A real estate licensee is preparing a comparative market analysis (CMA) for a seller. The licensee notices that a recently sold comparable property, similar in size and amenities, sold for significantly less than expected due to a known neighborhood nuisance (e.g., a noisy factory next door). How should the licensee account for this in the CMA?
- AInclude the comparable property but make a downward adjustment to its sales price to reflect the nuisance.
- BInclude the comparable property but make an upward adjustment to its sales price to reflect the nuisance, as the subject property does not have it.
- CExclude the comparable property from the CMA entirely, as it distorts the market value.
- DInclude the comparable property without adjustment, but mention the nuisance in the CMA's remarks section.
Show answer & explanationAnswer & explanation
Correct answer: B. Include the comparable property but make an upward adjustment to its sales price to reflect the nuisance, as the subject property does not have it.
When using the sales comparison approach, adjustments are made to the comparable properties, not the subject property. If a comparable has a negative feature (like a nuisance) that the subject property does not have, an upward adjustment is made to the comparable's sale price to reflect that the subject property is superior in that aspect.
Why the other options are wrong
- A. Adjustments are made to the comparable property's sale price. If the comparable has a negative feature the subject doesn't, the comparable's price needs to be adjusted *upward* to reflect the subject's superior condition.
- C. Comparable properties should generally not be excluded unless they are truly unrepresentative; adjustments are preferred.
- D. Simply mentioning it is insufficient; a quantitative adjustment is necessary to accurately reflect value differences in a CMA.
CMA Adjustments (Sales Comparison)
In a Comparative Market Analysis (CMA), adjustments are made to the sales prices of comparable properties to account for differences between them and the subject property, ensuring a more accurate valuation.
- Adjustments are always made to the comparable properties, not the subject.
- If a comparable is superior to the subject in a feature, a downward adjustment is made to the comparable's price.
- If a comparable is inferior to the subject in a feature, an upward adjustment is made to the comparable's price.
Memory trick: When comparing homes, adjust the 'comps' to match the 'subject' – if the comp is worse, add value; if better, subtract.