A comparable sold with the seller paying $9,000 of the buyer's closing costs. Before any grid adjustments, what must the appraiser consider?
Correct Answer
A) Adjusting the sale price for the concession's effect on it
Why this is correct: Seller concessions (like paying buyer's costs) can artificially inflate the recorded sale price. To reflect the true market value of the real estate, the appraiser must adjust the sale price downward to account for the concession's effect. This is typically the cash equivalent price. Why the other choices are wrong: The sale should not be discarded solely due to a concession; it can be adjusted. Adding $9,000 would further inflate the price. Real estate commissions are seller costs of sale and are never deducted from the sale price for comparison. Exam tip: Always analyze concessions. The adjustment is to find the price the property would have sold for without the concession.
Why This Is the Correct Answer
The correct answer asks the right question, which is what effect the concession had on the price, and it places that inquiry before the grid adjustments. That ordering is important because every later adjustment operates on the price, so an uncorrected price contaminates the whole row. The resulting figure is the cash-equivalent price, the amount the property would have brought without the concession. The magnitude of the adjustment is derived from market evidence, which may or may not equal the full $9,000.
Why the Other Options Are Wrong
Option B: Discarding the sale, since concessions void a comparable
Concessions are extremely common, particularly in slower markets and in first-time buyer segments, so a rule voiding any sale with a concession would eliminate much of the available data. Concessions are quantifiable and therefore adjustable, which is the test for whether a sale is usable. Discarding is reserved for distortions that cannot be measured or verified.
Option C: Adding $9,000 to the comparable's sale price
Adding $9,000 pushes the price further above what the real estate earned, compounding the very inflation the concession created. The direction is the opposite of what cash equivalency requires when the seller gave the buyer something of value. The error usually comes from thinking of the concession as a cost the seller absorbed and therefore something to be restored to the price.
Option D: Reporting the sale price net of the real estate commission
Real estate commissions are a seller's cost of sale paid out of proceeds, and they are never deducted from a sale price for comparison purposes, because the buyer paid the full price for the property. Netting them out would systematically understate every comparable in the market by five or six percent. This option confuses the seller's net proceeds with the transaction price, which are different figures serving different purposes.
Concessions Inflate, So Deflate
If the seller handed the buyer money, goods, or paid costs, the price on the deed is puffed up by roughly that much. Let the air out before gridding. The amount of air is a market question, not automatically the nominal figure.
How to use: When a stem names a dollar figure of seller-paid costs, choose the option that analyzes the concession's effect on price. Reject options that add the figure, discard the sale, or subtract seller costs of sale such as commissions.
Exam Tip
Watch the distinction between the concession's amount and the concession's effect on price. Exams reward the answer that adjusts for effect, since the two are equal only when the market fully capitalizes concessions dollar for dollar.
Common Mistakes to Avoid
- -Adjusting by the full nominal concession without testing market reaction
- -Deducting the real estate commission from a comparable's sale price
- -Applying physical adjustments before cleaning the price for concessions
Concept Deep Dive
Analysis
A seller concession is any item of value the seller gives the buyer outside the real estate itself, most commonly payment of the buyer's closing costs, prepaid items, points, or a rate buydown. Concessions matter because they usually get priced into the contract: a buyer who needs $9,000 of costs covered will often agree to a price roughly that much higher, so the recorded price overstates what the real estate alone commanded. The appraiser's task is not to deduct the concession mechanically but to determine its effect on price, which is a market question. In a market where nearly every transaction carries concessions, the market has effectively repriced around them and the effect on any single sale may be smaller than the nominal amount. This analysis belongs to the transactional adjustments and must be completed before any physical or locational adjustment touches the sale.
Background Knowledge
You need the definition of seller concessions, the concept of cash equivalency, and the standard sequence in which transactional adjustments precede property adjustments. You should also know that lender and secondary-market guidelines require concessions to be identified and analyzed, and that sale price is distinct from the seller's net proceeds.
Real-World Application
An appraiser reviewing four sales finds three carried seller-paid closing costs between $6,000 and $10,000. She compares them against two sales with no concessions in the same subdivision, concludes the market absorbed roughly eighty percent of the concession into price, adjusts on that basis, and shows the paired analysis in an addendum.
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Lender guidelines that flag net adjustments over 15% or gross over 25% are:
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Two otherwise identical homes sold three weeks apart: Property X (with a corner lot) sold for $372,000; Property Y (interior lot) sold for $360,000. The appraiser adjusts Property Y upward by $12,000 to reflect the corner lot premium when reconciling to the subject, which also has a corner lot. Which statement best describes the flaw in this reasoning?