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: 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. 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.
By Rachel Massey, SRA AI-RRS
Woody Fincham, SRA
We dream of seeing appraisal reports that stand-alone and are of themselves, self-sustainable as written. That market analysis, while a single component of many that make up an appraisal, is done in a manner that is robust, clear and narratively driven. How many reports have we seen that fail to state anything of real weight in them? More frequently than we would like to admit, we review reports that are nothing more than checkboxes and statements with no real support. We both look over reports that have some fundamental failings, ones that really make us question how well researched the data actually is in the report as a whole. Many of the cracks that we see begin with the market analysis portion of the report.
In this installment, we are going to look at market analysis and offer some insight on what we believe should go into a well-supported appraisal report. This installment is a rather lengthy one, but lays the groundwork for the next few installments. We often see appraisal reports that do very little to support the indications stated on the 1004 report. A cogent and well-supported market analysis is the foundation of a well-written report. The valuation process identifies the most basic flow for developing an opinion of value.
Jim Amorin, MAI, SRA, AI-GRS, and former president of the Appraisal Institute offered this quote about residential market analysis:
“Residential appraisers are required to be local market experts. The amount of research that they need to perform is much more in depth and specific than that of a general appraiser. Often times, a general appraiser uses regional level data, where a residential appraiser will need to have an in-depth knowledge of just a few blocks (Amorin, 2014).”
Clients should be retaining appraisers to provide that specialization and knowledge that only local and experienced appraisers can provide.
(The Appraisal Institute, 2014)
There are no shortcuts or work around, yet we see very limited market analysis in many reports. USPAP requires that appraisers adhere to two specific types of reporting options: Restricted Appraisal Reports and Appraisal reports. Most appraisal work is performed for lenders and requires the use of the Fannie Mae developed forms. Per USPAP, the Appraisal Report requires a summation of the analysis performed. Our contention is that many appraisals performed for the GSEs do not rise to the level of summation of market trends, which is the basis for market direction and sets the tone of the appraisal.
(Fannie Mae, 2014)
Fannie Mae has provided the profession with an interpretation of a minimum amount of information that they believe is significant for lenders to use. We think what FNMA ended up requiring is an executive level summary that just touches on points, and not complete summations of analysis. For those not familiar with an executive level summary: it is a summary type that touches on the 10,000 foot level rather than the on the ground perspective. Why do we take that stand? With the release and required addition of the 1004MC addenda, Fannie Mae realized that enough impetus was not being placed on a market analysis.
Many in the profession opine that the new addenda does not adequately reflect an adequate analysis as it is limited or does not work with rural and other heterogeneous data sets. We agree with those opinions in spirit but will go on to say that Fannie Mae was probably trying to make a square peg fit into a round hole. The 1004MC is an attempt to drive appraisers into an analysis of the market, but it is often too narrow in scope to be adequate, and should not be the sole basis of the appraiser’s analysis of the market.
An appraisal report should explain the data analyzed in such a way that is not misleading. When Fannie Mae or a client asks for specific things that may enhance or diminish sections of a report, it falls on the appraiser to reconcile what is being done. In a standard 1004 report, most appraisers now have to fill out the neighborhood section on page one, the appraiser must complete an inventory count in brevity on the top of page two and also complete the 1004 MC addenda. Depending on how each appraiser goes about completing each of these three sections, they can indicate different conclusions. It is a best practice to discuss each of the sections in your market analysis narrative in a supplemental addendum. Other items one should avoid glossing over are days-on-market for the comparable sales selected versus the actual averages indicated in the 1004 MC. USPAP now requires market time and exposure time explanations placed in the report. Much of this can only be covered through writing actual sentences and paragraphs and cannot be conveyed at any level of detail by simply checking boxes and making minimal commentary.
We dream that our clients want to, and need to, know what is happening in the market as of the date of the appraisal. These clients don’t want to rely on national media and Case-Schiller reports (no matter how good they are) because they realize that in all things real estate, the market is basically local. By local, we mean that the region where the property is located sets the mood for the market. A region can be broad, such as an entire county or even a set of counties. It can be as narrow as the submarket directly related to one employer as the base. The market that relates specifically to a property is much narrower than the region and can be as narrow as a couple city blocks. Our clients value an appraiser with this local expertise and knowledge.
Our clients can understand and depend on the report because it is developed and presented in such a way that the reader can follow our logic about the market Many appraisal reports are performed for residential lending, and a key component of lender work is assisting the lender in identifying risk associated with the collateral they are lending on. There is a need for the end-user to have all the facts and not just the barest of the facts. It can also be said that more clearly written reports will help the appraiser when dealing with unintended end-users that inadvertently end up with the reports as well. While not the impetus of this article, clear communication in the report prevents unintended conjecture from being made by the intended and non-intended users. No one should walk away from an appraisal report without understanding the market mix and preferences of the consumer. This leads into the highest and best use (HBU) analysis and extends into which approaches to value are most relevant and why. Like any well thought out research paper, an appraisal report should start broad and work towards a finite result. This is true for the report as a whole as well as each component that makes up the report.
To offer an out-of-the-box suggestion to lender clients and AMCs, your industry would be greatly benefited to try to retain appraisers on staff or through contract positions to read and vet appraisal reports. After the Dodd-Frank (and the preceding HVCC) act went through, many lenders pushed out valuation management to AMCs. Many AMCs, and some lenders through staff positions, utilize low-level clerks that are not certified to appraise to look through reports. This results in poorly vetted work. Some also utilize review appraisals from other appraisers, but these are often to have a supporting value not to obtain a true review of an appraiser’s report. The consistently low fees that are pushed on appraisers to take review assignments evidence this. In most cases, the lender/AMC wants a reviewer to do a review and provide an opinion of value for less money than the original appraiser did the first report for. Considering a review on the lender choice form 2000 is both a review AND an appraisal, it is nonsensical at best.
In other words, seek out quality and stop trying to cut costs.
When you treat valuation professionals like a hurdle, rather than a partner that enhances your ability to do business, the market reacts by letting the under-achievers rise to the top. Your collateral deserves vetting at a high level and makes sense to your overall risk assessment. Your stakeholders will thank you and adding a small additional level of cost to hire quality appraisers will pay you dividends. Rather than seek out those that will only give you answers that your origination staffs want to hear, look for those that are confident enough to give you hard answers to difficult questions. The reason we mention this in a blog about market analysis, is that you can begin to discern how good an appraiser is by reading their market analysis; also by how they approach highest and best use and most especially how well the approaches to value are explained and supported.
Pointers from the Authors:
We are going to cover two facets to the market analysis. One will be the macro –level, national to regional and sometimes city-level facets of the market analysis. The other is the micro-level. This covers the market segmentation that the subject falls into at a very specific level. Micro-level analysis deals with the smallest group of consumers that will consider the subject property and other competing properties as a group.
I have worked in a valuation practice that does all types of real property on the fee side, and currently I work in an office where I manage both residential and non-residential real property appraisers. I have seen how valuation works and it is enlightening to see the overlaps between the two sides. It does not matter what you are appraising, the valuation process is the same. All the academic concepts and fundamentals apply. All three approaches apply, HBU analysis applies and market analysis is certainly applicable for any valuation report.
Many residential appraisers have never seen, much less done, a narrative format report. When one is being paid to perform a narrative format report, it is easy to justify the pages most appraisers spend on discussing the many items that one should in the market analysis section. Frankly, many appraisers believe that narratives should be bulkier and more robust than a report created using a modular form. I disagree. A proper market analysis for residential lending reporting should include much of the same information that one would expect to see in both length and content as a narrative style report. With that being said, let us look at the macro side of things.
The best place is to start broad with national information distilled down to regional then down to the local level. Why start at such a high level? Most of the time, you are dealing with lender staff that is located far away from your market. They know and understand things from a high level, so starting with national trends helps draw a picture for them of your area. No two areas of the country are the same, but every market is affected by what happens on a national level. In my market analysis, I start out with national data, and then move to the state level, then to regional, before I finish with local data and analysis.
This normally should include a brief overview of the market historically. How it fits into the regional and state level indicates why consumers are there, coming there, or possibly leaving the region. What high-level employment events are occurring? Is a major employer slated to open anytime soon, or is one ramping down for a reduction in force or worse, close? Any regional programs such as transit related items, cross community programs and any major development that may create additional demand or diminishes demand in housing is a generally a great topic to include.
What drives residential demand? Many would say that employment levels are a direct driver. We all saw that after the lenders tightened up on credit requirements post 2007; available mortgage products affect the market directly because they can limit effective purchasing power. These are both important items to discuss, especially in a market that may have transitioning market conditions.
Regionally, public transit may or may not be a factor in consumer consideration but touching on whether it is or is not helps paint a picture for the reader. In markets that have no public transit, linkages, and distances to support services and commercial areas are considerations. I have seen this firsthand with petroleum prices increasing, many commuters changed to hybrid cars or moved closer to work. Chances are that subdivisions with direct or quick access to commuter routes have a better marketability than ones that require extensive drive time or access via small rural roads. As you look at communities farther away from employment centers and support centers, prices generally decrease to account for the distance.
Many regional markets have competing local markets. Why would some consumers prefer one to the other, and how does the consumer resolve this? Is there foreclosure competition? Is there new construction options? How do public school districts play into the considerations? Market mix is also important to cover at this level. What is a typical improvement for the area and what is the ideal improvement. Is the consumer preference transitioning; which will lead into the HBU analysis later on. Consumer preference speaks to the marketability of the property, and gets back to how risky is the collateral being leveraged against.
While certainly the wider national market has relation to what is happening at the University of Michigan or the Beltway, it does not set the stage for the nuances in the values around them. This is the same in most markets.
Since our lender clients are intelligent, understand that markets are both regional and local, and are driven by the wider economy, we offer some food for thought. This relates to the danger of reliance on the 1004MC form, which was developed by the GSEs in order to try and get appraisers to actually analyze the market. Instead we believe there needs to be more analysis, and not just charts and graphs, but a true analysis by the appraiser.
The reason the 1004MC form can be misleading, is that it requires, if done properly, that the appraiser analyze the competition. Unfortunately, in most markets, the competition is not very robust, and so an appraisal will often use five to ten sales (or less) over a year to come up with a trend analysis. This is simply not a sufficient number of sales to be meaningful. Relying on limited data, over a limited period, is not going to result in meaningful information, and at the worst can be misleading.
How do we analyze the market on a more local level? We pay attention to the number of sales that are occurring; the type of sale that is occurring (for example more REO properties or fewer);the days that these listings are on the market cumulatively; the list price to sales price ratio, median sales price, and median sales price per square foot. In addition, we both consider the contract-to-listing ratio to be very meaningful in measuring market activity at the time of the appraisal, and even predicting a short-term movement (normally a few weeks in the future). We may break out the macro to include a data such as a school district, down to the level of only generally competitive properties. Through doing so on most appraisals, we are able to see the market changes that are happening quickly. Even looking at a market as segmented, comparing REO to arm’s length sales is meaningful, such as the example below which shows how distress sales are lessening in one market:
Another useful way to perceive the market revolves around visiting Sunday Open Houses simply to see the amount of activity that is present. Doing so in one’s core market is beneficial in many ways, but mainly in seeing how much activity is happening as well as having the opportunity to view ones future comparable sales first-hand. The interaction with the agents is priceless, and the visibility is a great way to market.
