A comparable’s buyer obtained a conventional loan from a bank at market terms. Is a financing adjustment needed?
Correct Answer
B) No, a third-party loan is cash to the seller
An adjustment for financing terms is not required for a third-party loan, because such a loan is cash to the seller. Adjustments arise for non-market financing, such as seller financing at below-market rates.
Why This Is the Correct Answer
Option B is correct because a loan made by someone other than the seller is cash to the seller, so no financing-terms adjustment is required. The bank loan at market terms does not change what the seller received. Adjustments arise when financing is nonmarket, such as below-market seller financing.
Why the Other Options Are Wrong
Option A: Yes, deduct the loan amount from the sale price
Option A is wrong because it deducts the loan amount from the sale price. The loan is part of how the buyer paid the price, and the seller still received the full amount in cash, so deducting it would understate the price.
Option C: Yes, add the lender’s fees to the sale price
Option C is wrong because it adds the lender's fees to the sale price. Ordinary lender fees on a market-rate bank loan do not call for a financing adjustment to the comparable.
Option D: Yes, adjust by the difference between the loan rate and the cap rate
Option D is wrong because it adjusts by the difference between the loan rate and the cap rate. Those two rates measure different things, and a market-rate third-party loan requires no financing adjustment at all.
Bank loan equals seller cash
If someone other than the seller lends at market terms, the seller is paid in cash, so no financing adjustment.
How to use: Use this to decide quickly whether a comparable's financing needs cash-equivalency analysis.
Exam Tip
Look for who provided the loan and whether the terms were market terms; a third-party market loan points to no adjustment.
Common Mistakes to Avoid
- -Deducting the mortgage amount from the sale price
- -Treating ordinary lender fees as a financing adjustment
- -Confusing a loan interest rate with a capitalization rate
Concept Deep Dive
Analysis
This question tests when a financing adjustment is needed. A loan from a third party, such as a bank at market terms, means the seller receives cash at closing. Financing adjustments are for nonmarket financing, such as below-market seller financing.
Background Knowledge
Financing terms are an element of comparison because nonmarket financing can affect what a buyer is willing to pay. Conventional third-party loans at market terms are treated as cash to the seller. Cash-equivalency analysis applies when the seller provides favorable financing or other nonmarket terms.
Real-World Application
An appraiser verifies that a comparable's buyer used a conventional 30-year mortgage from a local bank at prevailing rates. The appraiser makes no financing adjustment. For another comparable where the seller carried back a below-market note, the appraiser analyzes a cash-equivalency adjustment.
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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Previous Question
A three-bedroom townhouse with a recently updated kitchen is under appraisal. The appraiser ranks four sales overall, taking the kitchen into account: Sale A at $288,000 and Sale B at $295,000 are inferior, and Sale C at $304,000 and Sale D at $311,000 are superior. The appraiser then concludes a value of $308,000, citing the updated kitchen. What is the error in this conclusion?
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Under Fannie Mae's Selling Guide, an appraiser is valuing a colonial in a subdivision where prices have risen about 0.5% a month for the past year. Three closed sales, each time-adjusted to the effective date, indicate $402,000, $409,000 and $416,000. Two similar colonials are under contract at $419,000 and $423,000, verified with the listing agents, and a third has been listed at $435,000 for 40 days. Over the same year, condominium prices in the city fell 3%. How should the contracts and the listing be used in reconciling the sales comparison approach?