All posts by annarborappraisal

About annarborappraisal

Veteran of the Ann Arbor market since 1984 (1989 as appraiser). My market is mainly private individuals who need an independent valuation for many reasons - divorce, estates, trust, bankruptcy, litigation, relocation, buy/sell negotiation, etc.

The Uniform Appraisal Dataset

This article first appeared in Appraisal Today. Thank you Ann O’Rourke for publishing!

 

The Uniform Appraisal Dataset (UAD) was designed to help bring some uniformity into the appraisal process related to mortgage work. After all, appraisers were not very uniform in the way they described condition and quality.  This applied not just to condition and quality ratings, but to a myriad of other factors such as view and location, down to how basement finish was identified. The Collateral Underwriter (CU) was designed in part to synthesize all of this information and also to identify areas where appraisers differed markedly from each other, as well as even within their own work product.

We had a lot of angst at the outset of CU related to reusing quality and condition ratings, and possibly changing them from one report to another. This was a valid concern because it is one of the factors that does get measured within the CU.  Since the UAD has been required since 2011 for mortgage related work intended for Fannie Mae or Freddie Mac, we would expect, five years after the fact, that appraisers would be well versed with what the specific ratings entailed. As both a reviewer and appraiser in the field, I find this is unfortunately far from the truth. The truth seems to be, that confusion related to the requirements is still rampant, and my contention is, that it is not the appraisers who are at fault, but the definitions themselves. There are simply too many grey areas. Either that, or education has not been sufficient in helping appraisers understand what is expected. It is a good possibility however, based on the continued widespread variances, that the definitions themselves are too vague.

Let us take a look at quality for a Q4 and a Q5 house. The ratings in the 1004 form show:

Q4 Dwellings with this quality rating meet or exceed the requirements of applicable building codes. Standard or modified standard building plans are utilized and the design includes adequate fenestration and some exterior ornamentation and interior refinements. Materials, workmanship, finish, and equipment are of stock or builder grade and may feature some upgrades.

Q5 Dwellings with this quality rating feature economy of construction and basic functionality as main considerations. Such dwellings feature a plain design using readily available or basic floor plans featuring minimal fenestration and basic finishes with minimal exterior ornamentation and limited interior detail. These dwellings meet minimum building codes and are constructed with inexpensive, stock materials with limited refinements and upgrades.

Q4 indicates stock builder grade and may feature some upgrades. Q5 indicates basic finishes and inexpensive, stock materials with limited refinements and upgrades. Both say stock, but Q4 says it may feature some upgrades. What are these upgrades? Are they upgrades to cabinetry, or are they upgrades to the building itself? Does taking a standard high-volume production build quality for the starter market, but adding higher-end cabinetry bump the quality level up?

What about condition? Probably the two ratings that are utilized the most are C3 and C4, which are as follows:

C3 The improvements are well maintained and feature limited physical depreciation due to normal wear and tear. Some components, but not every major building component, may be updated or recently rehabilitated. The structure has been well maintained.

*Note: The improvement is in its first-cycle of replacing short-lived building components (appliances, floor coverings, HVAC, etc.) and is being well maintained. Its estimated effective age is less than its actual age. It also may reflect a property in which the majority of short-lived building components have been replaced but not to the level of a complete renovation.

C4 The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building components have been adequately maintained and are functionally adequate.

 *Note: The estimated effective age may be close to or equal to its actual age. It reflects a property in which some of the short-lived building components have been replaced, and some short-lived building components are at or near the end of their physical life expectancy; however, they still function adequately. Most minor repairs have been addressed on an ongoing basis resulting in an adequately maintained property

Given the scenario that follows, the C3 and C4 ratings are most likely in play, and the difference between the two are that on C3, that some components may be updated or recently rehabilitated and well maintained, and on C4 they are adequately maintained and functionally adequate. What about quality ratings for this same property?

Because this is a question that seems to engender different answers, I asked this question through SurveyMonkey:

If the subject property is a solid Q5 or Q4 production house, but the owners have installed a new high quality kitchen and bathrooms, does the quality rating change?

Figure about a 10-year old house and all sales were built the same initially.

