A multiple regression of 14 sales of two-story homes in a suburban subdivision uses GLA, bedroom count and bathroom count. The GLA coefficient is +$96 per square foot and the bedroom coefficient is −$9,400. In these sales, the homes with more bedrooms are nearly always the larger homes. The subject has four bedrooms and Comparable 2 has three. What is the best response to the bedroom result?
Correct Answer
C) Set aside the coefficient and seek more sales or another method
With only 14 sales for three variables, and bedroom count moving almost in step with GLA (multicollinearity), the model cannot separate the effect of an added bedroom from the effect of added space, so the −$9,400 figure is unreliable in both size and sign. The coefficient should be set aside; the appraiser should add sales, drop the overlapping variable, or measure the bedroom difference another way, such as paired sales. Applying the figure as given, flipping its sign, or substituting construction cost all lack market support.
Why This Is the Correct Answer
Option C is correct because a −$9,400 bedroom coefficient comes from a small data set (14 sales for three variables) in which bedroom count tracks GLA closely, so the model cannot isolate the bedroom effect. The appraiser should set the figure aside and get more data, remove the overlapping variable, or use another method such as paired sales.
Why the Other Options Are Wrong
Option A: Adjust Comparable 2 downward $9,400 for its missing bedroom
Option A applies the −$9,400 coefficient as written, adjusting Comparable 2 downward because the subject has one more bedroom. With 14 sales and bedrooms moving in step with GLA, the model cannot separate the two, so neither the size nor the sign of the figure is reliable enough to use.
Option B: Adjust Comparable 2 upward $9,400 by reversing the sign
Option B flips the sign to make a +$9,400 adjustment. Reversing a coefficient has no statistical or market basis; the size of an unreliable figure is as doubtful as its sign.
Option D: Adjust Comparable 2 upward by the cost to build a bedroom
Option D replaces the coefficient with the cost to build a bedroom. Cost is not the same as the market's reaction to an extra bedroom, and the question is whether buyers pay for the bedroom apart from the GLA it adds.
Wrong sign, check the design
When a coefficient has a sign buyers would never accept, suspect overlapping variables or too few sales before trusting the number.
How to use: Use this when a regression gives a negative value for a feature buyers clearly want.
Exam Tip
On the exam, the best response to an illogical coefficient is usually to question the model and seek more data, not to apply, flip or replace the figure.
Common Mistakes to Avoid
- -Applying a coefficient with an illogical sign
- -Reversing the sign of a coefficient without support
- -Using too many variables for a small number of sales
Concept Deep Dive
Analysis
The question tests judgment about a regression output that contradicts market logic. With few sales and two variables that overlap, coefficients can take wrong signs; the right response is to reject the figure rather than force it into the grid.
Background Knowledge
Multiple regression estimates the contribution of each variable while holding the others constant, but it needs an adequate database. When independent variables are highly correlated (multicollinearity) or sales are few, coefficients become unstable and may have illogical signs or sizes.
Real-World Application
An appraiser's 14-sale regression shows an extra bedroom lowering price. Because bedrooms rise with size in that tract, she drops bedrooms from the model and finds a pair of same-size sales with three and four bedrooms to measure the difference.
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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