A house sold for $350,000 and resold 12 months later for $392,000. Between the sales, the owner added a bathroom that cost $20,000; market evidence shows it contributes $14,000 to value. No other changes occurred. Based on the first sale price, what annual market-conditions change does this resale pair indicate?
Correct Answer
B) 8.0% per year
A resale measures market change only when the property is unchanged between sales, so the bathroom's market contribution must be removed: $392,000 - $14,000 = $378,000. The remaining $28,000 change on $350,000 is 8.0% over 12 months. Subtracting the $20,000 cost gives 6.3%, ignoring the addition gives 12.0%, and adding its value instead of removing it gives 16.0%.
Why This Is the Correct Answer
Option B is correct because removing the bathroom's $14,000 market contribution leaves an adjusted resale price of $378,000. The $28,000 gain over $350,000 equals 8.0% over the 12 months between sales.
Why the Other Options Are Wrong
Option A: 6.3% per year
Option A, 6.3% per year, subtracts the $20,000 cost: (392,000 - 20,000 - 350,000) / 350,000 = 6.3%. Cost does not equal value; the market contribution of $14,000 is what the resale price reflects, giving 8.0%.
Option C: 12.0% per year
Option C, 12.0% per year, treats the whole $42,000 increase as market change. Part of that increase came from the added bathroom, so its $14,000 contribution must be removed first, giving 8.0%.
Option D: 16.0% per year
Option D, 16.0% per year, adds the $14,000 to the resale price: 56,000 / 350,000 = 16.0%. The resale already includes the bathroom, so its contribution is subtracted, not added, giving 8.0%.
Subtract contribution, not cost
Before reading a resale as pure market change, take out what the improvement adds to value, which is often less than what it cost.
How to use: Use this on any repeat-sales question where the owner made changes between sales.
Exam Tip
When both a cost and a market contribution are given, the contribution is normally the figure to use in sales comparison work.
Common Mistakes to Avoid
- -Using improvement cost instead of market contribution
- -Treating a remodeled resale as an unchanged property
- -Adding the improvement to the later sale price
Concept Deep Dive
Analysis
A repeat sale of the same property is a clean measure of market change only if nothing about the property changed. When an improvement was added, its market contribution, not its cost, must be removed from the later price before computing the time change.
Background Knowledge
Market-conditions adjustments can be measured from the same property selling more than once when no significant change occurred between sales. If a change did occur, the appraiser adjusts for it using a supported contribution so the remaining price change reflects the market.
Real-World Application
An appraiser finds a comparable that sold a year earlier and again recently after a bath remodel. Using paired data to support the remodel's contribution, the appraiser removes it from the recent price to isolate the market trend for the area.
More Market Questions
In market area analysis, what characteristic distinguishes a district from a neighborhood?
Under USPAP Standards Rule 1-3(a), which item must an appraiser identify and analyze when necessary for credible results in a market value assignment?
How does the Fannie Mae Selling Guide define a neighborhood?
Several homes in a neighborhood are vacant and boarded up. Which market force does Fannie Mae classify this as?
Infrastructure investment such as a new interchange typically affects nearby land by:
A city raises property tax rates and tightens building regulations. Which market force does Fannie Mae classify these as?
An appraiser believes, without market evidence, that a nearby group home lowers values. What does Fannie Mae require?
Which three categories are used to report the supply of properties in a Fannie Mae neighborhood section?
An appraiser is asked for a retrospective value opinion as of three years ago. When must the appraiser meet the Competency Rule?
Can mixed land uses in a residential neighborhood ever enhance home values, according to Fannie Mae?
People Also Study
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
A hotel is sold as an operating business, including its real estate, furniture and equipment, staff and brand-related intangibles. The total value of this operating enterprise is called:
Next Question
Under the federal agencies' definition of market value, the price represents the normal consideration for the property sold, unaffected by which of the following?