Comparable 1, a two-story home, sold for $465,000. The buyer assumed the seller's loan, which had a $260,000 balance at 4.5% interest with 180 monthly payments remaining, when new loans carried 6.5%. The buyer's payment is $276 a month less than on a new $260,000 loan at the market rate. The seller had originally borrowed $320,000. Paired sales in the subdivision over the past year show that homes sold with assumable low-rate loans of similar balance and remaining term brought about $12,000 more than similar homes bought with new market-rate loans. What amount should the appraiser deduct from Comparable 1's price for the financing?
Correct Answer
A) $12,000
The financing adjustment should equal the amount by which the assumed loan raised the price, and the paired sales measure that directly at about $12,000. The payment savings figures are what the loan is worth on paper: $276 a month for 180 months is worth about $31,700 discounted at the 6.5% market rate, but buyers do not pay that much for the loan, in part because many sell or refinance long before it ends. Discounting at the loan's own 4.5% rate ($36,100) is a further error, and the $60,000 paid down from the seller's original $320,000 loan plays no part.
Why This Is the Correct Answer
Option A is correct because paired sales show homes with assumable low-rate loans sold for about $12,000 more than similar homes bought with market-rate loans. A cash equivalent adjustment should come from direct market evidence when it exists, so the appraiser deducts $12,000, giving $465,000 − $12,000 = $453,000.
Why the Other Options Are Wrong
Option B: $31,700
Option B, $31,700, is the present value of $276 a month for 180 months at the 6.5% market rate. That is the loan's theoretical worth to a buyer who keeps it to the end; the paired sales show buyers paid about $12,000 for it.
Option C: $36,100
Option C, $36,100, discounts the same $276 a month at the loan's own 4.5% rate. Using the contract rate overstates the present value, and any computed figure gives way to the $12,000 the market paid.
Option D: $60,000
Option D, $60,000, deducts the principal paid down on the seller's loan: $320,000 − $260,000. The original loan amount plays no part in the financing adjustment; the paired sales measure the market's reaction at $12,000.
Market price, not paper savings
The adjustment is what buyers actually paid for the loan, which paired sales show; the payment math only estimates it.
How to use: Use it when a comparable's buyer assumed a low-rate loan or received seller financing and market evidence is available.
Exam Tip
When a question gives both a payment calculation and paired sales measuring the price effect, the paired sales figure is the adjustment. Fannie Mae's Selling Guide also asks for adjustments that approximate the market's reaction rather than dollar-for-dollar cost.
Common Mistakes to Avoid
- -Deducting the full present value of the payment savings
- -Discounting at the loan's contract rate instead of the market rate
- -Treating an assumed seller loan as third-party financing that needs no adjustment
Concept Deep Dive
Analysis
The question tests how to measure a financing adjustment for an assumed below-market loan. Several figures can be computed from the loan terms, but the stem also gives paired sales that measure how much buyers actually paid for the loan, and that market reaction is the adjustment.
Background Knowledge
Below-market financing can raise a sale price, so the comparable must be adjusted to a cash equivalent basis. The adjustment can be estimated by discounting the payment difference or by comparing sales with and without such financing; market comparison is preferred because buyers seldom pay the full computed value of the loan.
Real-World Application
In a market where many sellers have low-rate loans, an appraiser compares recent sales with assumed loans to similar sales with new financing and finds a modest, consistent premium. The appraiser adjusts each assumption sale by that premium and notes the paired sales in the report.
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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