An appraiser has two assignments for typical owner-occupied homes under Fannie Mae's Selling Guide. In Neighborhood A, bank-owned (REO) and short sales have made up nearly half of all sales for the past year and sell at prices in line with similar owner sales in the same condition. In Neighborhood B, such sales are under 3% of transactions, and the one recent REO sold well below the range after limited marketing. Which approach is most appropriate?
Correct Answer
D) Use REO sales in A as market evidence and give the B REO little weight unless its effect is measured
Fannie Mae accepts foreclosures and short sales as comparables when the data show they are the best sales available, and requires the report to address how prevalent they are and their effect. Where they are half the market and sell in line with owner sales, they are the market. Where they are rare and the one REO sold low after thin marketing, its conditions of sale differ, so it deserves little weight unless the discount can be measured. Blanket exclusion, uncritical use of the atypical sale, or reversing the two treatments all ignore the evidence.
Why This Is the Correct Answer
Option D is correct because in Neighborhood A the REO and short sales are about half the market and sell in line with owner sales, so they are valid evidence once prevalence is reported. In Neighborhood B the lone REO sold well below the range after limited marketing in a market where such sales are rare, so it should carry little weight unless its discount is measured.
Why the Other Options Are Wrong
Option A: Exclude REO and short sales in both neighborhoods because lender sellers act under pressure
Option A excludes distressed sales in both neighborhoods. In Neighborhood A they make up nearly half the market and sell at owner-sale prices, so excluding them would discard the main evidence of value, and Fannie Mae permits their use when they are the best sales available.
Option B: Use the Neighborhood B REO without adjustment because it is a recent closed sale nearby
Option B uses the Neighborhood B REO without adjustment because it is recent and nearby. Recency does not cure an atypical sale: it sold well below the range after limited marketing where REOs are rare, so its conditions of sale differ from the market's.
Option C: Use the Neighborhood B REO without adjustment and exclude the REO sales in A
Option C reverses the evidence. In Neighborhood A the REO and short sales are about half the market and sell in line with owner sales, so they are valid evidence; in Neighborhood B the lone REO sold well below the range after limited marketing where such sales are rare, so using it without adjustment ignores its atypical conditions of sale.
Common sets prices; rare distorts
When distressed sales are a big share of the market, they help form market value. When they are rare, they are the exception and need proof before they count.
How to use: Use this when a question contrasts REO or short sale activity between two markets.
Exam Tip
Read for two clues: how common the distressed sales are and whether their prices track owner sales. Those facts, not the seller type, decide the treatment.
Common Mistakes to Avoid
- -Excluding all REO sales regardless of market share
- -Treating a rare distressed sale as typical because it is recent
- -Reversing the treatment of common and rare distressed sales
Concept Deep Dive
Analysis
The question tests how the frequency of distressed sales changes the conditions-of-sale analysis. When distressed sales dominate and track owner sales, they reflect normal market behavior; when they are rare and sell low after limited exposure, they reflect atypical conditions. The appraiser follows the market evidence in each neighborhood rather than applying one rule to both.
Background Knowledge
Conditions of sale cover the motivations and market exposure behind a price. Distressed sales can sell below market when buyers are few and marketing is short, but where they are a large share of a market they help set prices for everyone. Fannie Mae requires the appraiser to discuss their prevalence and impact and not to assume a distressed sale is equal to the subject.
Real-World Application
After a regional plant closing, half the sales in one subdivision are REOs selling near owner prices, while a nearby stable area has a single bank sale at a deep discount. The appraiser uses the REOs in the first report with a prevalence comment and relies on owner sales in the second.
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
Comparable 3, a split-level home, sold for $360,000 four months before the effective date. The executor of the owner's estate accepted the first offer after two weeks of limited marketing. Paired sales show that homes sold this way at that time brought about 10% less than fully marketed sales of similar homes. Prices have been stable since the contract date. The deceased owner had bought the home for $210,000. What is the comparable's price after the conditions-of-sale adjustment?
Next Question
Comparable 2 sold for $415,000. A year before the sale, its owner added a full bath that the subject lacks; the bath would cost $30,000 to build today and shows 5% depreciation. The subject has a covered patio that the comparable lacks, with a depreciated cost of $6,000. Market data show buyers in this neighborhood pay about the depreciated cost of recent, well-built additions like these. What is the comparable's adjusted sale price?