A land comparable sold 18 months ago in a market rising about 4 percent a year. What adjustment direction applies?
Correct Answer
B) An upward adjustment of roughly 6 percent to the price
Why this is correct: In a market rising about 4% per year, an 18-month-old sale requires an upward time adjustment. Eighteen months is 1.5 years; 1.5 years × 4% per year = 6% upward adjustment. The adjustment brings the old sale price to an estimated current market level as of the effective date. Why the other choices are wrong: A downward adjustment would incorrectly treat the older sale as if the market were declining. No adjustment, since 18 months is within tolerance, is incorrect; tolerance is not a fixed rule, and market conditions dictate adjustment. An upward adjustment of exactly 4 percent per sale is wrong because the adjustment is per year, not per sale, and must reflect the actual time period. Exam tip: Calculate time adjustments proportionally: annual rate × (months/12).
Why This Is the Correct Answer
The market is rising, so a sale that closed 18 months before the effective date happened at a lower price level than exists today and needs to be brought up. Eighteen months is 1.5 years, and 1.5 times 4 percent is about 6 percent, which is the proportional adjustment the elapsed time calls for. Choice B gets both the direction and the proration right and appropriately hedges with roughly, since the underlying rate is itself an estimate.
Why the Other Options Are Wrong
Option A: A downward adjustment, as the sale predates the date
The direction is backwards. In an appreciating market, a price paid a year and a half ago sits below current levels, so leaving it alone understates value and reducing it understates value further. The option trades on a vague instinct that older data deserves a discount, when the discount belongs only in a declining market.
Option C: No adjustment, since 18 months is within tolerance
There is no tolerance period after which time adjustments are optional, and there is none before which they are unnecessary either. The test is whether market conditions changed between the comparable's sale date and the effective date, so in a fast-moving market even a three-month-old sale may need adjustment. At 4 percent a year, 18 months is a 6 percent difference, which is far too large to ignore.
Option D: An upward adjustment of exactly 4 percent per sale
This treats the annual rate as a flat charge per transaction and detaches the adjustment from elapsed time. Under that logic a six-month-old sale and a three-year-old sale would get the same 4 percent, which cannot be right. The rate is per year and must be prorated, so the correct figure here is 6 percent rather than 4 percent.
Rate Times Time, Point It at Today
Multiply the annual rate by the years elapsed, then point the arrow toward today's market. Rising market points the old sale up, falling market points it down. Never point it at the age of the sale itself.
How to use: Convert months to years first, multiply, then set the sign from the market trend and not from how old the sale is. If an option gives you the annual rate unprorated, it failed step one.
Exam Tip
Watch for stems that give a contract date and a closing date. Prices are set when the contract is signed, so measure elapsed time from the contract date when the stem supplies it.
Common Mistakes to Avoid
- -Reversing the direction of the adjustment in an appreciating market
- -Applying the annual rate without prorating for months elapsed
- -Using an appreciation rate with no market support behind it
Concept Deep Dive
Analysis
A market conditions adjustment, still commonly called a time adjustment, restates what a comparable sold for in the past into what it would likely bring as of the effective date. Its direction follows the market: in a rising market older sales occurred at lower price levels, so they are adjusted upward, and in a declining market the same sales are adjusted downward. Its size is the annual rate prorated across the elapsed time between the comparable's contract or closing date and the effective date, which for 18 months at 4 percent a year is roughly 6 percent, or 6.1 percent if compounded. The rate itself must be supported by market evidence, such as repeat sales of the same properties, matched pairs, or a documented trend in median price per unit, and the adjustment is applied to the sale price before the physical and locational adjustments are made.
Background Knowledge
You need how a market conditions adjustment is derived and supported, including repeat sales, matched pairs, and trend analysis of median price per square foot or per acre. You also need the convention that the market conditions adjustment is applied to the sale price first, before other adjustments, and the awareness that the relevant date may be the contract date rather than the closing date since price is agreed when the contract is signed.
Real-World Application
An appraiser valuing a two-acre commercial site finds only three land sales, the newest 14 months old. She supports 4 percent annual appreciation from two repeat sales of nearby parcels, adjusts each comparable proportionally to the effective date, and shows the derivation in an addendum so the reviewer can follow the rate.
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