Schizophrenic Adjustments

Dave Towne

Dave Towne

Certified Residential RE Appraiser at Towne Appraisals
AGA, MNAA, Accredited Green Appraiser - Licensed in WA State since 2003.
Dave Towne on e-AppraisersDirectory.com
Dave Towne

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Schizophrenic Adjustments - Down to Exact Dollar Amount

Appraisers, I’ve written in the past about what I believe are strange ways to report adjustments in appraisals, and suggested ‘rounding’ is a perfectly acceptable way to report them. This is largely due to buyers and listing agents thinking and listing in $100 increments – not down to exact dollar amounts.

During the past couple of weeks, I ‘came in contact with’ two separate appraisals done by different appraisers on totally different properties, in different market areas.

What struck me was the incredibly precise adjustments made for only certain items in these reports, while the rest of adjustments were ‘rounded’ to even dollars. Here are the examples:

Report 1 –

Schizo Adjustments report 1

Notice how the site size adjustment is reported to the nearest $1.00, and the first line for basement is to the nearest $5.00. All other adjustments are to even dollar amounts.

Notice how the Net Adjusted Sale prices are all showing a precise figure to $1.00.

The sales prices for these comps are all reported in exact even dollar figures, and the Opinion of Market Value (OMV) is also stated in an exact even dollar amount ($XXX,000). I don’t provide those here.

Report 2 –

Schizo Adjustments Report 2

Report 2 has the GLA reported to the nearest $5.00, while all other adjustments are to an even dollar amount.

Notice how the Net Adjusted Sale prices are all showing a precise figure to $25.00.

The sales prices for these comps are all reported in exact even dollar figures, and the Opinion of Market Value is also stated in an exact even dollar amount ($XXX,000).

These two examples demonstrate inconsistencies in these reports. This is common among many appraisers, because I have seen this before. These inconsistencies can lead reviewers and lender underwriters to question the validity of other info in reports.

It tells me that the appraisers are not really fully thinking about what they are doing. They are probably relying on some ancillary adjustment process to calculate the oddball line items, without really looking at the rest of the numbers on the grid.

It also begs the question: if certain line items are reported down to the nearest dollar or five dollars, why aren’t the OMV’s being reported in the same fashion when those values in the range demonstrate the relationship? At least that would provide CONSISTENCY in reports.

I don’t think it matters greatly whether or not adjustments in the grid are rounded. But if they are not rounded initially, and the resulting range of adjusted values show non-rounded numbers, would it seem logical that the OMV should be reported in the same way? Yes, I understand we reconcile our OMV based on the range of Adjusted Sale Prices. But if you believe ‘rounding’ of the OMV is fine, even though the individual adjustments are not, what is your rationale for NOT ‘rounding’ the adjustments?

Think this through, as if you’re on the witness stand being cross-examined by the opposing attorney who has a good understanding of appraisal reports.  What would your answer be? Likewise for your state regulatory agency investigator who has questions about your report adjustments, and wants to see your complete work file.

As I previously mentioned, most listing agents and buyers typically don’t think and act in terms of goofy looking dollar amounts. Yes, there are exceptions, but those are very few. Take a look at list prices and the resulting sales prices in your area, and I’ll bet you’ll find that a majority of those are mostly ‘rounded’ to no less than $100 increments.

In my practice, my philosophy is any adjustment less than $500 is immaterial and difficult to support by the market, and is not made. The contributory value of a $500 adjustment against a $450,000 sale is only 0.11%. I also round adjustments to $100.

I have the following statement in my report Addendum:

Adjustments of $499 or less are not made.

For clarity and ease of reading, all adjustments are ’rounded’ to the nearest $100. This does not diminish the accuracy of the reported Opinion of Market Value, because notably, most property sale prices are recorded at $100 increments.

If you want to report adjustment numbers to $1, $5, $25 or $100 ‘rounding’, fine. But be consistent for all adjustments. All report software allows ‘rounding’ to be done in the individual adjustment fields on the form by selecting a setting figure. Choose the one you believe you can support, and then let the auto-rounding feature take over.

Your reports will look much better and will be more believable (at least in the grid!) when you provide consistency in reporting adjustments.

One more item of note: Did you notice that the two report examples are for different Design (Style) homes with dissimilar Quality and Condition ratings? Did you also notice that the Fireplace adjustment in both reports is EXACTLY the same? Hmmmmmm. The Appraisers must have downloaded that common adjustment amount spreadsheet off the internet… the one that real estate agents always want to get from us, and state investigators would like to have a copy of.

