An appraiser runs a regression of sale price on gross living area for 38 sales of ranch homes in a subdivision over the past year. Most sales fall within about $10,000 of the fitted line, but one sale, a 1,600-square-foot home, closed at $268,000, about $55,000 below the price the line predicts for its size. Its MLS record has no remarks on condition, financing or terms. What should the appraiser do next?
Correct Answer
A) Verify the sale's data and terms with a party to the transaction
A sale that sits far from the fitted line, while the rest cluster closely around it, signals that something about it is different: wrong data, poor condition, a non-market transfer or unusual terms. The appraiser should verify the sale with the buyer, seller or an agent before deciding whether it stays in the model. Deleting it unverified may discard real market evidence, adding variables just to fit one point builds a model around a possible error, and ignoring it leaves an unexplained data problem in the analysis.
Why This Is the Correct Answer
Option A is correct because a sale $55,000 below the line, when the others sit within about $10,000, may reflect a recording error, a distressed or non-arm's-length transfer, or a condition problem. Sales data should be verified with the buyer, seller or an agent, and only then can the appraiser decide how to treat the sale in the model.
Why the Other Options Are Wrong
Option B: Delete the sale from the data and run the regression again
Option B deletes the sale and reruns the regression. Removing a sale before learning why it differs may throw away valid market evidence, such as a real condition discount, and leaves the decision unsupported.
Option C: Add variables to the model until the line passes near the sale
Option C adds variables until the line passes near the sale. Building the model to fit one unexplained point risks fitting an error and can weaken the model for every other sale.
Option D: Keep the model as fitted, since one sale has little effect
Option D keeps the model as fitted on the view that one sale has little effect. A $55,000 miss is far outside the pattern of the other sales, and an unexplained data problem should be investigated before the model is relied on.
Big miss means check first
When one sale lands far off the line, verify it before you keep, fix or drop it.
How to use: Use this when a question describes a sale far from a regression line or trend.
Exam Tip
Prefer the answer that investigates the unusual sale over one that deletes it, ignores it or reshapes the model around it.
Common Mistakes to Avoid
- -Deleting an unusual sale without verifying it
- -Reshaping the model to fit one point
- -Ignoring a large residual
Concept Deep Dive
Analysis
The question tests reading a large regression residual. The residual is a prompt to investigate, not a verdict: the sale may reflect a data error, an unusual transaction or a real condition difference. Verification decides whether the sale is corrected, kept with an explanation or excluded.
Background Knowledge
Regression and other statistical techniques can measure adjustments when there is an adequate base of reliable sales data. A residual is the difference between a sale's actual price and the price the model predicts. Large residuals often point to data errors or atypical transactions, which verification with a party to the sale can confirm or rule out.
Real-World Application
An appraiser's regression of subdivision sales shows one home selling far below the line. A call to the listing agent reveals the home sold with a failed septic system, so she records the condition and decides how to treat the sale with that fact in hand.
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?
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Previous Question
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?
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