 

I purposely limited the responses to three choices because I did not want to get too many options, or otherwise there would be little consensus from the respondents. The choices included 1) that recently installed new high-quality kitchen and bathroom changed the quality, 2) that it did not change the quality but changed condition, and 3) that it did not change quality but was addressed as a line item adjustment. At this writing, there were 442 responses, which is more than sufficient to have a good sense of appraiser’s opinions.

442

20.36% of the respondents considered it an upgrade of quality

54.52% considered it a condition rating change

25.11% considered it a line item adjustment

In essence, 79% of the respondents considered it did not change quality but was either a condition change, or warranted a separate line-item adjustment.

So, what is the answer?

Strictly speaking, the UAD language indicates it is a change of quality, but in the minds of appraisers and/or users, is it? If “once a manufactured home, always a manufactured home” is true, how does swapping out a higher quality kitchen and/or bathroom from stock raise the quality of the whole house? How does changing a kitchen and bathrooms affect the structure of the house? Does it do anything other than change condition? If it is condition, how is this different than installing a new kitchen and bathrooms of stock quality in the stock quality house? Would it be best addressed as a condition item, but also as a line item because one aspect of the house is now atypical for the quality of the typical house by this production builder?

I do not have the answers, throw this out for discussion, because as proposed at the beginning of this article, the UAD ratings are too vague, and open to interpretation. Perhaps now is the time to drill down to what is truly expected within the various ratings and start a discussion on how upgrades to some non-structural elements to a house could, or could not, affect the overall quality rating of the building. Hopefully this brief article spurs on discussion of these ratings, and helps ferment more consistency between appraisers who do mortgage related work, since we are all judged by the actions of our peers in our market and we want to be judged fairly.

As in all things appraisal, when in doubt, disclose. Write more, explain more. It certainly helps mitigate those grey areas to inform the intended users why one condition or quality rating was chosen over the other options.

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I have Google Earth and know how to use it

This post was originally published in Appraisal Today magazine and is republished with permission.

I have Google Earth and know how to use it

Seriously though, as a reviewer, it is one of the first tools I reach for when I look up the property that is the subject of the appraisal I am reviewing. Assume all reviewers do. We use it to make sure that the property does not back up to, side against, or face some type of externality such as a major 8-lane freeway, massive shopping mall or toxic waste facility. Hopefully the appraisal that has one of these externalities addresses it. Sometimes the appraisals go to great length to discuss externalities and any effect on marketability and value. Sometimes there is a sentence or two. Sometimes crickets.

Yesterday I pulled up GE on the house that was the subject of an appraisal I was reviewing and it backed up to a bunch of buildings. Looked possibly to be a school, but the street view maps took me around the side and to the entrance of what turned out to be a large condominium complex. Absolutely no big deal, but there wasn’t one single word related to this in the appraisal. I asked a group of appraisers whether they would make a comment if their subject property backed up to a condominium complex, and the responses ran the gamut from “of course”, to “no way, it is already covered in the neighborhood check boxes”.

While the check boxes for the neighborhood include multi-family, they do not include condominium, and in this instance, there was nothing in the appraisal even hinting that there was a mixture of single-unit uses in the area. This property didn’t raise a red-flag insomuch as backing to a freeway, commercial shopping center or toxic waste facility, but it did raise a question and warranted a bit more research. This is fine as it part of my job, but as someone who actually reads the reports in front of me, I was just left confused as to why it wasn’t even mentioned. I was even more confused by why so many appraisers say that it is not worth mentioning.

Maybe it is being old fashioned, but I grew up with the understanding that an appraiser was the eyes and the ears of the client, and that anything that would likely raise a question for the client should be addressed. Of course the freeway, mall and toxic waste facility are givens, but wouldn’t anything that was literally in the backyard also be something that would get questioned? How many minutes does it take out of the process to write a few sentences about a condominium complex? Couldn’t it be as simple as saying “The subject backs up to the XYZ condominium complex and has a seasonal view of some of these buildings. There is no negative effect on marketability or value of the subject property related to its location adjacent to this residential use” or some such rot?

While it is easy to overlook potential concerns due to the amount of reporting we have to do (and remember, there is no such thing as a perfect appraisal), stepping into the mind of the client and asking yourself “what would the client be concerned about” is a very useful exercise. While the client may not care about the house backing to a condominium complex because it is a residential use like the subject, they may care about it backing to the complex if for some reason it does affect marketability and/or value. It is up to us, as appraisers, to report and analyze what it is we see, and although we can never catch every little thing, our value is partly measured by our ability to communicate and to analyze these nuances.

