A sale occurred through foreclosure in an otherwise stable market. What is the sound analytical response?
Correct Answer
C) Investigate the transaction conditions and relevance before deciding whether to use it
Foreclosure conditions require investigation of motivation, exposure, terms and property condition. The label alone does not prove duress affected the price or make the sale unusable. A verified transaction may be relevant, including in a stable market, if its use and any adjustments are supported.
Why This Is the Correct Answer
Option C is correct because a threshold question in comparability is whether a sale meets the conditions of a market value transaction. The appraiser should investigate motivation, exposure, terms and property condition. A verified foreclosure sale may still be relevant, even in a stable market, if its use and any adjustments are supported.
Why the Other Options Are Wrong
Option A: Assume the foreclosure price reflects a standard distress discount and adjust upward
Option A, assuming a standard distress discount and adjusting upward, is wrong because the price effect of a foreclosure must be found through investigation, not assumed. The sale may or may not reflect a discount.
Option B: Exclude it because the market is stable and foreclosures are atypical
Option B, excluding it because the market is stable and foreclosures are atypical, is wrong because the foreclosure label alone does not make a sale unusable. After investigation, a sale may prove relevant even in a stable market.
Option D: Assume the foreclosed property is beyond economic repair
Option D, assuming the foreclosed property is beyond economic repair, is wrong because a foreclosure says nothing definite about physical condition. Condition must be verified like any other characteristic.
Label is not a verdict
A foreclosure label tells you to investigate, not what you will find.
How to use: Use this when an answer choice makes an automatic decision about a distressed sale.
Exam Tip
Prefer choices that investigate a sale's conditions over choices that assume a discount, exclusion or condition from a label alone.
Common Mistakes to Avoid
- -Assuming every foreclosure sold at a discount
- -Excluding a sale based only on its foreclosure status
- -Assuming a foreclosed property is in poor condition without verifying
Concept Deep Dive
Analysis
This question tests how to treat a foreclosure sale. The foreclosure label alone does not prove the price was affected by duress, nor does it make the sale unusable. The appraiser investigates the conditions of the sale and its relevance before deciding whether and how to use it.
Background Knowledge
Market value assumes typical motivation, reasonable exposure and normal terms. Sales that may not meet these conditions, such as foreclosures, call for investigation of how the sale occurred and whether it affected price. Depending on what is found, the sale may be used, adjusted with support or given less weight.
Real-World Application
A comparable in a stable neighborhood was sold by a lender after foreclosure. The appraiser learns it was listed for several weeks on the open market, received multiple offers and was in average condition. The appraiser decides it reflects market conditions and uses it with supported adjustments.
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?
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