A real estate salesperson is preparing a comparative market analysis (CMA) for a seller client. The salesperson discovers that a comparable property sold for significantly less than its market value due to a distressed sale (foreclosure). How should this information be treated in the CMA?
- AExclude the distressed sale entirely from the CMA, as it does not represent fair market value.
- BInclude the distressed sale, but make a significant upward adjustment to its sale price to reflect market conditions.
- CInclude the distressed sale as a direct comparable without adjustment, as it reflects a recent transaction.
- DInclude the distressed sale as an informational note, explaining the circumstances, but primarily rely on non-distressed comparables.
Show answer & explanationAnswer & explanation
Correct answer: D. Include the distressed sale as an informational note, explaining the circumstances, but primarily rely on non-distressed comparables.
Distressed sales, such as foreclosures, do not typically represent fair market value due to the forced nature of the sale. While they can provide some context, they should not be treated as primary comparables without significant explanation or adjustment. The best practice is to include them as an informational note while relying on more conventional sales for valuation.
Why the other options are wrong
- A. Excluding it entirely might omit relevant market activity, even if it's an outlier.
- B. Making a 'significant upward adjustment' is subjective and difficult to quantify accurately, potentially misrepresenting value.
- C. Including a distressed sale without adjustment inaccurately skews the market value downwards.
Distressed Sales in CMA
Distressed sales (e.g., foreclosures, short sales) do not typically reflect fair market value due to the seller's motivation. They should be used cautiously in a CMA, often as explanatory notes rather than primary comparables.
- Distressed sales are not arm's length transactions.
- They can depress market value unnaturally.
- Best practice is to note them with explanation, relying on non-distressed comps.
Memory trick: Contextualize the Comps, Don't Confuse the Value.