Remember, reviewers have Google Earth and other tools at their fingertips, and most use them.

Why adjust?

This article was originally published in Appraisal Today,Appraisal Today. A hearty thank you to Ann O’Rourke

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Some appraisals can take a narrow range of unadjusted sales prices, for example the range of $115,000 to $122,000, which is a spread of 6.09%, and through the process of analysis, it widens from $96,000 to more than $132,000 (spread of 37.5%). In case you think this is made up, it was a real world example, which spurred this short article,

This begs the question, if proper analysis of the units of comparison were applied, why would the range widen?

Sometimes it is due to the mechanical act of extracting adjustments from the market and putting them in the grid, without actually analyzing whether the adjustments extracted are actually valid. Alternatively, if there are a number of adjustments to be considered, do some of them weigh each other out? This means does the smaller house that is highly upgraded; possibly have more worth than the larger but dated house? If condition is not adequately accounted for, it is easy to see how the adjustments could make the dated house look more appealing, when in reality the market may well be more concerned with cosmetic condition than anything else. Because of the way buyers actually buy in the market place, it is critical that the appraiser step back from the process and look at the big picture to see if the value opinion ends up passing the curb test. The curb test is that of asking yourself, either whether you could see yourself paying that amount for the property, or if you would feel comfortable lending your own hard earned money for a buyer purchasing that property. If the answer is “heck yeah” then probably either it is too good a deal, or you are just that good. If the answer on the other hand is “heck no” then the value opinion is likely too high. Just right refers to that sweet spot where you consider that the price you would pay is fair to you as buyer, or lender, but also fair to the seller where it would be attractive enough to sell without any duress

What is the purpose of the adjustment process?

We make adjustments for the units of comparison that buyers recognize in the market, and through this process, narrow a range of unadjusted prices to something tighter, from which we reconcile. If for some reason the range actually broadens, there is a piece of the puzzle missing. This means we have to step back and reanalyze the processes and our adjustments; or perhaps even, our comparable choices. This is the very reason “bracketing” with a superior property and an inferior property is an important application. The unadjusted sales price of the inferior property sets the logical lower limit of expected value. The superior property also sets an upper limit of the expected value opinion. As soon as the appraised value is higher than superior, or lower than inferior, we know that there is something off in the analysis. If there are also similar properties to the subject included in the analysis, these become benchmarks for a generally expected value range.

Think of the way that buyers normally purchase property for a minute. Although there are some buyers who try to quantify everything, most do not. Most buyers simply like one house over another, and they do so because of location of the property, the site, the overall size, the flow/design, the condition and the amenities. Buyers will opt for the property that best meets their needs and is to their liking, for the most advantageous price. They will expect to pay less for a house that something that is superior to it and more than something inferior to it. Of course there are exceptions, such as the buyer who is under pressure to buy because they have sold their house and need to move, today. Or the buyer who wants to locate next to the grandchildren, or any other myriad reason that does not appear rational in the market as a whole. Often it is those very sales that throw off the appraisal in terms of widening the adjusted sales price range. Sellers also sometimes have undue motivations, which could cause them to sell at a lower price than expected, such as divorce, death, or other mitigating circumstances. Sometimes a seller will have an undisclosed sweetener, which might induce a buyer to pay more than expected, like that fancy new Mercedes that the buyer took a real fancy to that was parked in the garage of the otherwise vacant house. Verification of any unusual buyer circumstances with a party to the transaction is very important in this instance (it is in most, but when something is off in the adjusted range, this is often the best place to start reanalyzing). A conversation with the agent who sold the property will often uncover why the buyer paid what they did, such as the need to move, or even lately, having been outbid on so many prior offers that the buyer would simply have paid whatever necessary to buy the house.

