chapter 6 market conditions

Question 1

the 7 adjustments made in the sales comparison approach

Answer 1

Property rights conveyed
Financing terms/Cash equivalency
Conditions of sale
Expenditures made immediately after purchase
Market conditions
Location
Physical characteristics

Question 2

An element of comparison in the Sales Comparison Approach; comparable properties can be adjusted for differences in the motivations of either the buyer or a seller in a transaction

Answer 2

conditions of a sale

Question 3

A transaction between unrelated parties who are each acting in his or her own best interest

Answer 3

arms length transaction

Question 4

An element of comparison in the Sales Comparison Approach; comparable properties can be adjusted for any additional investment (e.g., curing deferred maintenance) that the buyer needed to make immediately after purchase for the properties to have similar utility to the subject property being valued.

Answer 4

expenditures made after a purchase

Question 5

An adjustment for expenditures made immediately after purchase might also be required in situations where the anticipated expenditures were for:

Answer 5

Curing deferred maintenance
Demolition and removal of any or all of the improvements
Costs for filling and grading of the site
Costs for attempting to change the zoning
Costs for remediation of actual or perceived environmental contamination
Costs for running utilities to a site
Costs for gaining access to a site, such as curb cuts

Question 6

This has commonly been referred to by appraisers as a “time” adjustment.

Answer 6

market conditions

Question 7

An element of comparison in the Sales Comparison Approach; comparable properties can be adjusted for differences in the points in the real estate cycle at which the transactions occur. Sometimes called a time adjustment because the differences in dates of sale are often compared, although that usage can be misleading because property values do not change merely as the result of the passage of time

Answer 7

Market Conditions

Question 8

Your research of a comparable sale reveals that the purchase price was $200,000, but the purchaser realized the property needed extensive repairs to the mechanical systems. The estimated cost to cure the problems was $15,000 but the actual costs turned out to be $20,000. What should you do?
Adjust the property sale price by $20,000
Adjust the property sale price by $15,000
Make no adjustment
Adjust the property sale price by $5,000, the amount of the excess cost

Answer 8

Adjust the property sale price by $15,000

the estimated cost to the purchaser at the time of the sale

Question 9

The definition of arms-length is a transaction between \_\_\_\_\_\_\_\_\_\_\_ parties acting in their own \_\_\_\_\_\_\_ interests.
Dispassionate, best
Affiliated, particular
Unrelated, best
Disconnected, biased

Answer 9

unrelated, best

Question 10

Market condition adjustments are also commonly known as:
Time adjustments
Clock adjustments
Conditions of sale adjustments
Value-of-duration adjustments

Answer 10

time adjustments

Question 11

Changes in a real estate market may be:

Answer 11

Cyclical - rising and falling with the fates of the local industries (aerospace, defense, etc.) that go through big hiring phases followed by layoffs
One-time only - related to an event, either good or bad, which is unlikely to reoccur
Seasonal - in a resort town, real estate purchases may occur within a narrow three month window of opportunity
Exponential - continuously increasing at a rapid rate, such as was experienced between 2002 and 2006 in the fast-growing parts of California, Nevada or Florida
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Question 12

Market areas typically go through four distinct phases:

Answer 12

Growth - Lots of new construction and development activity, speedy sales, increasing prices, a “seller’s market”
Stability - Slowing down of new construction, prices remain steady and high, excitement is cooling
Decline - Prices start to fall, new construction halts, more existing homes flood the market creating a “buyer’s market”
Revitalization - Prices have bottomed, sales stagnate, and hopefully the area receives new interest and renewal

Question 13

typically based on trends in population growth and income levels

Answer 13

market cycle long term

Question 14

based on the availability of mortgages and the prevailing interest rate

Answer 14

market cycle short term

Question 15

Long-term market cycles are:
Based on the prevailing interest rate
Always rapidly fluctuating and notoriously unstable
Caused by national or international conditions
Of little interest to an appraiser

