A recent sale of a two-story home closed at $378,000. Its listing reports 2,700 square feet of finished area, which includes 900 square feet of finished basement; its above-grade GLA is 1,800 square feet. The subject has 2,100 square feet of above-grade GLA and no basement. Market data show buyers here pay far less for finished basement space than for above-grade living area. The appraiser divides the price by 2,700 and applies the resulting $140 per square foot to the subject's GLA. What is wrong with this analysis?
Correct Answer
D) The rate is understated, because its divisor counts basement area as GLA
A unit of comparison must measure the comparable the same way as the subject. Dividing $378,000 by 2,700 square feet mixes 900 square feet of basement, which buyers here value far less, with above-grade living area, so the $140 rate is too low for above-grade GLA; by above-grade GLA the sale shows $378,000 / 1,800 = $210 per square foot before any basement adjustment. Applying $140 to the subject's 2,100 square feet of above-grade GLA understates its value; the comparable's basement belongs on its own line of the grid.
Why This Is the Correct Answer
Option D is correct because the 2,700-square-foot divisor counts 900 square feet of basement as if it were above-grade living area, though buyers here pay far less for basement space. That lowers the rate to $140, against $210 per square foot of the comparable's 1,800 square feet of above-grade GLA, so applying $140 to the subject's 2,100 square feet understates value.
Why the Other Options Are Wrong
Option A: Nothing, because finished basement space counts as GLA once finished
Option A says nothing is wrong because finished basement space counts as GLA once finished. Finished basement space is a separate element of comparison, and the market data show buyers here value it far below above-grade living area, so mixing it into GLA distorts the rate.
Option B: The rate should be found by dividing the price by the subject's GLA
Option B says the rate should be found by dividing the price by the subject's GLA. A comparable's unit price comes from its own price and its own area; dividing $378,000 by the subject's 2,100 square feet produces a figure that describes neither property.
Option C: The rate is overstated, so the subject's indication is too high
Option C says the rate is overstated, so the subject's indication is too high. Including the basement makes the divisor larger, which lowers the rate to $140 from $210 per square foot of above-grade GLA, so the error runs the other way.
Same ruler, both houses
Measure the comparable the way you measured the subject; a bigger divisor gives a smaller rate.
How to use: Use it when a comparable's reported area includes space, such as a basement, that the subject's GLA does not.
Exam Tip
Check which area each figure includes before dividing. When below-grade space is added to the divisor, the per-square-foot rate falls and a subject measured above grade only is understated.
Common Mistakes to Avoid
- -Taking listing square footage that includes basement space as GLA
- -Getting the direction of the distortion backward
- -Dividing a comparable's price by the subject's area
Concept Deep Dive
Analysis
The question tests consistent measurement in a price-per-square-foot unit. If the comparable's divisor includes basement area that the subject's GLA excludes, the rate no longer measures the same thing on both sides, and the direction of the error follows from the larger divisor.
Background Knowledge
Gross living area is commonly measured as finished above-grade area, with finished basement space reported and adjusted on its own line. A price-per-square-foot unit is meaningful only when the comparable and the subject are measured the same way.
Real-World Application
An appraiser notices that a listing's square footage includes a finished lower level. The appraiser recomputes the comparable's price per square foot on above-grade GLA only and adjusts for the finished basement on a separate line.
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?
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Previous Question
After qualitative ranking, comparable A ($402,000) is inferior to the subject and comparable B ($418,000) is superior. What does this bracketing indicate?
Next Question
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