Why does a sale between family members warrant additional scrutiny before it is used as evidence of market pricing?
Correct Answer
B) The price may not reflect open market terms
A family relationship can introduce gift elements or atypical financing, so the price and transaction circumstances require verification before treating it as market evidence. It does not prove that the price is below market, that the sale is unrecorded or that the parties cannot be contacted. Acceptance, adjustment or exclusion depends on supported analysis rather than relationship alone.
Why This Is the Correct Answer
Option B is correct because a family relationship can bring gift elements or atypical financing into the deal, so the price may not reflect open market terms. Sales between relatives are usually not open-market transactions and tend to occur at prices lower than would otherwise be expected. The appraiser verifies the circumstances before deciding whether to use, adjust or exclude the sale.
Why the Other Options Are Wrong
Option A: Such transactions are not legally recorded
Option A, saying such transactions are not legally recorded, is not true; family sales are typically recorded like other conveyances. The concern is whether the price reflects market terms.
Option C: Family sales are barred by law from use as comparables
Option C, saying family sales are barred by law from use as comparables, overstates the issue. After verification and supported analysis, an appraiser may accept, adjust or exclude such a sale.
Option D: The parties cannot be contacted for verification
Option D, saying the parties cannot be contacted for verification, is not a reason; related parties can often be contacted. Scrutiny is needed because the price may not reflect open market terms.
Family ties may tilt price
When buyer and seller are family, the relationship may tilt the price away from what the open market would pay.
How to use: Use this to recall why a related-party sale needs verification before use as a comparable.
Exam Tip
Prefer answers about whether the price reflects market terms over answers claiming legal bans or recording problems.
Common Mistakes to Avoid
- -Assuming all family sales are legally barred as comparables
- -Using a related-party sale without verifying its terms
- -Assuming the relationship alone proves the price is below market
Concept Deep Dive
Analysis
This question tests why related-party sales need verification before use as market evidence. A family relationship can introduce gift elements or atypical terms, so the price may not reflect open market conditions. The relationship calls for scrutiny, not automatic exclusion.
Background Knowledge
Market value assumes a transaction between typically motivated, unrelated parties acting at arm's length. Related-party sales may include motivations or concessions that depart from those conditions, so appraisers verify the details before relying on them.
Real-World Application
An appraiser finds a nearby sale well below other sales and learns the seller was the buyer's parent. After confirming that part of the price was a gift, the appraiser excludes the sale as non-arm's-length and documents the reason.
More Statistics Questions
Sale prices are $270,000, $290,000, $300,000, $310,000, $330,000. Treat the listed observations as the complete population and divide by n when computing the standard deviation. Report to the nearest dollar.
A sales sampling frame systematically excludes a relevant part of the target market. What is the principal risk?
An appraiser estimates a market-wide price trend using only sales data from one brokerage that specializes in luxury homes, without checking how other segments are represented. What is the principal concern?
Compared with analyzing one matched sale pair for one feature, what can a suitably specified multiple regression do?
The base-period median sale price is $400,000 and the current-period median is $460,000. Compute the price relative defined as current ÷ base, as a decimal to three places.
The assessment-to-sale ratios are 0.8, 0.85, 0.9, 0.92, 0.95, 0.98, 1.02, 1.05, 1.08, 1.1, 1.15, 1.2. Calculate COD as [average absolute deviation from the median ÷ median]×100. For even n, average the two middle ratios. Report the COD as a percentage to two decimals.
Assessment-to-sale ratios are 0.94, 0.96, 0.98, 1, 1.01. Compute the arithmetic mean. Report as a decimal ratio to three places.
Market data show a first quartile sale price of $405,000 and a third quartile sale price of $495,000. What is the interquartile range, to the nearest dollar?
Assessment-to-sale ratios are 0.96, 0.98, 0.99, 1.01. Compute the arithmetic mean. Report as a decimal ratio to three places.
Given first quartile $400,000, median $440,000 and third quartile $500,000, compute the trimean (Q1+2×median+Q3)/4. Report to the nearest dollar.
People Also Study
Real Estate Market
13.6% of exam
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
Previous Question
Sale prices are $200,000, $220,000, $220,000, $220,000, $230,000, $230,000, $250,000, $270,000. Treat the listed observations as the complete population and divide by n when computing the standard deviation. Report to the nearest dollar.
Next Question
An appraiser selects the comparables that best match the subject rather than drawing sales at random. What follows?