An REO sale where the property was listed for 120 days and marketed conventionally:
Correct Answer
D) May be usable with condition adjustments, not a distress deduction
Why this is correct: An REO (bank-owned) sale is not automatically a distressed sale. If it was marketed conventionally with normal exposure time and sold to a typical buyer, it may reflect market value. Any price difference is likely due to property condition, not seller duress, so a condition adjustment is appropriate. Why the other choices are wrong: 'Requires no analysis of its marketing' is incorrect; all comparable sales require analysis of the terms and conditions of sale. 'Must always receive a distress adjustment regardless' is wrong; a distress adjustment applies only if the sale was under duress. 'Is automatically excluded from the grid' is incorrect; usable comparables should not be arbitrarily excluded. Exam tip: Analyze the sale, not just the seller. A normal marketing period suggests a market transaction.
Why This Is the Correct Answer
An REO sale marketed conventionally with normal exposure may well reflect market value, so any price difference is more likely explained by condition than by seller duress, and condition adjustments are the appropriate remedy. Applying a distress deduction on top of a condition adjustment would double count the same discount. The 120-day exposure period stated in the stem is the fact that defeats the inadequate-exposure concern. Verification remains necessary to confirm how the sale was marketed and what condition the property was in.
Why the Other Options Are Wrong
Option A: Requires no analysis of its marketing
Every comparable requires analysis of its terms and conditions, and an REO sale requires more scrutiny rather than less because the seller category raises questions worth answering. Verification is how the appraiser learns that the marketing was in fact conventional. Skipping the analysis would leave the appraiser unable to defend using the sale.
Option B: Must always receive a distress adjustment regardless
An automatic distress adjustment applies a conclusion before the evidence is examined and would be wrong wherever the sale was properly exposed. It also risks double counting when a condition adjustment is separately applied for the same as-is state. The word always signals a category judgment substituting for analysis.
Option C: Is automatically excluded from the grid
Automatic exclusion would discard usable market evidence, and in markets where REO sales constitute a substantial share of transactions it could leave the appraiser without enough comparables. In some submarkets REO sales are the market and excluding them would misstate it entirely. Exclusion belongs where terms cannot be verified or distortion cannot be measured.
Analyze the Sale, Not the Seller
A seller's label does not settle whether a sale was market. Ask how long it was exposed, how it was marketed, and what condition it was in. Those facts, not the word bank on the deed, determine usability.
How to use: When a stem names an institutional seller, look for facts about exposure and marketing. Adequate exposure points toward usability with condition adjustments; a quick auction sale points toward distress.
Exam Tip
Keep the three distressed categories separate. Foreclosure auction sales, short sales, and REO resales have very different exposure profiles, and only the first is reliably compelled.
Common Mistakes to Avoid
- -Applying an automatic distress adjustment to any bank-owned sale
- -Double counting by deducting for both distress and as-is condition
- -Excluding REO sales in a market where they represent a large share of transactions
Concept Deep Dive
Analysis
Real estate owned property is real estate a lender has taken back through foreclosure or deed in lieu, and there is a persistent assumption that any REO sale must be distressed. That assumption is often wrong. Distress in the market value sense means the seller acted under compulsion or the property received inadequate market exposure, and a bank that lists a property with a broker, markets it conventionally, and leaves it exposed for 120 days has done neither. Institutional sellers are motivated but usually not compelled in the relevant sense; they are obliged to obtain a reasonable price and typically reject lowball offers. What genuinely distinguishes many REO sales is condition rather than terms: foreclosed properties are frequently vacant, sometimes stripped of appliances or fixtures, and often carry deferred maintenance from a period when nobody was paying for upkeep. They also sell as-is with no seller disclosures, which buyers price. Those are condition and terms issues addressable through ordinary adjustments, not a blanket distress deduction.
Background Knowledge
You need the market value definition's requirements of typical motivation, absence of undue compulsion, and reasonable exposure, and the conditions of sale adjustment. You should also understand how REO sales differ from foreclosure auction sales and short sales, and the practice of analyzing exposure time and marketing method during verification.
Real-World Application
An appraiser verifying an REO comparable learns it was listed with a local broker, exposed 120 days, and sold to an owner-occupant after two price reductions. She uses it with a condition adjustment for the stripped kitchen and deferred maintenance, applying no separate distress deduction, and documents the marketing history.
More Sales Comparison Questions
Excess land differs from surplus land in that excess land:
A paired sales analysis reveals that homes with stainless-steel appliances sell for $2,100 more than identical homes with standard appliances — but only when the homes are priced below $350,000. In the subject’s neighborhood, median sale price is $410,000. What is the appraiser’s obligation regarding the $2,100 appliance adjustment?
GLA differs by 210 sq ft between subject and comparable. Paired sales support $65 per sq ft of living area. The line adjustment is:
Paired sales are drawn from transactions six months apart in a stable market. The time adjustment needed is:
The most appropriate unit of comparison is determined by:
A comparable superior to the subject in every adjusted category should produce an indication that is:
Three sales support $520,000; the borrower's purchase contract is $505,000. May the appraisal conclude above the contract price?
A comparable sold for $300,000 with the seller carrying a loan 2 points below market, a benefit worth $8,000. What is its cash-equivalent price?
Why is a foreclosure sale generally a poor comparable in a stable market?
A comparable sold 8 months ago for $250,000 in a market appreciating 6% per year. What is the time-adjusted price?
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