A seller’s loan to the buyer carries an interest rate below the market rate. Which technique estimates the cash equivalent adjustment?
Correct Answer
C) Discounting the loan payments at the market interest rate
An adjustment for non-market financing can be estimated by discounting the periodic payments of the non-market loan at the market interest rate into a cash equivalent present value.
Why This Is the Correct Answer
Option C is correct because the cash-equivalent adjustment for non-market financing is estimated by discounting the periodic payments of the non-market loan at the market interest rate. The result is the loan's cash-equivalent present value. Comparing that value with the loan's face amount shows how much the financing affected the price.
Why the Other Options Are Wrong
Option A: Multiplying the loan balance by the difference in rates once
Option A, multiplying the loan balance by the difference in rates once, is wrong because it captures only one year's interest difference. The benefit of below-market financing extends over the loan's payment stream, which is why the payments are discounted.
Option B: Subtracting the loan’s face amount from the sale price
Option B, subtracting the loan's face amount from the sale price, is wrong because the loan is part of the consideration and still has substantial value. Only the difference between its face amount and its cash-equivalent value is the financing effect.
Option D: Averaging the contract rate with the market rate
Option D, averaging the contract rate with the market rate, is wrong because an average rate has no basis in how the market prices the loan. The loan's payments should be discounted at the market rate.
Discount at market
Take the cheap loan's payments and discount them at the market rate to find what the note is really worth in cash.
How to use: Use this whenever a comparable sale includes seller financing below market rates.
Exam Tip
For below-market financing questions, look for present-value discounting at the market rate rather than simple rate arithmetic.
Common Mistakes to Avoid
- -Subtracting the full loan amount from the price
- -Using a single year's interest difference as the adjustment
- -Discounting at the contract rate instead of the market rate
Concept Deep Dive
Analysis
This question tests the technique for adjusting a sale with below-market seller financing. The seller's loan made the deal more attractive, so the recorded price may exceed a cash-equivalent price. The adjustment is found by discounting the loan's payments at the market interest rate to a present value.
Background Knowledge
Cash equivalency converts a sale with non-market terms into the price a typical cash or market-financed buyer would pay. With a below-market seller loan, the buyer receives a financial benefit that may raise the price. Discounting the loan payments at the market rate measures that benefit.
Real-World Application
A comparable sold with the seller carrying a loan well below current market rates. The appraiser discounts the loan's monthly payments at the market rate and finds the note is worth less than its face amount in cash. The comparable's price is reduced by that difference to reach a cash-equivalent price.
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
The subject property is a 1,720-sf two-story home in an established subdivision. The appraiser ranks four recent sales against it overall. Sale 1, which sold for $331,000, is inferior; its price and date come only from the public record, and neither the parties nor the agents could be reached. Sale 2 ($344,000), Sale 3 ($349,000) and Sale 4 ($357,000) are superior, and each was confirmed with the listing agent. Sale 4's assessed value is $296,000. The appraiser concludes that the sales bracket the subject between $331,000 and $344,000. What is the main weakness of this bracket?
Next Question
The subject property is a three-bedroom ranch on one of the few lots in its suburb that back onto a private lake. Market data show buyers pay more for lake lots. None of the closed sales in the subject's neighborhood over the past six months is on a lake lot, so every sale found so far is inferior for this element. What should the appraiser do?