A comparable sold subject to a lease at rent above current market, and the subject is appraised as fee simple. How is the comparable’s price adjusted?
Correct Answer
D) Deduct the estimated amount the lease added to the price
When a lease at above-market rent enhances a comparable’s price, the estimated enhancement is deducted so the price reflects the fee simple interest. A below-market lease calls for an addition. The adjustment is usually the discounted rent difference over the remaining term, not one year’s excess.
Why This Is the Correct Answer
Option D is correct because when a lease at above-market rent enhances a comparable's sale price, an estimate of that enhancement must be deducted from the price. This brings the comparable to a fee simple basis consistent with the subject. The enhancement is usually estimated as the discounted rent difference over the remaining lease term.
Why the Other Options Are Wrong
Option A: Add the estimated enhancement, since the lease adds value
Option A is wrong because it adds the estimated enhancement to the comparable. The comparable's price already includes the lease enhancement, and the fee simple subject lacks it, so the adjustment must be a deduction.
Option B: No adjustment, because leases do not affect sale prices
Option B is wrong because it claims leases do not affect sale prices. A lease at above-market rent can raise what a buyer pays, which is why the enhancement is deducted.
Option C: Deduct the full annual excess rent once from the price
Option C is wrong because deducting the full annual excess rent once from the price does not measure the enhancement. The enhancement usually reflects the discounted rent difference over the remaining lease term, not a single year's excess.
Above-market lease: take it out
An above-market lease lifts the comparable's price, so deduct the lift; a below-market lease lowers it, so add.
How to use: Use this when a comparable's lease rent differs from market rent and the subject is fee simple.
Exam Tip
Ask whether the lease made the comparable's price higher or lower than fee simple, then adjust in the opposite direction.
Common Mistakes to Avoid
- -Adding the lease enhancement instead of deducting it
- -Using one year's excess rent as the full adjustment
- -Ignoring lease terms because the buildings are physically similar
Concept Deep Dive
Analysis
This question tests adjusting for property rights when a comparable sold subject to an above-market lease and the subject is valued as fee simple. The lease made the comparable more valuable to a buyer, so the price includes an enhancement the subject does not have. That enhancement must be estimated and deducted.
Background Knowledge
Fee simple is the most complete ownership interest, while a leased fee is the owner's interest subject to a lease. An above-market lease can make a leased fee sell for more than fee simple; a below-market lease can make it sell for less. Appraisers adjust comparables so their rights match the rights being appraised.
Real-World Application
An appraiser valuing an owner-occupied house finds a comparable rental house that sold with a tenant paying well above market rent for two more years. The appraiser estimates the present value of the excess rent over the remaining term. That amount is deducted from the comparable's price to reflect fee simple rights.
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?
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Previous Question
A comparable recorded price is $568,000 with seller concessions costing $18,000. Verified market analysis attributes only $11,000 of the recorded price increase to them. What price results after removing the verified concession price effect only?
Next Question
An appraiser is valuing a vacant lakefront residential lot with 90 feet of lake frontage and 19,800 square feet of area. Three lakefront lots on the same lake sold recently: Lot 1, with 100 front feet and 23,000 square feet, for $250,000; Lot 2, with 80 front feet and 20,000 square feet, for $200,000; and Lot 3, with 120 front feet and 18,000 square feet, for $300,000. Agents report that buyers here compare lots by their lake frontage, and all four lots have the same west-facing view. What value do these sales indicate for the subject lot?