Dave Towne

Dave Towne

AGA, MNAA, Accredited Green Appraiser - Licensed in WA State since 2003. Dave Towne on e-AppraisersDirectory.com

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35 Responses

  1. Lou Gerak on Facebook Lou Gerak on Facebook says:

    I have this conversation with some of my Appraisal friends all the time. Old school thinking sometimes…. Adjust for anything that is different and fit the numbers…

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  2. chris says:

    Not old time thinking, old appraisers always rounded. It’s the young appraiser that preset their computers to input automatically. LAZY….

    And then NEVER change them….. lol…. it just makes us look dumb and that a computer can do the appraisals…. wait…. that sounds very familiar for some reason…. hmmmm.

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    • Lou Gerak on Facebook Lou Gerak on Facebook says:

      My experience is (and I’m old school) is that many still live in the day that when an Appraiser made an adjustment, it wasn’t questioned and they “liked” the adjusted values to be reasonably similar so some adjustments were just included based on the limited data. I don’t agree with it. All sales are different and have information that isn’t always evident in the MLS data or data available so you look at the market and the range of sales and value accordingly. I have no idea how to preset my computer…

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  3. Fritz Vogel AGA,CRS,CEI,GRI 27+ Yr Cert. Residential says:

    Rounding is an automatic function of the report. When did you last see a value come in at $323,555?

    With few sales to rely on (Why the MC report is going away) appraisers must rely on “Market reaction” to an item, what a typical buyer in that market is willing to pay for that item.

    They only way to adjust that is with YEARS in the marketplace. That’s why they pay me.

    With no sales, no model matches, they is no mathematical formula.

    Then we have the “Cost” of an item, we need to know that to begin with before we can speculate on an adjustment amount.

    I see your point that these guys were spot on in one adjustment and wishy washy in another.

    But this is not nor will ever be a science with the strange and differing properties we encounter.

    If a lender wants 100% accuracy  get a full report not a summary, I think with 95-98% probability is a very good thing given our fee and time allotted.

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  4. John Pratt says:

    It is OK  to round adjustments however it has little or no affect on the final results, not really a big deal. The adjustment for gross living area is merely a function of the computer program, if you round it doesn’t make any different. The more important facts are in report # 1 there is 3 adjustments for age 2 for $100 and one for $250 and there is an adjustment for the basement of a 6 ft difference in size and one for 15 ft difference in size. This appraiser really needs help. Adjustments should reflect market reactions for the differences and there is no way the market, a potential buyer, is going to adjust the offer for $100 or $250 for an age difference or for a 6 ft or 15 ft difference in the area of a basement.

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    • chris says:

      You are 100% right…. these appraisers who are NOT thinking, make all of us look like idiots. It’s a perfect argument for getting rid of us and replacing us with what….. computers who don’t think…. and desk reviewers writing hybrids who have NOT been in the field for years!!!

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    • James says:

      That was the exact thing that caught my eye before anything else. $100 adjustment? Really? Is your ego so big that you can nail a market difference to within $100? Wow! I don’t even make and adjustment for anything less than $1,000.

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  5. Baggins Baggins says:

    Well, you may also want to consider the FNMA CU valuation patents… Welcome to the brave new world of automated appraisal quality review. The T3 model is your new standard underwriter. If you step out of line, the data will say so, they’ll reach down and swat you out of the lineup. Don’t confuse the day one reviewer protocols or a human will step in and they will fight to protect their new CU master at all costs.

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  6. Pierce says:

    I do not round time or GLA/basement area adjustments. What we are required to do is provide adjustments that a “reader” of the report could “replicate”. If I round GLA or Basement area adjustments, the “reader / reviewer / underwriter” might not be able to replicate those adjustments. I cannot count the times several years ago that I have had underwriters email me wanting to know why my GLA adjustments were a different $/sf. When it was rounded, they just could not figure it out. Yes, it looks Stupid to have this adjustment to the exact dollar, but I am writing the report for Stupid people that ask Stupid questions. Since I started not Rounding GLA adjustments to the nearest $100, I have not had the FIRST call about different $/sf adjustments. You have to pick your battles and this is one that I have won.

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  7. don says:

    There is no credible evidence that VALUES are exacting. There are rounding rules, there are preferences, people are conscientious negotiators, prices vary according to ongoing changes, to landscaping, to stucco color, to appliance quality. How do you predict Prepaid HOA dues for two years accurately. Estimate the traded in Holstein, better than a Jersey?

