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?
Correct Answer
C) No adjustment, because a short lease at market rent left the price unaffected
A lease changes the price of a property through the difference between contract rent and market rent over the remaining term. Here the contract rent equals market rent and only three months remained, so the leased fee sold for what the fee simple would have brought and no property rights adjustment is needed. A leased fee sale needs an adjustment when the lease rent is above or below market, not merely because a lease exists. The remaining rent is a fair return for a buyer who waits three months for possession, and the bank loan at the market rate is third-party financing that needs no adjustment.
Why This Is the Correct Answer
Option C is correct because the $2,100 lease rent equals market rent and the lease had only three months to run. With no difference between contract and market rent, the leased fee interest is worth what the fee simple is worth, so the sale price needs no property rights adjustment.
Why the Other Options Are Wrong
Option A: An upward adjustment, because a leased fee interest was conveyed
Option A adds to the price because a leased fee interest was conveyed. An upward adjustment is called for when a below-market lease depressed the price; a lease at market rent does not depress it.
Option B: A downward adjustment, because the buyer received rental income at closing
Option B deducts from the price because the buyer received rental income at closing. Market rent compensates the buyer for the months without possession, so the income is not a premium in the price.
Option D: A downward adjustment of $6,300 for the rent left on the lease
Option D deducts $6,300, three months of rent at $2,100. That rent is what the house would earn at market anyway while the buyer waits for possession, so it does not raise the price above fee simple value.
Rent gap times time
A lease moves price only through the gap between contract and market rent, over the time left on the lease.
How to use: Use it whenever a comparable sold subject to a lease and the subject is appraised in fee simple.
Exam Tip
Check two facts before adjusting a leased comparable: is the rent above or below market, and how long does the lease run? If the rent is at market and the term is short, expect little or no adjustment.
Common Mistakes to Avoid
- -Adjusting every leased comparable because a leased fee was sold
- -Deducting the remaining lease rent from the price
- -Treating a third-party loan at market terms as a financing concession
Concept Deep Dive
Analysis
The question tests whether a sale of a leased property needs a property rights adjustment. The amount depends on the gap between contract and market rent and on the remaining term; with rent at market and three months left, the gap is zero.
Background Knowledge
A lease splits the bundle of rights into the leased fee held by the landlord and the leasehold held by the tenant. When contract rent equals market rent, the leasehold has little or no value and the leased fee is worth about the same as the fee simple; the further the rent is from market and the longer the term, the larger the adjustment.
Real-World Application
An appraiser finds that a comparable sold to an investor with a tenant in place at market rent and a lease ending soon after closing. The appraiser verifies the rent against current rentals and makes no property rights adjustment, explaining why 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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