Answer 15

Caused by national or international conditions

Question 16

Changes in a market cycle may be cyclical, one-time-only, \_\_\_\_\_\_\_\_\_\_\_ and \_\_\_\_\_\_\_\_\_\_\_\_.
Recurring, exponential
Repeating, inverse
Seasonal, exponential
Seasonal, geometric

Answer 16

seasonal, exponential

Question 17

The life cycle of a market area typically includes the stages of growth, \_\_\_\_\_\_\_\_\_\_\_\_\_, decline and \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.
stability, destruction
plateau, stagnation
urbanization, rehabilitation
stability, revitalization

Answer 17

stability, revitalization

Question 18

Here is a list of some factors that can help you analyze changes in market conditions:

Answer 18

Changes in the area's demographics
Changes in typical exposure time on the market
Foreclosure rates in the area
Increases or decreases in residential rents
Instances of seller financing
Nearby development
New construction available for sale
Quantity of offers received by sellers
Relationships between asking prices and closing prices
Terms of available financing
Trends in listing prices
Volume of properties available for sale
Zoning changes

Question 19

Market condition adjustments (and location adjustments) are generally calculated on a

Answer 19

percentage basis

Question 20

Your subject is located in an area where property values have been rising consistently at 1% a month for the past fourteen months. You have located a comparable that is practically identical to your subject. It sold four months ago for $200,000. How much should you adjust the price?

Answer 20

$208,000.

The first month, the comparable increased $2,000 in value ($200,000 x .01 = $2,000), making it worth $202,000.

The second month, it increased $202,000 x .01 = $2,020, for a value of $204,020.

The third month, it increased $204,020 x .01 = $2,040.20, for a value of $206,060.20.

The fourth month, it increased $206,060.20 x .01 = $2,060.60, for a value of $208,120.80

This could be calculated by applying the compound interest formula.

Future Value = Present Value x (1 + i)n

Future Value would be $200,000 x (1 + .01)4 = $208,120.80

Principal x Rate x Time = Future Value

Simple Interest: $200,000 x .01/month x 4 months = $8,000.

That would mean that the comparable property would have sold today for $208,000.

Question 21

Property values rise in your region during ski season (November through April) by 5% and remain flat the rest of the year. Your comparable sold in September for $105,000. You are doing an appraisal in December. How much would you adjust?

Answer 21

$105,000 x .05 = $5,250

Question 22

You work in a beach town where property values increase by 10% during the summer months and then settle back down to pre-summer values. Your comparable sold in August for $150,000. You are doing an appraisal in November. How much should you adjust?

Answer 22

RIGHT WAY:

$150,000 – ($150,000 / 1.10) = $13,636 adjustment

WRONG WAY:
$150,000 x 0.10 = $15,000 adjustment
This gives you the wrong answer because you are working from the wrong base. You need to find the base price before the 10% increase. You can check this by starting with the base and adding 10%. 135,000 x 1.10 = $148,500 – NOT $150,000)

Question 23

Market conditions adjustments to comparables should always be calculated from the time of the

Answer 23

contract of the sale to the effective date of the appraisal

Question 24

If market conditions have changed and an adjustment is necessary, then the adjustment should reflect the change in market conditions from

Answer 24

January to August

Question 25

A property sold in November for $312,500. It sold again 9 months later for $354,800. What was its average monthly rate of appreciation?

1. 15%
2. 18%
3. 50%
4. 78%

Answer 25

1.50%

$354,800 - $312,500 = $42,300.
$42,300 ÷ 312,500 = .135. .135 ÷ 9 = 0.015 or 1.5%

Question 26

You are in a very hot real estate market with values going up monthly by 2%, and lenders are taking months to process transactions, creating extended closing times. As an appraiser, you should:
Make market conditions adjustments from the date of closing
Make no adjustments for market conditions
Ask your client which date they prefer, and do what is most convenient for them
Adjust the comparables from their contract date of sale to the effective date of the appraisal

