When reconciling the adjusted prices of several comparables, why should an appraiser generally avoid a simple arithmetic average?
Correct Answer
A) Because it presumes each adjusted price is equally valid
A simple average presumes the adjusted sale prices have equal validity. Greater weight should go to the most comparable sales, judged by the number and gross amount of adjustments. USPAP does not mandate any formula, including the median.
Why This Is the Correct Answer
Option A is correct because a simple arithmetic average presumes each adjusted price is equally valid. Greater weight generally belongs to the most comparable sales, judged by factors such as the number and gross amount of adjustments.
Why the Other Options Are Wrong
Option B: Because the average must equal the lowest adjusted price
Option B says the average must equal the lowest adjusted price. An average lies within the range of the values and equals the lowest only if all values are the same, so this is mathematically incorrect.
Option C: Because averaging is prohibited by USPAP
Option C says averaging is prohibited by USPAP. USPAP does not prohibit averaging or mandate any particular formula; it requires a credible, supported reconciliation.
Option D: Because the median must be used instead
Option D says the median must be used instead. No standard requires the median, and like a simple average it does not by itself reflect differences in the reliability of each sale.
Average treats all sales equal
A simple average acts as if each comparable is equally good, which is rarely true.
How to use: Use this when asked why simple averaging is avoided in reconciliation.
Exam Tip
Answers that claim USPAP bans or requires a specific formula are usually wrong; the issue is whether the weighting is supported.
Common Mistakes to Avoid
- -Averaging adjusted prices without considering reliability
- -Believing USPAP prohibits averaging
- -Believing the median is required
Concept Deep Dive
Analysis
This question tests why simple averaging is generally avoided in reconciliation. A simple average gives each adjusted sale price equal influence, which assumes they are equally valid, when in practice some comparables are more similar and better supported than others.
Background Knowledge
Reconciliation in the sales comparison approach weighs each adjusted sale price by its reliability and similarity to the subject. Sales needing fewer and smaller adjustments are typically given more weight. The appraiser explains which sales received the most weight and why.
Real-World Application
An appraiser has three adjusted prices, one from a sale needing only minor adjustments and two needing large ones. Rather than averaging, the appraiser places most weight on the least-adjusted sale and explains this in the report.
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?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam