, ask: "Was the financing typical?" If not, adjust the sale price to reflect what it would have been with typical market financing.
Why This Is the Correct Answer
Subtracting the $8,000 financing benefit from the $300,000 nominal price yields $292,000, the price attributable to the real estate under typical financing. The direction follows from who was advantaged: favorable financing to the buyer inflates the nominal price, so the adjustment is downward. Cash equivalency belongs to the transactional adjustments and is applied before physical and locational adjustments, because it corrects the price itself rather than a property difference. The same technique in reverse would adjust upward where a buyer accepted onerous financing terms.
Why the Other Options Are Wrong
Option A: $308,000, adding the financing benefit
Adding the benefit treats favorable financing as a desirable feature of the property to be priced in on top, which double counts a premium the buyer already paid. It also produces a comparable price higher than the market would support for the real estate alone, biasing the grid upward. The instinct comes from thinking of a benefit as something that increases value, without asking whose value and whether it was already captured.
Option C: $300,000, since financing never alters price
Financing terms demonstrably do alter nominal prices, which is why cash equivalency exists as a recognized adjustment and why market value definitions specify financing typical for the area. Sellers routinely trade a higher price for concessionary terms, and buyers accept it because their monthly cost is unchanged. Treating price as financing-neutral ignores the substitution the parties actually made.
Option D: $285,000, deducting one point per $7,500
A rule of thumb converting each point to a fixed dollar amount is not market-derived and produces a number unconnected to the $8,000 the stem already established. Point-based shortcuts also vary with loan size, term, and rate spread, so a flat per-point figure is arbitrary. When a question supplies a quantified benefit, that figure is the adjustment; inventing a substitute method is the error being tested.
Who Got the Gift Pays for It
Identify who received the financing advantage. If the buyer got the gift, the buyer paid extra, so subtract to get back to cash equivalent. If the buyer was stuck with bad terms, he paid less, so add.
How to use: On any financing question, write the direction before doing arithmetic: favorable to buyer means subtract, unfavorable means add. Then apply the quantified benefit the stem provides rather than any per-point shortcut.
Exam Tip
Seller-paid closing costs, buydowns, and rate concessions all work the same way as seller financing. Strip the concession out of the price before anything else touches the sale.
Common Mistakes to Avoid
- -Adjusting in the wrong direction by treating favorable financing as added property value
- -Using a fixed dollars-per-point rule instead of discounting the actual payment differential
- -Applying physical adjustments before cleaning the price for financing and concessions
Concept Deep Dive
Analysis
Cash equivalency analysis converts a sale price that was influenced by atypical financing into the price that would have been paid under typical market financing. A seller who carries paper at two points below prevailing rates is handing the buyer something of measurable value, namely a stream of below-market payments, and a rational buyer pays for that benefit in the purchase price. The nominal price therefore overstates what the real estate alone commanded. The benefit is normally quantified by discounting the difference between the contract payment stream and a market-rate payment stream over the expected holding period, and the stem hands you the result of that work at $8,000. Because the buyer received the benefit and paid extra for it, the adjustment removes value from the nominal price to reach the cash-equivalent figure.
Background Knowledge
You need the market value assumption of financing terms typical for the area, the concept of cash equivalency, and the sequence of transactional adjustments: property rights conveyed, financing terms, conditions of sale, expenditures made immediately after purchase, and market conditions. You should also understand how a below-market interest rate is valued by discounting the payment differential.
Real-World Application
An appraiser in a rising-rate market finds a comparable where the seller carried a note two points under market. She discounts the payment differential over the loan's expected life, deducts the resulting benefit from the price, and grids the cash-equivalent figure, disclosing the calculation so a reviewer can reproduce it.
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