If market interest rates are 8% and a comparable property is sold with seller financing at 6%, the price paid for the comparable property is likely to be:
A. Higher than market value
B. Lower than market value
C. The same as market value
D. None of the above
Answer (1)
The seller financing interest rate (6%) is lower than the market interest rate (8%).
The buyer benefits from a lower borrowing cost.
To compensate the seller, the buyer likely pays a higher price.
Therefore, the price paid is higher than market value: Higher than market value
Explanation
Understanding the Problem The problem states that market interest rates are 8%, while a comparable property is sold with seller financing at 6%. We need to determine how this difference in interest rates affects the price paid for the comparable property.
Analyzing the Interest Rate Difference Since the seller is providing financing at a rate (6%) lower than the prevailing market rate (8%), the buyer is benefiting from a lower cost of borrowing. To compensate the seller for providing this below-market financing, the buyer likely pays a higher price for the property.
Determining the Price Relationship Therefore, the price paid for the comparable property is likely to be higher than market value.
Final Answer The correct answer is a. Higher than market value
Examples
Imagine you want to buy a car. The bank offers a loan at 7% interest. However, the car dealer offers you financing at 5%. To get this lower interest rate, you might agree to pay a slightly higher price for the car than if you had taken the bank loan. This is because the dealer is giving you a financial advantage with the lower interest rate, and they are compensated with a higher selling price. This is similar to the seller financing scenario in the problem.
