Under Fannie Mae's Selling Guide, builders in a new-home segment routinely pay large buyer closing-cost credits. An appraiser argues that because nearly every sale in the segment includes such credits, the comparables need no concession adjustment. How does the Guide treat this reasoning?
Correct Answer
C) It rejects it, because the need to adjust does not depend on typicality
Fannie Mae states that the need for, and amount of, negative concession adjustments is not based on how typical the concessions are in a segment; large concessions can be typical and still produce prices above the value of the real estate. So typicality is not a reason to skip the adjustment. The Guide also rejects strict dollar-for-dollar deductions of the seller's cost, requiring the market's reaction instead.
Why This Is the Correct Answer
Option C is correct because Fannie Mae states that the need for concession adjustments is not based on how typical the concessions are in a segment. Large concessions can be common and still produce sale prices above the value of the real estate, so the appraiser must measure and deduct their price effect.
Why the Other Options Are Wrong
Option A: It accepts it, because typical concessions are already part of market value
Option A accepts the argument on the theory that typical concessions are part of market value. Fannie Mae holds the opposite: typical concessions can still inflate prices above the value of the real estate, so they must be adjusted for.
Option B: It accepts it, provided the credits stay within the segment's usual range
Option B accepts the argument if the credits stay within the segment's usual range. Staying within the usual range is just another way of saying the credits are typical, and typicality does not remove the need to adjust.
Option D: It rejects it, and requires deducting each credit's full dollar cost
Option D rejects the argument but then requires deducting each credit's full dollar cost. Fannie Mae calls strict dollar-for-dollar deductions of the seller's cost inappropriate; the adjustment should approximate the market's reaction to the concession.
Common is not clean
A concession that everyone gives still pads the price. Common does not mean the price is clean, so measure the padding and take it out.
How to use: Use this when an answer choice suggests skipping a concession adjustment because concessions are typical.
Exam Tip
For Fannie Mae concession questions, remember the two parts: adjust even when typical, and size the deduction to the market reaction rather than the seller's cost.
Common Mistakes to Avoid
- -Skipping adjustments because concessions are common locally
- -Deducting the seller's full cost instead of the market reaction
Concept Deep Dive
Analysis
This question tests whether a concession's being common in a segment excuses the adjustment. Fannie Mae says it does not: typical concessions can still lift prices above the value of the real estate. It also tests the second half of the rule, that the adjustment reflects the market's reaction rather than the seller's cost.
Background Knowledge
Market value assumes a price unaffected by special financing or sales concessions. In segments where builders or sellers commonly give credits, recorded prices may embed those credits. Fannie Mae requires appraisers to adjust comparables for the market's price reaction to concessions whether or not they are common.
Real-World Application
In a master-planned community, almost every builder sale includes a closing-cost credit. The appraiser compares resales without credits to builder sales with them, estimates the price lift the credits cause, and deducts that amount from each builder comparable.
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