In a suburban neighborhood where nearly all homes are owner-occupied, the subject property has a finished room over the garage with a separate entrance, included in its gross living area. None of the comparable sales has such a room. A local business has offered to rent the room as an office for $500 per month. Rented homes in the area sell for about 145 times their monthly rent. Paired sales show buyers pay no more for homes with such a room than for homes of the same size without one. What is the best treatment of the separate-entrance room?
Correct Answer
A) Make no separate adjustment for the room
Adjustments must reflect the market's reaction to a difference. Paired sales here show buyers pay no more for a home with a separate-entrance room than for a home of the same size without one, and the room's area is already counted in gross living area, so no separate adjustment applies. A single office-rent offer is not a market rent difference for similar homes, and capitalizing it, using cost, or averaging a rent figure with the sales evidence would add value buyers do not pay.
Why This Is the Correct Answer
Option A is correct because paired sales show buyers pay nothing extra for a separate-entrance room beyond the living area it adds, which the grid already counts. Adjustments must reflect the actions of typical purchasers, so this direct sales evidence controls and no separate adjustment is made.
Why the Other Options Are Wrong
Option B: Capitalize the $500 office rent at 145
Option B capitalizes the $500 office offer at 145, adding $72,500. One business's offer is not evidence that similar homes rent for more with such a room, and the paired sales show buyers pay no premium for it.
Option C: Adjust by the room's depreciated cost
Option C adjusts by depreciated cost. The paired sales show buyers pay nothing extra for the room's separate entrance, so a cost figure would overstate the market's reaction.
Option D: Average the rent-based and paired-sale figures
Option D averages a rent-based figure with the paired-sale result. Blending in an estimate that does not reflect typical buyers moves the adjustment away from the market evidence.
Sales evidence beats a rent offer
When sales show what buyers actually pay for a feature, that answer stands; a one-off rent offer cannot override it.
How to use: Use this when a stem pairs a rent-based figure with paired-sale evidence for the same feature.
Exam Tip
Check that a rent difference comes from market leases of similar homes; when paired sales show no premium, make no separate adjustment.
Common Mistakes to Avoid
- -Capitalizing rent potential that typical buyers do not pay for
- -Counting a room's value twice, in living area and as a separate item
- -Averaging an unsupported figure with market evidence
Concept Deep Dive
Analysis
The question tests weighing a rent-based figure against direct sales evidence. Capitalizing a rent difference is sound only when market leases show a lasting rent difference for the feature; here a single office offer is not that evidence, and paired sales show directly that buyers pay no premium.
Background Knowledge
Capitalization of a rent difference requires a market-supported rent difference and multiplier. When paired sales measure the market's reaction to a feature directly, that evidence is the basis for the adjustment, and an isolated offer for a non-residential use is not market rent for the property type.
Real-World Application
A homeowner points to an offer to rent a room over the garage as an office. The appraiser notes that the neighborhood is almost entirely owner-occupied and that paired sales show no premium, and makes no separate adjustment beyond gross living area.
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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Previous Question
A recent sale of a two-story home closed at $378,000. Its listing reports 2,700 square feet of finished area, which includes 900 square feet of finished basement; its above-grade GLA is 1,800 square feet. The subject has 2,100 square feet of above-grade GLA and no basement. Market data show buyers here pay far less for finished basement space than for above-grade living area. The appraiser divides the price by 2,700 and applies the resulting $140 per square foot to the subject's GLA. What is wrong with this analysis?
Next Question
A comparable is twice the size of the subject. Even after converting to price per square foot, what is the concern?