Under Fannie Mae's Selling Guide, a comparable went under contract 7 months before the effective date and closed 5 months before it at $440,000. Supported evidence shows a steady simple (non-compounded) increase of 0.5% per month throughout the past year, or 6% over 12 months. What time-adjusted price is indicated?
Correct Answer
C) $455,400
Fannie Mae measures market change from the comparable's contract date through the effective date, here 7 months. At 0.5% per month that is 3.5%, so $440,000 x 1.035 = $455,400. Using the 5 months from closing gives $451,000, adjusting downward instead of upward gives $424,600, and applying the full 12-month 6% trend gives $466,400.
Why This Is the Correct Answer
Option C is correct because the comparable's contract date is 7 months before the effective date, and 7 x 0.5% = 3.5%. Applying that to the $440,000 price gives $440,000 x 1.035 = $455,400.
Why the Other Options Are Wrong
Option A: $424,600
Option A, $424,600, adjusts in the wrong direction: 440,000 x (1 − 0.035) = 424,600. Prices have been rising, so the 3.5% change over the 7 months since contract is added, giving $455,400.
Option B: $451,000
Option B, $451,000, measures from the closing date: 5 x 0.5% = 2.5% and 440,000 x 1.025 = 451,000. The guidance runs from the contract date, so 7 months and $455,400 are correct.
Option D: $466,400
Option D, $466,400, applies the whole 12-month 6% trend: 440,000 x 1.06 = 466,400. The comparable's own interval is 7 months, so only 3.5% applies, giving $455,400.
Price is set at contract
The deal's price froze on the contract date, so the market has been moving away from it since then. Count months from contract, not from closing.
How to use: Use this whenever a question gives both a contract date and a closing date for a comparable.
Exam Tip
Write down both dates and circle the contract date before calculating. Check whether the market is rising or falling to set the direction of the adjustment.
Common Mistakes to Avoid
- -Counting months from the closing date
- -Applying the annual trend to a comparable that is less than a year old
- -Adjusting downward in a rising market
Concept Deep Dive
Analysis
Two steps are needed: choose the correct interval, then apply the supported rate. The interval runs from the contract date, when price was agreed, to the effective date, so it is 7 months, not the 5 months since closing. With a simple 0.5% monthly rate, the adjustment is 3.5% upward in a rising market.
Background Knowledge
Fannie Mae requires appraisers to analyze market change from each comparable's contract date through the effective date, and to report both contract and settlement dates. The contract date matters because that is when the buyer and seller set the price under the market conditions of that time.
Real-World Application
A comparable in a fast-rising market took two months to close after its contract was signed. The appraiser reports it as c03 and s05, then applies the supported monthly rate from March to the effective date so the adjustment reflects the full period since the price was agreed.
More Market Questions
In market area analysis, what characteristic distinguishes a district from a neighborhood?
Under USPAP Standards Rule 1-3(a), which item must an appraiser identify and analyze when necessary for credible results in a market value assignment?
How does the Fannie Mae Selling Guide define a neighborhood?
Several homes in a neighborhood are vacant and boarded up. Which market force does Fannie Mae classify this as?
Infrastructure investment such as a new interchange typically affects nearby land by:
A city raises property tax rates and tightens building regulations. Which market force does Fannie Mae classify these as?
An appraiser believes, without market evidence, that a nearby group home lowers values. What does Fannie Mae require?
Which three categories are used to report the supply of properties in a Fannie Mae neighborhood section?
An appraiser is asked for a retrospective value opinion as of three years ago. When must the appraiser meet the Competency Rule?
Can mixed land uses in a residential neighborhood ever enhance home values, according to Fannie Mae?
People Also Study
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
In a local market, the number of homes for sale exceeds the number buyers want at current prices. What tends to happen?
Next Question
A seller financed a comparable sale by carrying back a note at a stated interest rate well below the market rate for similar notes at the time of sale. How should the appraiser treat this sale price to reach a cash-equivalent indication?