Under the market value definition used by appraisers, what must the appraiser do with each sale price used as an indicator?
Correct Answer
B) Investigate whether market value conditions were present
Each selling price used as an indicator of market value should be investigated to see whether the stipulated market value conditions were present; if any was absent, the appraiser must judge whether and how much it influenced the price.
Why This Is the Correct Answer
Option B is correct because each selling price an appraiser uses as an indicator of market value should be investigated to determine whether the market value conditions were present at the time of sale. If a condition was missing, the appraiser must judge whether and how much it influenced the price.
Why the Other Options Are Wrong
Option A: Use it as recorded, without any further investigation
Option A says to use the price as recorded without further investigation. A recorded price may reflect a related-party deal, duress or unusual financing, so it cannot be relied on as market value evidence without verification.
Option C: Adjust it by the local inflation rate for the period
Option C says to adjust each price by the local inflation rate. Market conditions adjustments are based on market evidence of price change, and a general inflation adjustment does not address whether the sale met market value conditions.
Option D: Exclude it from the analysis if it was below list price
Option D says to exclude any sale that closed below list price. Selling below list price is common in arm's-length transactions and does not by itself show that market value conditions were absent.
Verify before you rely
A sale price is a witness; question the witness before trusting its testimony about market value.
How to use: Use this phrase when a question asks what to do with sale prices before using them as comparables.
Exam Tip
Answers that accept recorded prices at face value, or reject sales by a single mechanical test, are usually weaker than the answer calling for verification of market value conditions.
Common Mistakes to Avoid
- -Taking public-record prices at face value without verification
- -Assuming a sale below list price is not arm's-length
- -Using a general inflation index instead of market evidence for time adjustments
Concept Deep Dive
Analysis
This question tests the appraiser's duty when using sales as indicators of market value. Market value assumes certain conditions, such as a typically motivated buyer and seller, reasonable exposure and normal financing. A recorded price is only reliable evidence of market value if those conditions were present or their absence is accounted for.
Background Knowledge
Market value definitions stipulate conditions such as buyer and seller acting prudently and knowledgeably, reasonable market exposure, typical motivation and payment in cash or comparable financing terms. Verifying sales with parties to the transaction or other reliable sources helps the appraiser identify non-market influences. Sales that fail these conditions may still be used if their influence can be understood and accounted for.
Real-World Application
A comparable sale looks low for its neighborhood. On calling the listing agent, the appraiser learns it was a sale between relatives with no market exposure, so she either sets it aside or explains how that condition affected the price before giving it any weight.
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?
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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?
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