Because houses are purchased and sold by humans, and humans do not always make rational decisions, understanding the “why” of a transaction can be critical. Because humans are making the purchasing decisions, it is important to understand what drives buyers to certain properties over others. Conversations with agents in the field are critical in understanding shifting buyer sentiments. So too is visiting builder models and seeing what the builders are installing in newly built properties. The builders are reacting to buyer desires and demands, and are a good source of information. Open Houses are also an excellent source of information, not only from the standpoint of seeing your future comparable sale, but also in listening to what buyers are saying while they are at the property, and talking with the agent if no one is there. A house with a much desired feature may sell for far more than others, and will skew the adjusted sales price range if the desired feature is not adequately analyzed or even isolated.

Market fluidity also affects sales prices. At times when there is an abundance, buyers have many options and can become very picky about features and condition of houses, and this will be shown in what they pay. Conversely, when the market is tight, and there is little to no inventory, buyers may pay far above what would be considered rational. This is one reason that we need to be aware of supply and demand.

After everything is considered and analyzed, there is no good rational reason for the unadjusted range of $115,000 to $122,000 to widen to the degree it did ($96,000 to $132,000). When this happens, step back from the process and ask what is missing. Pick up the phone and call the agents involved in the sales to get buyer motivations. Next time the adjusted sales price range widens, start asking if the various factors involved in the sales that were used in the appraisal report were adequately addressed –because through the very process of adjusting, the range should narrow, not widen.

Grouped data analysis

This article is reprinted with permission from Working RE. The original can be found here

Extracting an Adjustment – One Way to Measure
By Rachel Massey, SRA, AI-RRS

Because I often get calls from both Realtors and homeowners asking how much a certain feature in a home is worth, I thought a brief discussion of one method of extracting an adjustment from the market might be worthwhile.

This method is described in detail in The Appraisal of Real Estate, 14th Edition (as “grouped data analysis” starting on page 398) and is not a new technique, but one that appraisers may find useful in their daily practice. It can work well because if the appraiser uses care in the isolation process, the sheer number of sales will provide a range of answers, which can then be used for extraction, and support of that particular adjustment.

Instead of writing about theory, I think a simple example from my market is a good starting point. I work in a market where there are usually enough sales to use this method, but it can be useful even in markets where data is more limited. I have to go back two plus years for most of my studies to get enough data points for an adequate sample. This is not perfect but it does work for me when determining certain adjustments, such as basement finish, basement versus no basement, garage stalls, and swimming pools. I have not found it to be very effective with gross living area and it has had mixed results with bathroom counts. There are drawbacks to using it, mainly that the underlying site value is not extracted, but if the sales that are used for the study are relatively similar, the volume of sales generally resolves the issue.

The following show two different examples of an extraction for basement finish; one in my main market big-city area, related to a generally newer house in the $400,000 +/- price range, and the other in an outlying district about ten miles away, in the under $200,000 price range. Both use the same methodology and show substantial differences in results, which is why an appraiser cannot just provide a number or a percentage when asked. Instead, the appraiser has to look at the market.

For the first example, I went back over two years and narrowed my market data to houses between 2,000 and 3,000 sq. ft., built between 1990-2010, on the west side of my market area, and then downloaded all these sales to Excel and segmented the sales between houses with finished basements and those without. The results included 37 sales without finished basements and 62 identified with finished basements. Here is what it looks like on a spreadsheet:

I then looked at median and average sales price differences and median and average amount of basement finish, and came up with between $21,647 and $24,500 difference in price, favoring those with the basement finish and between $24.24 per sq. ft. and $27.75 per sq. ft. of basement finish. This provided me with some support for whatever adjustment I considered most reasonable. This would be anywhere from $21,500 to $25,000 based on sales price differences, or between $24 and $28 per sq. ft. of finished space, if used in that manner.

From experience, I know that basement finish typically costs around $40 per square foot in this market, which suggests that both physical depreciation and functional obsolescence are playing a role here, since the difference is more than what would be expected from physical depreciation alone.

For the second example, I used data from another proximate market with my target properties between 1,200–1,700 sq. ft. in size and built between 1985-2010. I also went back just over two years. I had 48 sales without basement finish and 36 with basement finish, and the median difference in price was $8,953; the average price difference was $14,420. Here is what it looks like on a spreadsheet:

The median size of finish was 625 sq. ft. and the average size of finish was 703 sq. ft., supporting adjustments per sq. ft. of $14.32 to $20.51. This means I could be comfortable using adjustments anywhere from $9,000 to $14,500 for the basement finish as a whole, or between $14 and $21 per square foot if I chose to address it that way. This data gives me something to work with and in the end, I use my experience in the market and what the comparables are telling me for my final determination, but I have support for whatever I do.

As you can see, there are differences in price between the areas and the sizes, as would be expected. Cost remains about the same to complete. Each appraisal may be different, and the numbers presented in these two examples could change depending on how far back the appraiser goes when collecting data and what they set as the perimeters for the data search. I offer this to fellow appraisers as a simple study showing how I often go about trying to extract an adjustment from the market.

Ranking and Reconciliation

Republished with permission from Working RE

Ranking and reconciliation

Road to Supporting Value: Ranking & Reconciliation
by Rachel Massey, SRA and Tim Andersen, MAI

Because the Sales Comparison approach and both the Income and Cost approaches are meant to reflect the actions of knowledgeable buyers and sellers active in the marketplace, a brief discussion of ranking andreconciliation is beneficial. The acts of ranking and reconciliation help set the stage for the appraiser’s opinion of value.

We appraisers tend to get caught up in the minutia of the adjustments, as well as supporting our adjustments, as is appropriate. This means we sometimes miss the big picture, and get way too caught up in the details. It is a rare buyer who breaks out each unit of comparison in a dollar amount. Instead, the typical buyer (of residential property at least) expects to pay more for a property than those that are inferior to it, and less for a property than those that are superior to it. This is just common sense and serves as the foundation of ranking properties relative to the subject.

When we are at the point in the appraisal process of analyzing sales that we consider to be the best representatives of comparison to the subject, we should also look at the larger picture and analyze the sales as a whole. Ideally, we have gathered sufficient and meaningful sales data to have properties both inferior and superior to the subject, as well as ones that are generally similar. It is not always possible to attain this data but in most markets it is generally not too difficult.

The process of analysis and summarization of the sales that we use in our reports should guide the intended user to follow us to a very logical conclusion. The following is a type of real-world example, imperfections and all*:

Example

Comparable sale 1 is a similarly sized, ranch-style house with an updated roof, windows, kitchen, and bathrooms. It has a quiet location off a main road, but does require some travel along gravel roads. This house is superior to the subject in the following manner: It is larger and includes an additional half bathroom; has a deck, a finished basement, and a newer kitchen. It is inferior to the subject in that it lacks a breezeway and the quality is not to the same level as the subject.

Sale 1 is similar to the subject in location because its quiet location is offset by the greater distance to town than the subject. Overall, sale 1 is slightly superior to the subject due mainly to size, bathroom count, and basement finish and it sold for $208,000, setting a logical upper limit of the value range.

Comparable sale 2 is noted in the MLS as being newly remodeled, but the selling agent indicates the house needed work, and the exterior of the house is not in good shape. The house has an addition off the back, which may not flow as well as a house built this size to start. This house is located in a different school district from the subject, right at the district border. In our opinion, there is no marked difference in value between the districts in this location and buyers will consider both equally. The house is inferior to the subject, due to overall condition and its location, which is closer to the other community, which is not as good. The road tends to be very busy at certain times of the day. There is a commercial property across the street and south by only a couple of lots, and an animal hospital/dog play park just a few lots south. As an inferior property, this house sets the logical lower end of the value range and it sold for $153,000 in September 2014. As the market has been increasing, and we can measure an increase of approximately 5% from the date of contract to the effective date of our report, the expected value of this house were it to go under contract as of the effective date is $161,000.

Sale 3 is a good comparable property of similar overall quality and appeal. This house is superior to the subject in that it has an extra half bathroom and two fireplaces as well as being larger overall. It is inferior to the subject in overall cosmetic condition and is more dated cosmetically. The location is closer to the subject community and the road does have traffic, although not as much as the subject’s location. The features that are similar, other than style, are that it has a breezeway and updated furnace and A/C (equal to furnace and electrical). Overall, this property is similar due to the size and amenities such as the deck and fireplaces being offset by the inferior condition. This house sold when the market was about 3% lower, with an approximate value on today’s market in the same condition of $183,000, setting another benchmark in value for the subject.

We have also included information about a pending sale that is located in close proximity to the subject and is similar in age, site size, and overall appeal. This house is superior to the subject in having an additional half bath and being slightly larger. Due to having electric heat, and a more dated decor, it is slightly inferior to the subject overall; it is listed for sale for $184,900 and went under contract within 37 days on the market. We expect the house to sell within 3% of the list price based on the list price to sales price ratios found in this market place. This pending sale provides good evidence of current market activity.

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This type of ranking description is not extensive, but it provides the client and intended users a good place to start to understand some of the appraiser’s logic in arriving at a value conclusion. The appraiser has already indicated that the subject has a logical lower limit of value of $153,000 and an upper limit of value of $208,000. This is a relatively wide spread, however, of 35.95 percent based on the unadjusted sales price range. Through the adjustment process, such as with the use of paired-sales data, grouped paired-sales data, regression, depreciated cost, sensitivity, and more, it is logical to conclude this range should narrow considerably as a result of the adjustment process. Consider the following reconciliation of the three sales that were addressed above:

We have included three closed sales in the analysis. The closed sales present one inferior (sale 2), one superior (sale 1), and one generally equal (sale 3). Looking at these sales without any adjustment for any of the units of comparison other than changing market conditions, the superior property sold for $208,000, presenting a logical upper end of the value range. The inferior property sold for $161,000 (accounting for the changing market conditions only), providing a logical lower end of the value range. The similar property sold for $183,000. Together these sales provide a means to indicate that even without adjusting for anything other than changing market conditions, the subject would have a low range of $161,000, high range of $208,000 and a logical price range around $183,000.

After applying the units of comparison that we considered most relevant, namely market conditions, site value, condition, size and bathroom count, the adjusted sales price range narrows significantly from a low of $179,000 to a high of $186,500. The most similar sale adjusts to $179,000, and a similar competitive offering is for sale for $184,900 and expected to be close to list price. All of this information causes us to consider the most likely value for the subject at $183,000, which is the appraised value. This takes into account both the adjusted and unadjusted sales prices of the comparables as described above.

Logical, isn’t it? Notice how the adjusted sales price range has narrowed from 35.95 percent down to 4.19 percent? This would be typical of a well thought out and analyzed adjustment grid. All too often appraisers average these sales data rather than reconcile as to which sale has the most meaning relative to the subject and why. Remember that the Uniform Standards of Professional Appraisal Practice (USPAP) actually requires us to “…reconcile the quality and quantity of data available and analyzed within the approaches used…”(Standard Rule 1-6 (a). It also requires us to “…summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions and conclusions…”(Standard Rule 2-2(viii)) when using the Appraisal Report format.

Why is this important? It is important because it shows the logic the appraiser used to go from the general information of the unadjusted comparable sales, to the specific rationale behind the appraiser’s value conclusion. Not only that, it also reflects the way that buyers buy houses. Buyers may consider the cost of a new house as an alternative, as well as weighing the time to completion, particularly on newer houses. When buying a house, most buyers also consider the cost of renting on a monthly basis, so the income approach is also often applicable to the formation of a credible value opinion when buyers in a particular market could rent just as easily as they could buy. At the very least, knowing that their mortgage payment would be in the range of a rental payment is at the forefront of many buyers’ minds, in particular after the recent mortgage crises.

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Recall that standards rule 1-6 requires us, when developing a real property appraisal, to reconcile two areas of our analyses. First, we reconcile the quality and quantity of data available and analyzed within the individual approaches. This means that we discuss the analyses of construction costs, depreciation estimates, site values, comparable sales, comparable rentals, and availability of data, ability to confirm the data, and so forth. Then we reconcile between the various approaches to value that we have applied in the appraisal process. Please consider this language as one example:

Because there were sufficient data from reliable sources, the appraisers were able to analyze the subject using all three of the standard approaches to value. While the Cost approach indicated a value conclusion approximating that of the Sales Comparison approach (after adjustments), it is best used as a secondary method on a house of this age. There was plenty of comparable sales data by which to form a value conclusion. All were relatively close to the subject. Since the houses in the subject’s neighborhood are generally not purchased and sold as investments or income producing properties, the Income approach was not able to yield a reasonable indication of value. For this reason, its details are in the workfile, but the appraiser has omitted it from the report as neither applicable nor necessary to the formation of a credible value opinion.  

Next, Standards Rule 1-6 requires us to reconcile the applicability and relevance of the approaches, methods, and techniques we use to arrive at a credible value conclusion. As we pointed out earlier, this is nothing more than a process where we assign a specific weight to the conclusion of a specific approach. Typically, the more comfortable we are with the value conclusion of a specific approach to value, the greater weight that approach receives in this reconciliation. Consider this language:

For the reasons cited above, the appraiser chose to give the greatest weight to the value conclusion from the Sales Comparison approach. For those same reasons, the appraiser gave some weight to the value conclusion the Cost approach indicated. Finally, for the reasons cited, the Income approach merited no weight in the final analysis. It is for these market-supported reasons the appraiser concludes the market value of the subject property, as of the appraisal’s effective date, was $183,000. 

Notice how we ranked the sales and then provided the “why” behind that ranking? Then we ranked the data in the individual approaches, as well as the “why” of that ranking. Finally, we ranked the individual approaches and, again, explained why we did so. With this ranking we showed both the sales that merited the greatest weight in the final analysis, as well as why we concluded they merited that weight. Then, via the reconciliation to the individual value indications, we indicated (a) which was most persuasive in forming the value opinion, as well as, (b) how and why we arrived at that conclusion. These two steps are in compliance with SR1-6(a, b) as well as the Fannie Mae Selling Guide. This is the quality of appraisals and reports clients and intended users look for, and that, over time, will merit more professional fees.

*We took a real world example and cleaned up some of the language, eliminated a sale to make it more readable and to eliminate any telltale signs of the subject property.

One simple extraction

I just fielded a call from a potential client who was curious about how an appraiser would go about extracting an adjustment from the market, in this case specifically basement finish. In the discussion I explained that there is no factor that appraisers use, but that we turn to the market to try and show us what buyers are paying. Because different markets can act quite differently, I thought putting up a couple of examples of this type of extraction might be useful, both to my potential client, as well as my audience in general. The following show two different examples of an extraction for basement finish, one in Ann Arbor related to a generally newer house in the $400,000 or so price range, and the other in Lincoln school district in the under $200,000 price range. Both use the same methodology and both show substantial differences in final results, which is why an appraiser cannot just provide a number. Instead the appraiser has to look at the market. The first sample I went back two years and narrowed my market data to houses between 2000 and 3000 sqft, built between 1990-2010 on the west side of Ann Arbor (used areas 82, 83, and 84) and then downloaded all these sales to Excel and segmented the sales between houses with finished basements and without. The results were 37 sales without finished basements and 62 identified with finished basements. I looked at median and average sales price differences and median and average amount of basement finish, and came up with between $21,647 and $24,500 difference in price favoring those with the basement finish, and between $24.24 per sqft and $27.75 per sqft of basement finish. This provided me with some support for my adjustment. I don’t recall what my adjustment was, but I think anywhere between $20,000 and $25,000 is supported based on this data. That and in my experience, basements in this area cost about $40 per sqft to actually finish. Here is what it looks like on a spreadsheet: basement finish a2 400k The next example is using sales in the Lincoln school district, and in this one my isolated properties were between 1,200 – 1,700 sqft in size and built between 1985-2010, also going back two years. I had 48 sales without basement finish and 36 with basement finish, and the median difference in price was $8,953 and the average price difference was $14,420. The median size of finish was 625 sqft and the average size of finish was 703 sqft, supporting adjustments per sqft of $14.32 to $20.51. lincoln As you can see, there are differences in price between the areas and the sizes, as would be expected. Cost remains about the same to complete. Each appraisal may be different, and the numbers found here in these two samples could change depending on how far back the appraiser goes on their data research and what they set as the perimeters for the data search. I offer this to you, my readers, as a simple study showing how I often go about trying to extract an adjustment from the market. A final word of caution; I would not expect to see an appraiser put this analysis into their appraisal. They will likely do it, and say something in the report about the adjustment being analyzed through market data. This is what they likely mean, but won’t put the actual results into the report, instead they will have it in their files, be it in the office in general, or specific to an appraisal they were working on. Hope you all enjoyed this simple explanation, and if you have questions about appraisals and appraisal processes, please feel free to contact me. Easiest way to reach me is via email at rach mass at comcast dot net.