Answer 26

Adjust the comparables from their contract date of sale to the effective date of the appraisal

Question 27

The real estate market tends to be:
Lagging at the end of short-term economic cycles
An early responder to short-term economic cycles
Sluggish to recover from short-term economic cycles
Unrelated to short-term economic cycles

Answer 27

an early responder to short-term economic cycles

Question 28

You live in a summer resort town. Real estate prices typically drop 15% during autumn and winter. A house sold for $200,000 in July. What would it sell for in December?
$170,000
$185,000
$230,000
$215,000

Answer 28

$170,000

200,000 x .15 = 30,000
200,000 - 30,000 = 170,000

Question 29

A property sold in October for $412,500. It sold again 9 months later for $471,900. What was its average (not compounded) monthly rate of appreciation?

1. 6%
2. 48
3. 8%
4. 0%

Answer 29

1.6%

$471.900 ÷ $412,500 = 1.144 or 14.4%.

14.4% ÷ 9 = 1.6%

Question 30

"An element of comparison in the Sales Comparison Approach; comparable properties can be adjusted for differences in the motivations of either the buyer or a seller in a transaction” is the definition of
Market conditions
Duress
Conditions of sale
Property rights conveyed

Answer 30

conditions of sale

Question 31

Long-term market cycles are
Based on the prevailing interest rate
Very volatile and therefore irrelevant
Caused by national or international conditions
Of little interest to an appraiser

Answer 31

caused by national or international conditions

Question 32

You live in a summer resort town. Real estate prices typically drop 15% during autumn and winter. A house sold for $250,000 in July. What would it sell for in December?
$170,000
$287,500
$235,000
$212,500

Answer 32

212,500

Question 33

Houses on the north side of town sold for a median price of $186,420 twelve months ago and that the median price of those homes for the current month is $214,975. What is the percent of increase?

14. 2%
15. 3%
16. 5%
17. 7%

Answer 33

15.3%

$214, 975 ÷ $186,420 = 1.153 or 15.3%.

Question 34

A home sold five months ago for $232,000. Since then, property values have appreciated by 1% per month. (Use simple interest.) The appraiser estimates that its inferior location depreciates the total value by 10%. What is its estimated value?
$214,560
$216,400
$218,680
$219,240

Answer 34

$219,240

$232,000 X 1.05 = $243,600. $243,600 X .90 = $219,240.

Question 35

A property sold for $256,000 and sold again 11 months later for $289,000. What was its percent of increase?

8. 6%
9. 7%
10. 4%
11. 9%

Answer 35

12.9%

$289,000 ÷ $256,000 = 1.129 or 12.9%

Question 36

Which of the following would NOT be classified as a long term trend for market cycles?
Population trends
Interest rates
Income levels
Migration patterns

Answer 36

interest rates

Question 37

Your subject is located in an area where property values have been declining consistently at 0.5% a month for the past ten months. You have located a comparable that is practically identical to your subject. It sold 8 months ago for $200,000. How much should you adjust the price?
-$4,000
\+$10,000
-$8,000
\+$8,000

Answer 37

-$8,000

Convert the 0.5% to a decimal first. 0.5% = 0.005.
Then multiply 8 X .005 = .04. .04 X $200,000 = $8,000.

Question 38

Fannie Mae expects that the appraiser should provide which date or dates for each comparable sale?
Sales contract only
Closing date only
Sales contract and the closing date
Sales contract or closing date

Answer 38

Sales contract and the closing date

Question 39

Which would NOT typically be a cause of duress that could result in a transaction that would not be considered arms-length?
Sale to a relative
Sale to a corporation
Sale with an unknowledgeable buyer or seller
Sale prior to an impending foreclosure

Answer 39

sale to a corporation

Question 40

If a sale is not arms-length, the appraiser
Must discard it
Must use it anyway
May either discard it or use it with adjustments
May use it after seeking the client’s permission

Answer 40

may either discard it or use it with adjustments