Two percentage adjustments, +5% and −3%, apply to the same comparable. Why is the additive method (net +2%) generally preferred to multiplying the factors?
Correct Answer
D) Multiplying assumes the factors are related, which is rarely verified
A multiplicative adjustment implies the factors are causally related and correlated, and it should not be used unless that correlation is verified, which is not often the case. The additive method simply sums the percentages. Either method still needs market support.
Why This Is the Correct Answer
Option D is correct because a multiplicative adjustment implies the factors are causally related and correlated with each other. Multiplicative percentage adjustments should not be used unless that correlation can be verified, which is not often the case. The additive method simply sums the percentages, here +5% and −3% for a net +2%, and still needs market support.
Why the Other Options Are Wrong
Option A: Multiplying produces a larger adjustment than adding the factors
Option A says multiplying produces a larger adjustment than adding. That is not the reason, and in this example it is not even true: 1.05 × 0.97 = 1.0185, a net +1.85%, which is smaller than the additive +2%.
Option B: Additive percentages are required by Fannie Mae for each adjustment
Option B says Fannie Mae requires additive percentages for each adjustment. The preference for the additive method rests on the unverified correlation that multiplication assumes, not on a lender requirement.
Option C: Additive percentages remove the need for market support
Option C says additive percentages remove the need for market support. That is wrong because both additive and multiplicative adjustments still need market support; the method of combining them does not replace evidence.
Multiply means linked
Multiplying factors implies they are linked; unless you can prove the link, add them instead.
How to use: Use this when deciding how to combine several percentage adjustments.
Exam Tip
When asked why additive percentages are preferred, look for the answer about multiplication assuming correlated factors that are seldom verified.
Common Mistakes to Avoid
- -Assuming multiplication gives a larger adjustment than adding
- -Believing the additive method removes the need for market support
- -Citing a lender rule as the reason for the additive method
Concept Deep Dive
Analysis
This question tests the difference between additive and multiplicative percentage adjustments. Multiplying factors carries a hidden assumption that the factors are causally related and correlated. Reason through why that assumption needs verification before multiplication is used.
Background Knowledge
When several percentage adjustments apply, they can be summed (additive) or applied in sequence by multiplying factors (multiplicative). Multiplication compounds one adjustment on top of another, which only makes sense if the factors interact. Because such correlation is rarely proven, the additive method is generally preferred.
Real-World Application
An appraiser has a +5% location adjustment and a −3% condition adjustment for a comparable. With no evidence that location and condition interact in this market, the appraiser sums them to a net +2% rather than multiplying.
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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