A comparable sold with seller financing at an interest rate well below the market rate for similar loans. What does that indicate for the comparable’s price?
Correct Answer
C) The price likely includes a financing premium, so it may be reduced
When the stated rate is below the market rate, the seller is assumed to have compensated by raising the price, so the price is reduced to its cash-equivalent amount. A third-party loan at market terms needs no such adjustment, and the sale need not be excluded.
Why This Is the Correct Answer
Option C is correct because, when the stated interest rate is below the market rate, the seller is assumed to have compensated by increasing the price. The loan is discounted to its cash equivalent amount, which reduces the indicated price, so a downward adjustment may be needed.
Why the Other Options Are Wrong
Option A: The price is unaffected, because financing terms are not part of value
Option A says the price is unaffected because financing terms are not part of value. Market value assumes cash or cash-equivalent terms, and favorable financing can raise a sale price, so financing terms do matter.
Option B: The price is probably understated, so an upward adjustment is needed
Option B says the price is probably understated and needs an upward adjustment. Below-market financing tends to push the price up, not down, so the adjustment direction is reversed.
Option D: The sale must be excluded, because seller financing is not arm’s length
Option D says the sale must be excluded because seller financing is not arm's length. Seller financing does not by itself make a sale non-arm's length; the sale can be used after a cash equivalent adjustment.
Cheap Loan, Pricey House
A seller who gives a cheap loan usually charges a higher price, so the price comes down to its cash equivalent.
How to use: Use this to remember the direction of a financing adjustment for below-market seller financing.
Exam Tip
Below-market seller financing points to a downward cash equivalent adjustment; it does not require excluding the sale.
Common Mistakes to Avoid
- -Adjusting upward for below-market financing
- -Ignoring favorable financing terms
- -Excluding all seller-financed sales as non-arm's length
Concept Deep Dive
Analysis
This question tests the effect of below-market seller financing on a sale price. When the seller gives an interest rate below the market rate, the seller is assumed to have offset that concession by raising the price. The price therefore includes a financing premium and is reduced to its cash equivalent.
Background Knowledge
Market value is typically defined in terms of cash or financing equivalent to cash. When a comparable involved non-market financing, the appraiser converts its price to a cash equivalent, often by discounting the loan's payments at the market rate. A third-party loan at market terms needs no such adjustment.
Real-World Application
A comparable sold with a seller-carried note at a rate well below current market rates. The appraiser discounts the note at the market rate, finds the cash equivalent price is lower, and adjusts the comparable downward.
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?
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An appraiser uses a recent foreclosure as a comparable because it is the best available sale. According to Fannie Mae, what may the appraiser NOT assume about how the foreclosure compares with the subject?
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A protected greenbelt lies behind the house being appraised. A trainee proposes a $15,000 upward adjustment to two comparables that back onto other houses, taking the figure from a rule of thumb. Market data in the neighborhood do not isolate the greenbelt's effect through paired sales or any other measurement. What is the most appropriate treatment of this difference?