A sale involved financing with an above-market interest rate. No evidence of its effect on the sale price is provided. What can the appraiser conclude?
Correct Answer
D) The actual price effect must be investigated before determining an adjustment
The loan’s interest rate alone does not establish its actual effect on the property’s transaction price. Verify and analyze the financing and market response before determining cash equivalency; do not automatically add a calculated financial benefit to a sale price.
Why This Is the Correct Answer
Option D is correct because when a loan's stated rate differs from the market rate, a financing adjustment may be needed, but the amount depends on the actual effect on price. With no evidence of that effect, the appraiser must verify and analyze the financing and the market response before determining an adjustment.
Why the Other Options Are Wrong
Option A: A fixed upward adjustment is required for the financing
Option A, a fixed upward adjustment, has the wrong logic. Unfavorable financing for the buyer does not justify a preset adjustment; any adjustment must be supported by the actual price effect.
Option B: The interest-rate spread equals the difference in the property’s sale price
Option B, that the interest-rate spread equals the difference in sale price, confuses a loan term with a price effect. A rate difference does not translate dollar for dollar into a price difference without market analysis.
Option C: The sale must be discarded from the comparable set
Option C, that the sale must be discarded, overreacts. A sale with unusual financing can still be used if its terms are verified and the price effect is analyzed and adjusted as supported.
Rate isn't price
An unusual interest rate tells you to investigate; only market evidence tells you the price effect.
How to use: Use this on any question about creative or non-market financing in a comparable.
Exam Tip
When the stem says no evidence of price effect is available, choose the answer that calls for investigation rather than a fixed adjustment or exclusion.
Common Mistakes to Avoid
- -Applying a preset adjustment for unusual financing
- -Equating the loan rate difference with a price difference
- -Discarding any sale with non-market financing
Concept Deep Dive
Analysis
This question tests cash equivalency analysis for non-market financing. A loan's rate that differs from the market can affect the sale price, but the rate alone does not show how much. The appraiser must investigate the actual price effect before deciding on any adjustment.
Background Knowledge
Cash equivalency adjusts a sale price to what it would have been with typical market financing. The adjustment should reflect how the market actually responded to the financing, not a mechanical calculation of the loan's financial benefit or cost.
Real-World Application
A comparable sold with seller financing at a rate above market. The appraiser interviews the parties and compares similar sales to see whether the price was affected before deciding on any cash-equivalency adjustment.
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?
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Previous Question
The subject, a three-bedroom ranch, is appraised in fee simple. Comparable 2, a similar ranch on the next street, sold to an investor while rented under a lease at $2,100 a month, which agents and rental listings show is market rent for such homes. The lease ended three months after closing. The investor paid 25% down and borrowed the rest from a bank at the market interest rate. What adjustment for property rights conveyed does Comparable 2 need?
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The real estate agent in the subject transaction supplies the appraiser with comparable sales data. What does Fannie Mae require?