An appraiser is valuing a single-family residence and discovers that one comparable sale was between related parties at below-market terms. Under Standard 1, the appraiser should:
Correct Answer
D) Investigate the terms; use only with a supportable market adjustment, otherwise exclude
Verify the related-party transaction and its below-market terms. A supported market-equivalent adjustment may allow useful comparison; an unsupported adjustment or the relationship label alone cannot establish comparability. If a credible market comparison cannot be made, do not rely on it for that indication.
Why This Is the Correct Answer
Option D is correct because the appraiser must collect, verify and analyze information necessary for credible results, which includes investigating the related-party terms. A supported market adjustment may make the sale useful, but if no credible adjustment can be supported, the sale should not be relied on for that indication. The relationship label alone neither proves nor disproves comparability.
Why the Other Options Are Wrong
Option A: Use the sale without any adjustments since it represents market activity
Option A is wrong because using the sale without any adjustments treats a non-arm's-length, below-market transaction as typical market activity. That would distort the value indication.
Option B: Use the sale only if no other comparable sales are available
Option B is wrong because using the sale only if no other comparable sales are available ignores whether it can be credibly adjusted. Scarcity of data does not make an unsupported sale reliable.
Option C: Use the sale and adjust for the relationship between the parties, without investigating the terms
Option C is wrong because adjusting for the relationship between the parties without investigating the terms produces an unsupported adjustment. Verification must come before any adjustment.
Verify, support, or set aside
For a suspect comparable: verify its terms, support any adjustment with market data, or set it aside.
How to use: Use this when a question describes a non-arm's-length or unusual-terms comparable.
Exam Tip
Favor options that require investigation and supported adjustments over ones that accept or adjust a sale blindly.
Common Mistakes to Avoid
- -Using a related-party sale as if it were arm's length
- -Making an adjustment without verifying the transaction terms
- -Relying on a weak sale just because data is scarce
Concept Deep Dive
Analysis
This question tests how to handle a related-party comparable sale with below-market terms. Standard 1 requires collecting, verifying and analyzing information needed for credible results. The appraiser must investigate the sale and use it only if a supportable adjustment can reflect market conditions.
Background Knowledge
Market value assumes typically motivated parties acting at arm's length. Sales between related parties, such as family members or affiliated companies, may not reflect market conditions. Appraisers verify transaction details and either support a market-based adjustment or exclude the sale from reliance.
Real-World Application
An appraiser finds that a nearby sale was from a parent to a child at a steep discount. After confirming the terms, the appraiser finds no market data to support an adjustment and excludes the sale, explaining why in the report.
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