A single-family home sold for $400,000. The buyer paid $40,000 in cash, obtained a $200,000 first mortgage from a bank at the market interest rate, and gave the seller a $160,000 second mortgage at 3% when similar second mortgages carried 7%. Local note investors pay about 80% of face value for seller-carried notes on these terms. What is the cash equivalent price of this sale?
Correct Answer
D) $368,000
Only the below-market seller note needs a cash equivalency adjustment; the bank loan is cash to the seller. The $160,000 note is worth 80% of face, or $128,000, so the cash equivalent price is $40,000 + $200,000 + $128,000 = $368,000. Discounting the whole price gives $320,000, discounting both loans gives $328,000, and discounting the bank loan instead of the seller note gives $360,000.
Why This Is the Correct Answer
Option D is correct because the $160,000 seller note at 3% is worth only 80% of face to the market, or $128,000. Adding the $40,000 cash and the $200,000 bank loan, which the seller received in cash, gives $368,000. The $32,000 difference is the price premium the below-market note produced.
Why the Other Options Are Wrong
Option A: $320,000
Option A, $320,000, applies the 20% discount to the entire $400,000 price (0.80 x $400,000). The cash down payment and the bank loan reached the seller as cash and need no discount; only the $160,000 note does, which gives $368,000.
Option B: $328,000
Option B, $328,000, discounts both loans: $40,000 + 0.80 x $360,000. The $200,000 bank loan is at the market rate and is cash to the seller, so discounting it understates the price; the correct figure is $368,000.
Option C: $360,000
Option C, $360,000, discounts the $200,000 bank loan by 20% ($400,000 - $40,000) while leaving the seller note at face. That reverses the analysis: the market-rate bank loan needs no adjustment and the 3% seller note does, giving $368,000.
Who lent it decides it
If a third party lent the money, the seller got cash and nothing is discounted. If the seller lent it below market, the seller's note is marked down to its market value.
How to use: Use this when a stem lists several financing sources and asks for a cash equivalent price.
Exam Tip
Break the price into its parts (cash, third-party loan, seller paper) and discount only the parts the seller did not receive in cash at market terms.
Common Mistakes to Avoid
- -Discounting the entire sale price instead of the seller note
- -Adjusting a market-rate bank loan
- -Using the interest rate gap times the loan balance as the adjustment
Concept Deep Dive
Analysis
The question tests cash equivalency when a sale mixes cash, a market-rate third-party loan and below-market seller financing. The candidate must recognize that the bank loan is already cash to the seller and apply the market's measured discount to the seller note alone. Summing the cash value of each part gives the cash equivalent price.
Background Knowledge
A seller who accepts a note below the market rate usually recovers that concession through a higher price, so the recorded price overstates the cash value of the real estate. The cash equivalent price replaces the note's face amount with what the market would pay for it. Adjustments should come from market evidence where possible, such as what note investors pay or paired sales.
Real-World Application
A retiring owner sells a house with a bank first mortgage and a 3% carry-back second. The appraiser asks a local note buyer what such paper sells for, learns about 80 cents on the dollar, and reports the comparable at its cash equivalent price in the grid with an explanation.
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?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam