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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.

Highest and Best Use is More Than Just a Check Box

This originally appeared over the Appraisal Buzz on Wednesday, December 3, 2014

http://appraisalbuzz.com/buzz/features/highest-and-best-use-is-more-than-just-a-check-box

As review appraisers, one of the issues that we see all the time is the failure to analyze highest and best use for a market value opinion related to mortgage lending appraisals. This makes sense to a large degree, because many appraisers believe that providing the “yes” answer relieves them of further analysis and communication. We wanted to address this topic and offer some insight as to why one may want to rethink their approach to this common issue. In that light, we thought that we would look at a key part of the valuation process, but one that often gets overlooked in residential reporting: Highest and Best Use. With the majority of reports being written on pre-formatted reports from Fannie Mae, many appraisers skip over this section as nothing but a box to check.

A required characteristic of any valuation professional is the ability to learn, and not just occasionally, but to continuously do so through one’s career. Look at any successful appraiser that you know; chances are that he or she makes time for classes. Many of the leaders in the profession are even known to write course work or review it for publication. So do not look at this article as us telling you that the sky is falling, but rather as a perspective that many of us have adopted in our evolution as valuation professionals. I know that we both will periodically look back at past work and reevaluate how we approached a specific problem. After all, as we learn and experience more, we learn new ways to do things or ways to improve upon what we already do. The goal is continual improvement.

As appraisers, we are by nature opinionated. We have a tendency to believe our way is the only way, or the best way, and although we may expect perfection, none of us come into the world knowing how to appraise. Appraisal learning is life-long, and perfection is not possible, although we strive for it by continuing to have an open mind to gaining new insights. The Uniform Standards of Professional Appraisal Practice (USPAP) even addresses that perfection is impossible to attain, and competence does not require perfection.1 The Standard Rule 1-1 (a) comment also addresses how the principle-of-change it continues to affect the way that appraisers perform their work.2 These items are under the development standard with which we all abide, and are the set up the point we are making – which is that none of us are perfect, and hopefully we all simply try and improve our skillset, each and every day.

The Valuation Process is an eight-step procedure that starts with the identification of the problem to solve; flows on to the determination of the appraiser’s scope of work; data collection and property description; followed by data analysis (see figure 1). Data analysis includes the market analysis as well as the Highest and Best Use Analysis – considering the land as vacant; what the ideal improvement would be, and the property as currently improved. Next, is the land value opinion; application of the approaches to value; reconciliation of the valuation approaches as well as a final opinion of value followed by the reporting of that defined value.

Clearly, the data analysis section requires a highest and best use analysis related to a market value opinion. This is also succinctly addressed in The Appraisal of Real Estate, 14th Edition on pages 42-43 for further reading.3

Figure 1: Courtesy of the Appraisal Institute (used with permission)

The 1004 form, which is the most common report form for residential mortgage assignments, specifically asks the question “is the highest and best use of the subject property as improved (or as proposed per plans and specifications) the present use?” followed by a check box for yes or no, and if no to describe (see figure 2).

Figure 2

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As Standard 1-3 (b) in USPAP exhorts us to develop an opinion of highest and best use of the real estate when a market value opinion is developed (page U-19 2014-2015 USPAP), and Standard 2-2(a)(x) states specifically “when an opinion of highest and best use was developed by the appraiser, summarize the support and rationale for that opinion” (page U-24 2014-15 USPAP), checking the box without any further discussion is not adequate. Perhaps it is the lack of description in the box next to “yes” that throws appraisers off, but USPAP is clear that when it is developed, a summary for the opinion is required.5

To even start to address Highest and Best Use, the appraiser needs to have at least visited the zoning ordinance to not only understand what is an allowable use, but also what the minimum site size requirements are; what width is required; what the setbacks are, etc. Often we see zoning mislabeled, and more often than not, no information about what even the minimum site size is for the use. Without this basic information, it is not possible to start analyzing the highest and best use.

Discussing this issue with some appraisers online it was apparent that many do not believe any additional summation is required in the form other than checking the yes box, with the argument that as zoning is reported as either legal or not, meets the legally permissible criteria. That a house is built (or proposed) tests the physically possible criteria, and that reporting of functional depreciation in the cost approach or sales comparison approach addresses overall conformity and therefore financial feasibility, and that finally the remaining economic life provides for highest and best use as currently improved. While this may seem like a reasonable argument, we do not believe it is sufficient for a number of reasons, including it being nothing but an executive summary of real work and does not rise to the level of summation.

In addition, when doing work for a lender client, one must ask, “What is the purpose of this report?” The obvious answer is to determine market value, but the lender uses it as a risk assessment tool. They are trying to ascertain if the property is atypical to the market in any way and if so, how does that affect the value, and ultimately the ability to free them of the collateral in the event the loan goes sour. While an appraisal cannot answer that question in the entirety, it does help them assess their full risk by lending on a specific property.

Since the majority of appraisal work related to mortgage lending completed on form reports is for an improved property, much of the time the conclusion is that the highest and best use of the real property is that which is already in place. How difficult is it to flesh out a short paragraph related to this analysis? Given what we are seeing on a routine basis, it is apparently a monumentally difficult task given that it is rare for us to see anything beyond the “yes” check box.

What we are suggesting is that appraisers take a few extra minutes to summarize the highest and best use analysis. It can be done in as little as a sentence, but usually no more than a paragraph. One of the biggest reasons that we suggest it is that it will force you to slow down and look at your data. There have been instances where one of the authors has found out that some appraisals under review were in an illegal or a legal non-conforming use. During the review, it was discovered that the appraiser did not stop and do the analysis or did not really understand that they should look at it or report it. This puts a lender in a sticky position as they may have to shelf the loan and will not be able to sell it on the secondary or worse, have to buy it back.

In such instances, it may require several pages to support the highest and best use. Once it becomes something more complex, due diligence is paramount. The biggest reason appraisers should care about this is that it puts the appraiser in a more defensible position if something awry happens down the road with the loan. By attempting to address this directly up front you are less likely to be discredited for skipping or going too quickly through a section of the report.

One of the authors has done litigation review work where this specific issue was used by the attorneys as part of their strategy to discredit the appraisal report. In litigation, attorneys will often go to the fundamentals to challenge the appraiser’s work. To a judge or a jury it easy to make the connection that if the report is short on a fundamental concept then it is easy to assume it is also short on the section most scrutinize the heaviest, the sales comparison approach. We have both seen reports that have great sales comparison approaches, but little else in the way of a well-written report. Those are the reports that can hurt you in situations where you must defend your work.

So there you have it folks. A seemingly simple thing that really is not so simple. If anything, we hope this offers you something to think about when you are writing your reports and developing the analysis. We are sure this will create some interesting comments as well. Please feel free to share your thoughts as discourse helps us all learn more.

– See more at: http://appraisalbuzz.com/buzz/features/highest-and-best-use-is-more-than-just-a-check-box#sthash.kXUgU1Qb.dpuf

Virginia Is Charging Into the Toxic Mortgage Civil Fray

Attorney General Mark Herring has filed a 1.15 Billion dollar lawsuit in Civil Court this week.   As reported by Housing Wire (link):

“The named banks are:

Barclays Capital
Citigroup Global Markets
Countrywide Securities Corporation
Credit Suisse Securities (USA)
Deutsche Bank Securities
Goldman, Sachs & Co.
RBS Securities
HSBC Securities (USA)
Morgan Stanley & Co.
UBS Securities
WAMU Capital
J.P. Morgan Securities (and as current owner of Bear, Stearns & Co.)
Merrill Lynch, Pierce, Fenner & Smith Incorporated (and as current owner of Banc of America Securities)

“Every Virginian was harmed by the financial crisis. Homes were lost, retirement accounts were devastated, small businesses saw their credit dry up almost overnight, and state and federal budget cuts hurt vulnerable Virginians,” said Herring.

“It will take many more years to recover the economic strength and stability we lost, but I will not allow Virginians to be left holding the bag for the reckless, fraudulent business practices of a few big banks who thought they were above the law. These banks lied to Virginia, and taxpayers and state employees lost hundreds of millions of dollars as a result,” Herring continued.”

This is a major development but one many appraisers and others in the housing profession will likely welcome.  

Residential Green Valuation Tools

Sandy is one of the best residential instructors I have ever met. She is one of the foremost experts of green valuation on the planet.
Woody Fincham, SRA

Sandra K. Adomatis, SRA, LEED Green Associate

Ever wonder how appraisers develop value of houses with green or energy efficient features?  <a href=”http://appraisalinstitute.org/residential-green-valuation-tools/” title=”Residential Green Valuation Tools”>Residential Green Valuation Tools </a>was published last month by the Appraisal Institute.  The 189-page book has 13 chapters that address the most often asked questions about the valuation process and green building.  As the author of the book, I found the challenge of writing this book a great learning and networking tool.  The topic became a passion for me six years ago. It is difficult to analyze something that you do not understand.  My challenge was to discover how the green rating building science compared to the building science of the standard building code.  Appraisers must understand this distinction because the typical energy efficient home often must be appraised using sales that are traditional code-built houses that do not possess the same degree of energy efficiency.  The book has tables, studies…

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Thrilling? You Bet! Part 2

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Given there have not been all that many flat residential real estate markets in the past 10-years, how market-accurate, then, are the published tables? SR2-3 requires appraisers to certify to the fact that the statements of facts in an appraisal report are both true and correct. If there have been essentially no flat markets in the last 10-years, how can we certify our depreciation is both true and correct if the published depreciation tables are based on a flat market? If markets are dynamic, but the published tables assume a flat market, how accurate are they?

Another issue with the published tables is their self-recognized inability to speak to the appraiser about functional obsolescence and external or locational obsolescence. Appraisers know there are three components to accrued depreciation. Yet they depend on the published tables to conclude as to all three of depreciation’s components. These tables do not and cannot estimate the latter two forms of depreciation. In addition, it is a logical fallacy to assume a property has only one form of depreciation (even, sometimes, in a new one).

The Comment to SR1-3(a) is very clear about unsupported assumptions. If the appraiser does not engage in the analytics of the Cost approach, how is the appraiser sure there is no functional obsolescence? If the appraiser does not engage in the analytics of the Cost approach, how is the appraiser sure there is no external or locational obsolescence? If the appraiser does not engage in the analytics of the Cost approach, how can the appraiser certify that everything in the Cost Approach is both true and correct? Falling rents and/or falling multipliers may indicate the presence of these other two components of accrued depreciation. However, how many appraisers, via the residential income approach, go to the effort to read the market’s tea-leaves?

To professional appraisers, then, the issue is to extract accrued deprecation from market data. Published tables may be a help with depreciation’s age-life component, true. But they cannot aid the appraiser with conclusions as to functional or locational/external obsolescence. These tables simply cannot calculate them; the appraiser must extract them from the market evidence. Yet, unfortunately, many do not. And, equally unfortunately, many appraisers do not understand when, where, and how to account for an entrepreneurial profit/incentive. Because of this lack of competency, therefore, many appraisers do not understand the market since they are unable to listen to it.