A comparable sold to a tenant already occupying the property. This transaction may require:
Correct Answer
B) Analysis of whether the tenant paid a typical price
Why this is correct: A sale to an existing tenant may or may not be arm's length. The tenant may have paid a premium or received a discount. The appraiser must investigate the transaction circumstances to determine if the price is representative of the open market. Why the other choices are wrong: It should not be automatically excluded. An upward adjustment is not automatic; analysis comes first. Occupancy and the buyer's relationship are highly relevant. Exam tip: Verify all sales, but pay extra attention to non-typical transactions like sales to tenants or relatives.
Why This Is the Correct Answer
Analyzing whether the tenant paid a typical price is the right response because the direction and magnitude of any distortion cannot be known without verification. That analysis means asking how the price was set, whether an option or right of first refusal was exercised, whether the property was exposed to the market, and whether either party was under compulsion. Depending on what turns up, the appraiser may use the sale as is, apply a conditions of sale adjustment, or exclude it. The conditional phrasing of the answer matches the conditional nature of the professional judgment.
Why the Other Options Are Wrong
Option A: Automatic exclusion from the comparable set
Automatic exclusion throws away a real transaction before learning anything about it, and many tenant purchases are genuinely negotiated at market. In thin markets, discarding data on category alone can leave the appraiser without enough comparables to support a conclusion. The correct trigger for exclusion is a verified distortion that cannot be reliably quantified, not the identity of the buyer.
Option C: An upward adjustment for the occupancy
An automatic upward adjustment presumes the tenant underpaid, which is only one of two possible directions and is not established by any fact in the stem. A purchase option struck below current market would justify an upward adjustment, but a relocation-avoidance premium would justify a downward one. Choosing a direction before doing the verification is exactly the error the item is testing.
Option D: No consideration, since occupancy is irrelevant
Occupancy and the buyer's relationship to the property are among the most relevant things an appraiser verifies about a sale, because market value assumes a typical, uncompelled buyer and adequate market exposure. Calling them irrelevant contradicts the verification requirement in the development standards. This option only appeals to candidates who think of a sale price as a self-evident fact rather than as data requiring interpretation.
Who Is the Buyer
Before you use any sale, name the buyer's relationship to the property: stranger, tenant, neighbor, relative, lender, government, or affiliate. Stranger is the default market. Every other label means verify before you grid.
How to use: When a stem identifies a non-stranger buyer, choose the option that investigates rather than one that excludes or adjusts automatically. Only pick a direction of adjustment when the stem supplies a fact establishing which way the price was pushed.
Exam Tip
Look for the words may, might, or requires analysis in the answer set. In verification items the hedged answer is usually the correct one, because the professional response is to investigate.
Common Mistakes to Avoid
- -Excluding or including a tenant purchase based on category rather than verification
- -Missing a purchase option or right of first refusal that set the price years earlier
- -Overlooking whether the property was ever exposed to the open market
Concept Deep Dive
Analysis
A sale to a sitting tenant is one of a family of transactions where the buyer is not drawn from the open pool of purchasers, and that fact alone requires the appraiser to look closer. The distortion can run in either direction. A tenant may pay above market because moving costs, business goodwill tied to the location, or leasehold improvements he already installed make staying worth a premium, and because the property may never have been exposed to the open market at all. A tenant may equally pay below market because the lease contained a purchase option struck at a price set years earlier, or a right of first refusal, or simply because the landlord valued a quick, certain closing with a known party over the cost and delay of listing. Exposure to the market is itself an element of the market value definition, so a transaction that never reached the market deserves scrutiny on that ground alone.
Background Knowledge
You need the market value definition's assumptions of typical motivation, arm's length dealing, and reasonable exposure to the market, plus the conditions of sale adjustment. You should also know common lease provisions that affect price, particularly purchase options and rights of first refusal, and the general requirement to verify each comparable's terms and conditions.
Real-World Application
An appraiser verifying a small industrial sale learns the buyer was the tenant of nine years and that the price came from an option in the lease set at signing. She calculates how far that option price sits below current market, treats the sale as not arm's length for grid purposes, and cites it only as supporting commentary.
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