An appraiser discovers that comparable sale #2 had a $5,000 seller concession for closing costs, while the subject property sale will have no seller concessions. What adjustment should be made to comparable #2?
Correct Answer
B) Subtract $5,000 from the sale price
When a comparable sale includes seller concessions that the subject does not have, the comparable's sale price should be adjusted downward by the amount of the concession. This is because the concession artificially inflated the comparable's sale price relative to the subject.
Why This Is the Correct Answer
When a comparable sale includes seller concessions that the subject does not have, the comparable's sale price should be adjusted downward by the amount of the concession. This is because the concession artificially inflated the comparable's sale price relative to the subject.
Why the Other Options Are Wrong
Option A: Add $5,000 to the sale price
Adding $5,000 would incorrectly increase the comparable's adjusted sale price, making it even less comparable to the subject property. This would overstate the comparable's value since the seller concession already artificially inflated the original sale price. The adjustment should move in the opposite direction to neutralize the effect of the concession.
Option C: No adjustment needed
No adjustment would leave the comparable's sale price artificially inflated by the $5,000 concession amount. This would result in an inaccurate comparison since the comparable buyer effectively paid $5,000 less than the recorded sale price, while the subject property buyer will pay the full purchase price without concessions.
Option D: Adjust based on local market conditions
While local market conditions are important in appraisal, seller concessions require specific mathematical adjustments regardless of market conditions. The $5,000 concession represents a quantifiable difference that must be adjusted to ensure accurate comparison between the subject and comparable properties.
SUBTRACT Seller Concessions
Remember 'SUBTRACT' - when the comparable has Seller concessions that the Subject doesn't have, you must SUBTRACT the concession amount from the comparable's sale price to get the true economic value.
How to use: When you see a question about seller concessions, immediately identify which property (subject or comparable) has the concession, then remember to SUBTRACT the concession amount from whichever property had the advantage (the comparable in this case).
Exam Tip
Always read carefully to determine which property has the concession - if the comparable has it and the subject doesn't, subtract from the comparable; if the subject has it and the comparable doesn't, add to the comparable.
Common Mistakes to Avoid
- -Adding the concession amount instead of subtracting it
- -Confusing which property had the concession and adjusting in the wrong direction
- -Ignoring seller concessions entirely and making no adjustment
Concept Deep Dive
Analysis
This question tests the fundamental principle of sales comparison adjustments when seller concessions are involved. Seller concessions represent financial benefits given by the seller to the buyer, which effectively reduce the net amount the buyer pays for the property. When a comparable sale includes concessions that the subject property doesn't have, the comparable's sale price appears higher than what the buyer actually paid out-of-pocket. To make an accurate comparison, appraisers must adjust the comparable's sale price downward to reflect the true economic value exchanged.
Background Knowledge
Seller concessions are financial incentives provided by sellers to buyers, such as paying closing costs, buying down interest rates, or providing repair credits. These concessions effectively reduce the net amount buyers pay for properties, making direct price comparisons misleading without proper adjustments.
Real-World Application
In practice, appraisers regularly encounter seller concessions in purchase contracts and must adjust comparable sales accordingly. This ensures that the final opinion of value reflects true market conditions rather than artificial price inflation from seller incentives, providing lenders and clients with accurate property valuations.
More Report Writing Questions
Under FIRREA, which federal agency has the authority to set minimum standards for real estate appraisals in federally related transactions?
What is the minimum transaction threshold for requiring a state licensed or certified appraiser under Title XI for most federally related transactions?
The Dodd-Frank Act established which requirement specifically related to appraisal independence?
Which of the following is NOT a responsibility of the Appraisal Subcommittee (ASC)?
State appraiser regulatory agencies are primarily responsible for which of the following functions?
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam