The subject home backs onto a four-lane arterial road. A comparable sale is on a quiet interior street. Market rents for similar homes are $2,400 per month on interior streets, $2,250 on collector streets and $2,150 backing onto the arterial. Recent sales of rented homes in the area were: Sale 1, $375,000, rented at $2,500 per month; Sale 2, $330,000, rented at $2,200 per month; Sale 3, a sale between relatives, $276,000, rented at $2,300 per month. By how much should the comparable's sale price be reduced for the road influence?
Correct Answer
D) $37,500
The two arm's-length sales both indicate a monthly gross rent multiplier of 150; the sale between relatives is not a market transaction and is excluded. The rent loss between an interior street and the arterial is $2,400 - $2,150 = $250 per month, and $250 x 150 = $37,500. $35,000 includes the family sale in the multiplier, and $22,500 and $15,000 capitalize the wrong pair of rents.
Why This Is the Correct Answer
Option D is correct because the arm's-length sales give multipliers of 150 ($375,000 / $2,500) and 150 ($330,000 / $2,200). The comparable on an interior street earns $250 more per month than a home on the arterial, so it is superior by $250 x 150 = $37,500, which is deducted from its price.
Why the Other Options Are Wrong
Option A: $15,000
Option A, $15,000, compares collector-street and arterial rents ($100 x 150). The comparable is on an interior street, not a collector street, so the loss is $250 and the adjustment is $37,500.
Option B: $22,500
Option B, $22,500, compares interior and collector rents ($150 x 150). The subject is on the arterial, not a collector street, so the correct rent loss is $2,400 - $2,150 = $250 and the adjustment is $37,500.
Option C: $35,000
Option C, $35,000, averages in the sale between relatives ($276,000 / $2,300 = 120), giving 140 and $250 x 140. A sale between relatives does not reflect market behavior, so the multiplier should be 150 and the adjustment $37,500.
Match the rents to the locations
The rent gap must be between the subject's setting and the comparable's setting, and the multiplier only from arm's-length sales.
How to use: Use this when a stem lists several rent levels or a mix of sales for deriving a multiplier.
Exam Tip
Screen derived-multiplier sales for conditions of sale before averaging, and check that the rent pair matches the two properties being compared.
Common Mistakes to Avoid
- -Including a non-arm's-length sale in a derived multiplier
- -Using rents for the wrong pair of locations
- -Adding the adjustment to the superior comparable
Concept Deep Dive
Analysis
The question tests capitalizing a rent loss from an adverse location influence. The candidate must derive a multiplier only from market transactions, choose the rent pair that matches the subject's and the comparable's locations and then apply the multiplier to the monthly loss.
Background Knowledge
A permanent rent difference caused by location, such as traffic exposure, can be capitalized into a sales comparison adjustment. Both the rent difference and the multiplier should come from market data, so non-market transactions are excluded from the multiplier.
Real-World Application
Appraising a home backing onto a busy road, an appraiser finds few paired sales but good rental data. The appraiser measures the rent discount for arterial exposure and capitalizes it with a multiplier from recent arm's-length sales of rented homes.
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?
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