How can a justified cash equivalent (financing) adjustment be estimated?
Correct Answer
A) With discounting formulas or tables, or through paired sales analysis
Cash equivalent adjustments, when justified, can be estimated with discounting formulas or tables or through paired sales analysis, and should whenever possible be supported by direct market evidence.
Why This Is the Correct Answer
Option A is correct because cash equivalent adjustments, when justified, can be estimated using discounting formulas or tables or through paired sales analysis. Discounting converts the below-market loan to its cash equivalent value, while paired sales show how the market actually reacted to similar financing. Whenever possible, the adjustment should be supported by direct market evidence.
Why the Other Options Are Wrong
Option B: By deducting the seller’s full cost of the financing, dollar for dollar
Option B deducts the seller's full cost of the financing dollar for dollar. Cost to the seller is not the same as the price effect in the market; buyers may not pay a full dollar-for-dollar premium, so the adjustment should come from discounting or paired sales evidence.
Option C: By applying a standard percentage to each financed comparable sale
Option C applies a standard percentage to each financed comparable sale. Financing effects vary with loan terms and market conditions, so a uniform percentage is not supported; the adjustment should be estimated by discounting or paired sales analysis.
Option D: By substituting the lender’s appraisal of the property for the price
Option D substitutes the lender's appraisal for the price. The goal is to convert the comparable's actual sale price to its cash equivalent, not to replace market evidence with another party's opinion of value.
Discount It or Pair It
Cash equivalency comes from two tools: discount the loan's payments at market rates, or compare paired sales with and without the special financing.
How to use: Use this when an answer choice offers a shortcut such as a flat percentage or a cost figure for a financing adjustment.
Exam Tip
Choose methods that measure the market's reaction to financing; reject answers based on seller cost, flat percentages or substituted opinions.
Common Mistakes to Avoid
- -Deducting the seller's cost of a buydown dollar for dollar
- -Applying a fixed percentage to all financed sales
- -Ignoring financing terms when they affected the price
Concept Deep Dive
Analysis
This question tests how an appraiser estimates a cash equivalent adjustment when a comparable sold with non-market financing. The adjustment must reflect what the financing was worth in the market. Recognized methods are discounting formulas or tables and paired sales analysis, ideally supported by direct market evidence.
Background Knowledge
Market value assumes cash or terms equivalent to cash. When a sale involves favorable financing, such as a below-market seller loan, the price may include a premium for those terms, and a cash equivalent adjustment estimates what the price would have been on market terms.
Real-World Application
A comparable sold with a seller-carried note at a rate well below market. The appraiser discounts the note's payments at the prevailing market rate to estimate its cash equivalent and checks the result against local sales with and without similar financing.
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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