A comparable's buyer assumed a below-market loan, worth a $12,000 premium folded into its $310,000 price. Cash-equivalent price:
Correct Answer
A) $298,000 after removing the financing premium
Why this is correct: A sale price may include a premium for favorable financing (like a below-market assumable loan). To make comparables consistent, appraisers calculate a cash-equivalent price by subtracting the estimated value of that financing advantage from the stated price. Here, the $12,000 premium is removed: $310,000 - $12,000 = $298,000. Why the other choices are wrong: "$322,000 with the premium restored" would add the premium, moving further from the property's true market value. "$310,000 unchanged" ignores the financing concession, which would distort comparison with cash sales. "$155,000, half the recorded figure" is an arbitrary calculation with no basis. Exam tip: Cash equivalency adjustments are made before any other adjustments (like time or condition) are applied.
Why This Is the Correct Answer
Subtracting the $12,000 premium from $310,000 gives a cash-equivalent price of $298,000. The direction follows from who benefited: the buyer got favorable financing, so the buyer paid extra, so the adjustment comes out. Cash equivalency sits among the transactional adjustments and is applied before any property-level adjustments, so $298,000 is the figure that then enters the grid for time, location, and physical comparison. Reasoning in reverse confirms it, since $298,000 plus the $12,000 the buyer paid for the loan advantage reconstructs the recorded price.
Why the Other Options Are Wrong
Option B: $322,000 with the premium restored
$322,000 adds the premium back, treating the favorable loan as something that should raise the property's indicated price. That double counts the advantage, once in the recorded price where the buyer already paid for it and again in the adjustment. It also produces a comparable priced above anything the real estate could support on typical terms, biasing the entire grid upward.
Option C: $310,000 unchanged, since loan assumptions are perfectly normal
Loan assumptions are indeed ordinary transactions, but that is not the same as their being financing-neutral. What matters is whether the assumed rate differs from market, and the stem states it does and quantifies the difference at $12,000. Leaving the price unchanged would compare a subsidized sale directly against unsubsidized ones, which is precisely what cash equivalency exists to prevent.
Option D: $155,000, half the recorded figure
$155,000 halves the recorded figure for no stated reason and bears no relationship to the $12,000 premium supplied. No appraisal technique produces a cash-equivalent price by dividing by two. It functions as a check on whether the candidate is reading the numbers at all.
Subtract the Sweetener
Favorable financing is a sweetener baked into the price. To taste the real estate alone, take the sweetener out. Buyer got the sugar, so subtract; buyer swallowed something bitter, so add.
How to use: Identify the beneficiary first and write the sign, then apply the quantified amount the stem provides. Do not compute the loan advantage yourself when the question already states it.
Exam Tip
Assumed below-market loans, seller carrybacks, buydowns, and seller-paid points all resolve the same way. Learn one direction rule and it covers the entire family of financing questions.
Common Mistakes to Avoid
- -Adding the financing premium instead of removing it
- -Assuming a loan assumption has no price effect without checking the rate against market
- -Applying the financing adjustment after physical adjustments rather than before
Concept Deep Dive
Analysis
An assumable loan carried at a rate below current market is a real financial asset to whoever takes it over, because the buyer inherits years of payments smaller than a new loan would require. In a market with rising rates, buyers bid for that advantage, and the bidding shows up as a higher purchase price rather than as a separate payment. The appraiser quantifies the advantage by discounting the difference between the assumed loan's payments and payments on a market-rate loan of similar term, then treats that present value as the financing premium embedded in the price. The stem hands you the result of that work at $12,000. Removing it converts the $310,000 nominal price into the price the real estate alone would have brought under typical financing.
Background Knowledge
You need the market value assumption of financing typical for the area, the mechanics of cash equivalency, and how the value of a below-market loan is measured by discounting the payment differential over the loan's remaining term. You should also know that transactional adjustments precede property adjustments in the standard sequence.
Real-World Application
An appraiser in a market where rates jumped three points finds several sales where buyers assumed older low-rate mortgages. She discounts each payment differential over the remaining term, deducts the resulting premiums to reach cash-equivalent prices, and documents the calculation so the reviewer can see why the raw recorded prices overstate the market.
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