A valuer discovers after completing a valuation that one of the comparable sales used was between related parties at below-market terms. According to API standards, what should the valuer do?

Q: What is the correct answer to: A valuer discovers after completing a valuation that one of the comparable sales used was between related parties at below-market terms. According to API standards, what should the valuer do?

The correct answer is Exclude the sale and recalculate the valuation. Option B is correct because API valuation standards explicitly require the exclusion of non-arm's length transactions from comparable sales analysis. Related party sales don't represent genuine market conditions and including them would compromise the valuation's accuracy and professional integrity. The API emphasizes that valuations must be based on evidence of actual market value, which can only be demonstrated through independent, arm's length transactions. Recalculating without the compromised comparable ensures the valuation meets professional standards and provides reliable market value evidence.

Q: What background knowledge is needed for this Valuation question?

The Australian Property Institute (API) sets professional valuation standards requiring that market value assessments be based on arm's length transactions between independent parties. Related party transactions include sales between family members, business associates, or entities with common ownership. These sales often involve non-commercial considerations that distort pricing. The concept of 'arm's length' means both parties act independently, with full knowledge, and without compulsion. API standards mandate that valuers exclude any sales that don't meet these criteria to ensure valuations reflect genuine market conditions and maintain professional credibility.

Q: What is a good way to remember the answer to this Valuation question?

Remember CLEAN: Comparable sales must be Clean (no related parties), Legitimate (arm's length), Evidence-based (market transactions), Accurate (true market conditions), and Neutral (independent parties). If a sale isn't CLEAN, it must be excluded completely. When you see questions about problematic comparable sales, think CLEAN. If any element is missing (especially the 'Clean' aspect regarding related parties), the answer will involve exclusion rather than adjustment or notation.

Q: What exam tip applies to this Valuation question?

For comparable sales questions involving related parties or non-market conditions, the API standard is always exclusion, never adjustment. Look for the option that removes the problematic sale entirely rather than trying to fix or note it.

Q: How does this Valuation concept apply in Australian real estate practice?

A valuer is assessing a suburban home and discovers one of their comparable sales was between siblings at $50,000 below similar properties. The family needed a quick sale for estate settlement and the buyer helped by purchasing below market value. Despite the sale being recent and in the same street, the valuer must exclude this transaction entirely and source additional arm's length comparables. Using this sale, even with adjustments, would violate API standards and could expose the valuer to professional liability if the valuation is challenged.

Question

ValuationAppraisal StandardsHARD

A valuer discovers after completing a valuation that one of the comparable sales used was between related parties at below-market terms. According to API standards, what should the valuer do?

Answer Options

A

Adjust the comparable sale price upward to market levels

B

Exclude the sale and recalculate the valuation

C

Note the relationship but keep the sale in the analysis

D

Apply a discount factor to account for the relationship