A comparable sold at a cash-equivalent price of $538,000 exactly 6 months before the effective date. Market prices have declined at a compound rate of 0.6% per month. No other adjustments apply. What is the time-adjusted price, to the nearest dollar?
Correct Answer
B) $518,920
538000×(1+-0.006)^6=518920.21. Common errors: using simple instead of compound change gives $518,632; treating the −0.6% as an increase gives $557,661; applying only one month of the change gives $534,772.
Why This Is the Correct Answer
Option B is correct because $538,000 × (1 − 0.006)^6 = $538,000 × 0.994^6 = $518,920.21, which rounds to $518,920. Compounding applies each month's decline to the already reduced price of the prior month.
Why the Other Options Are Wrong
Option A: $518,632
Option A, $518,632, uses simple instead of compound change: $538,000 × (1 − 0.006 × 6) = $538,000 × 0.964. The market change compounds, which gives $538,000 × 0.994^6 = $518,920.
Option C: $534,772
Option C, $534,772, applies only one month of the change: $538,000 × 0.994. The price is 6 months old, so the factor must be 0.994^6, giving $518,920.
Option D: $557,661
Option D, $557,661, treats the −0.6% as an increase: $538,000 × 1.006^6. The market declined, so the factor is 0.994^6, giving $518,920.
Compound means raise to a power
Simple change multiplies the rate by the months; compound change raises (1 plus the rate) to the number of months.
How to use: Use this to pick the right formula when a time adjustment is stated as compound.
Exam Tip
Check three things: the sign of the rate, the number of periods and whether the rate is simple or compound.
Common Mistakes to Avoid
- -Using simple instead of compound change when compounding is stated
- -Treating a declining rate as an increase
- -Applying the rate for only one period
Concept Deep Dive
Analysis
This question tests compounding a negative monthly market change. The change is −0.6% per month compounded for 6 months, so the factor is (1 − 0.006) raised to the 6th power. Apply that factor to the $538,000 cash-equivalent price and round to the nearest dollar.
Background Knowledge
Market conditions adjustments can be computed with simple or compound rates, and the question states which to use. Compounding applies each period's change to the prior period's adjusted value, the same idea as future value calculations. Time adjustments, or the lack of them, must be supported by evidence.
Real-World Application
In a softening market, an appraiser's analysis supports a decline of about 0.6% per month. A comparable that went under contract 6 months before the effective date is adjusted downward using the compounded rate.
More Sales Comparison Questions
Supported adjustments are: non-market financing $10,000, GLA $36/sf, garage $3,500 per car, pool/spa $12,500. A comparable identical to the 2,800 sf subject sold for $267,000 with non-market financing. What is its adjusted price?
Using GLA $36/sf and non-market financing $10,000: a 3,100 sf comparable sold for $277,000 with non-market financing; the subject has 2,800 sf. Bath count differences are not adjusted. What is the adjusted price?
Using garage $3,500 per car and pool/spa $12,500: a comparable with a 2-car garage and a pool/spa sold for $268,000. The subject has a 3-car garage and no pool. What is the adjusted price?
Using GLA $36/sf, garage $3,500 per car and pool/spa $12,500: a 2,600 sf comparable with a 2-car garage and a pool/spa sold for $264,000. The subject is 2,800 sf with a 3-car garage and no pool. What is the adjusted price?
In a neighborhood with declining values and marketing times over six months, what must Fannie Mae lenders confirm about the sales comparison analysis?
A house is a 4,000 square foot home in an area of 2,000 square foot homes. How must the appraiser treat this over-improvement in the sales comparison grid?
According to the Interagency Appraisal and Evaluation Guidelines, which items should an appraisal’s market conditions discussion include?
A comparable listed at $420,000 and sold for $399,000. What sale-to-list price ratio (sale price ÷ list price) does this indicate?
An appraiser wants to describe the neighborhood boundaries in a Fannie Mae report. Which approach is acceptable?
Which of these is listed by Fannie Mae as a sales or financing concession?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
The 12-month price trend in a market is clearly positive, but prices were flat between a comparable’s contract date and the effective date. Under Fannie Mae guidance, the comparable’s time adjustment should be:
Next Question
A multiple regression of 240 recent sales of detached homes in the subject's market area includes gross living area, lot size, age, bathrooms and garage spaces. The coefficient for gross living area is $58. What does this coefficient indicate?