While writing a market analysis that includes macro level information can be a huge project, it can be updated periodically. Once you have established the major trends that have recently occurred, those that are presently happening, and those that are likely to happen, one only needs to edit and update it as often as shifts occur. This increases one’s ability to defend the report if needed, but it also increases one’s perception as a professional. Expert-appraisers should be performing this level-of-work. By giving in to the pressure from scope creep and just checking boxes and making ambiguous statements in the report you are giving in to the commoditization that lenders and AMCs want to push the profession towards.
If all that we offer are reports that contain only executive level summaries, it is hard to have a debate about how fees have been pushed down since Dodd-Frank paved the way for AMCs to capitalize on lender work. With USPAP moving from summary report to appraisal report, it is best to explain each facet of the report in a professional and thorough manner. Move away from the intention of the lender and especially the AMCs to force the profession into a commoditized service by not giving in to the pressure to do less work, but by doing more. We know that seems counter-intuitive, but throwing your hands up in the air and doing less than credible work by just checking boxes and user vague boiler plate narrative just makes it seem like anyone can do it.
Amorin, J. M.-G. (2014, April 2014). (W. Fincham, Interviewer)
Fannie Mae. (2014, April 13). Appraisers. Retrieved from Single Family: https://www.fanniemae.com/singlefamily/appraisers
The Appraisal Institute. (2014). The Appraisal of Real Estate. Chicago: The Appraisal Institute.
We are two appraisers separated by a three- hour flight or a nine-hour car ride. We have never met in person, but have come to know one another through social media. We are designated and recognized experts in residential valuation in our respective regions; both have had successful careers working in various positions within the profession; we are separated by enough distance that we experience completely different market stimuli. We subscribe to doing valuation work the right way. The way it should be done: defensible and well supported. Yet, we (and many others in the profession) are watching it being dismantled by the lenders, appraisal management companies (AMCs) and even from within the profession itself. This is not the way that it should be, yet we still stick to our guns and we dream about how it should be regardless of the present reality.
We share a dream:
Like any great dream, it is lofty, challenging and worthwhile. We dream that we can make a living as fee appraisers, doing our jobs the proper way. The dream is to take the time to analyze the problem to be solved; research the market thoroughly including market trends; interview the market participants; analyze the sales and extract market adjustments; and then report the opinion of value in a way that the client can understand the thought processes. Within this, there will be good support for conclusions and the appraisal will make complete sense to the reader. It will not leave gaping holes or questions. The opinion of value will be well supported by sales that are both inferior to the subject as well as those that are superior (and ideally equal). The appraisal will address the current market conditions and the active competition as well as the closed and pending sales.
Analysis is what we do, refined by the appraisal process, tempered by ethics and integrity all rounded out by participation in a profession that is carried out by like-mined and well-intentioned practitioners.
The dream continues:
Our clients will truly care about the analysis and it will be meaningful to them. They need something of substance, and not simply paper for a loan closing package, or simply a report for a divorce or bankruptcy proceeding. The client understands that the valuation is based on fact, but in the end is an educated and well-supported opinion. The client understands that each report is a unique and extensive research project that is custom designed. The client is comfortable with the opinion of value because they reached out to a well-qualified and experienced appraiser; one that is rewarded the report because they are respected professionals, not just another step in a loan closing process or the cheapest one they could find.
We realize this is getting into the lofty and idealist side of things, hence the title of the blog. What this series is going to focus on is some of the challenges appraisers face, and how we should handle them. There is constant pressure on appraisers to adhere to scope of work enhancements from clients. While we may mention customary and reasonable fees and the dynamic that the cost of business plays in the appraisal process in the course of this series, this is about what appraisers should be doing after they accept an assignment.
Rachel has years of experience reviewing appraisal reports working within the lending world as a staff reviewer and manager, and in the fee world through her private practice. Rachel has recently earned the new residential review designation with the Appraisal Institute. Woody has been doing private fee review work for years and also has to review reports for tax assessment appeal as part of his position within the assessor’s office in Albemarle County, VA. Between our combined experiences, we will focus on some issues that we see pop up repeatedly throughout various reports that have made their way across our respective desks over the years.
By Woody Fincham, SRA
This was originally posted over at Appraisal Buzz
This is the first part of a series that will briefly compare and contrast real estate assessment and standard fee practice. There are lots of similarities as well as differences between the two disciplines. There are both superior and inferior aspects to both sides, with both sides producing appraisers and analysts that are unique to their respective sides. Having worked both sides at staff and management levels, I can see how a combination of both disciplines could very well produce valuation professionals that are, to borrow one of my favorite band’s lyrics, “Some Kind of Monster”. Of course, I mean monster in a good sense. In my opinion, there are key items that both sides could benefit from learning from the other.
Often, I will be with a group of fee appraisers and hear some negative comments about assessment values or about the staff appraisers that work for a city or county. Having cut my teeth in fee work, many of my colleagues will confide stories of this or that about how “wrong” assessment is as a rule. Sometimes I think they are just trying to get a rise from me. I also get similar comments from assessment appraisers and head assessors saying things about fee appraisers such as “I can’t believe that appraiser…” I always listen, sometimes I try to explain where one side or the other may be coming from, and sometimes I just smile and say, “How about that”.
Of course, both sides of the fence have good points and both offer tremendous merit to valuation as a whole. I think because both sides work within their own respective universes without understanding how similar they really are and have minimal to no understanding why there are differences. More specifically, there are good reasons why things are different. Appraisers and assessors would be better suited to have a conceptual understanding of the differences between the two sides. After all, both groups are working towards the same end: market value.
What is the difference between assessment valuation and fee appraisal valuation? When I start doing research, I often start with very basic steps. Most often, I pull out my dictionary or a related textbook so let us try that here using the Appraisal Institute’s The Dictionary of Real Estate Appraisal, 5th edition:
1. The act or process of developing an opinion of value.
2. An opinion of value. (USPAP, 2010-2011 ed.) (Appraisal Institute )
An appraiser who is paid a fee for the appraisal assignments he or she performs
(Appraisal Institute ).
1. The official valuation of property for ad valorem taxation (Appraisal Institute ).
1. The head of an assessment agency; sometimes used collectively to refer to all administrators of the assessment function. (IAAO)
2. One who discovers, lists, and values real property for ad valorem taxation (Appraisal Institute ).
Just looking at the definitions, one can infer that both fee appraisers and assessors are essentially doing the same thing: developing value. The stated difference really is the purpose of the value and the implied is for whom the valuation is performed. With fee reports, the appraiser is valuing for whoever hires him or her. With assessment, the purpose is to value for ad valorem taxation, and generally this is done for a local governmental entity, but can also be for state governments and in some parts of the world the national level of government. Since local code or state law usually requires assessment, laws and precedent can limit the methodology or manner used for valuation.
The most obvious difference one will note is that with fee appraisal, a single property is valued at a time using standardized practices and technique. With assessment, a group of properties is valued at a time, using standardized practices and techniques. In both cases, the professionals performing the valuation follow technique and practices as established by the valuation profession. Most reading this blog already have a well-informed understanding of single-property appraisal; fewer will have a professional understanding of exactly how assessment of groups of properties or, mass appraisal works.
the process of valuing a universe of properties as of a given date using standard methodology, employing common data, and allowing for statistical testing. (USPAP, 2010-2011 ed.) Often associated with real estate tax assessment valuation (Appraisal Institute ).
Well that wraps up this installment, but I will be following this up soon with the next part. I encourage everyone to take the time to comment and ask any assessment related questions that you may have. Whatever side of the valuation fence you may be familiar with, I welcome your input and inquiry.
Appraisal Institute . The Dictionary of Real Estate Appraisal, 5th ed. Chicago : Appraisal Institute, 2010.