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  8. Helen Rae says:

    The above “appraisals” are pretty poor “opinions” of value based on those ridiculous adjustments. Yes, they make us all look like fools…

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  9. Scott Wachter says:

    Most appraisals that I have seen have rounded adjustment factors, (ie. $75/sf or $10,000 per bedroom) but not the total adjustment amount. I don’t see anything schizophrenic about that. To me, changing the total adjustment amount would be the same as rounding the GLA’s or site sizes of the comparables in order to have rounded results.

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  10. Jeff Bodi says:

    Must be a slow news day….

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  11. SCOTT says:

    Not rounding assumes an accuracy that’s not there.

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    • Juliana Homstead says:

      Exactly! This is a significant figures question and in my humble opinion market reaction can not be measured that precisely. I round all my adjustments to the nearest hundred and my final value opinion to the nearest thousand.

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  12. fred says:

    I have reviewed many many appraisals; the precise adjustment crowd, about 90% of the time, is a commercial designated appraiser completing a residential assignment.  I have a big enough sample size to make this statement BTW. ISWIS

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  13. chris says:

    Agreed, the reports I reviewed from commercial appraisers are brutal. most of them think being located on a busy street is a positive for a residential property, they take no consideration in size, and they really have no idea with market-based adjustment should be for residential appraisals.

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  14. AS Appraisal says:

    I round my adjustments to the nearest $100 and usually do not make adjustments that are less than 1%. When I bought a house from a builder for $324,872 I switched lenders and 2 appraisals were done… One came in at $325,000 and the other came in at $324,872…. wow- pretty precise!?!

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  15. James says:

    Truth is it doesn’t matter if you use some complicated algorithm or simple marched pair studies it’s still an overall adjust based on similar sales in a given neighborhood or market. I can take you to nearly every neighborhood and pull all sales and listings. I’ll bet you will have sales that vary by 100, 200 or even 300 sq feet but sell nearly identical prices with no reason why. I’ve long said that how a property is marketed can boost or lower the sales price. In other words the slick talking realtor with excellent marketing skills can get 10% more from a property than the lazy realtor just trying to make a quick sale. Now isn’t that higher priced home or homes in some cases by same realtor in a neighborhood gonns push per sq ft values? All my rambling is meant to make appraisers see that don’t work yourself in a tizzy over adjustments. I never adjust for differences in sq feet less than 50 and usually its 100 feet. I typically never adjust for age on homes over 20 years. Why would you? I can fund 50 year old house same size  quality and condition as 20 year old house and 50 year old sold for more. Of course there is always exceptions. Just relax and ask yourself do I really need to make an adjustment for that fireplace? Fence? Brick versus vinyl? Etc. Make sure it actually has any impact in the market. Excessive adjustments are just as bad as doing no adjustments. Both ways you are incorrectly producing skewed results.

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    • Baggins Baggins says:

      Welcome to the brave new world of collateral underwriter and digital review tools anyone can use. Red flag; there is an adjustment for this but not for that, and an observable difference for both. Red flag, the appraiser has shown a pattern of such inconsistent adjustments. Just tag in the minor adjustments to appease the digi reviewer and then go back to the art not a science approach. Otherwise there will be no end to the pushback and having to educate the next assignment clerk.

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  16. chris says:

    James, you might want to review the concept of substitution again, I know it was taught years ago in appraising 101.

    Also does anybody remember effective age, I wonder why they removed effective age from our appraisal reports.

    Effective age adjustments would really mess up their computer derived adjustments for C1, C2, C3 C4 C5 C6 adjustments

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    • James says:

      I believe you mean principle of substitution.

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    • Dave Towne says:

      Chris….no one ‘removed’ Effective Age adjustments (when using UAD). What FNMA said early on is don’t make an EA adjustment on the Age line. You can make a EA adjustment on one of the blank lines if you choose to use that. I don’t make EA adjustments at all, because those are SUBJECTIVE and not really based on market evidence. Age and Condition related to the same items and are subjects of depreciation.  Normally I only make an Age adjustment between properties because typically the Condition between properties is roughly the same. Age is quantifiable. Condition also has subjectivity injected.

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      • chris says:

        Well said…..we need more lines….. I learned in county where effective age adjustments were absolutely necessary, I no longer cover that County…….moved to a not so rural area, almost no competition.

        My point was that the computers cannot figure out effective age adjustments.

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        • Baggins Baggins says:

          “Effective age” is better indicated as a C line or individual line item for quality of materials adjustment. Rather than play with effective ages just apply generalized reasonable market reaction estimates for the differences a buyer would pay for these deficient, superior, or inferior, whatever, aspects of an individual home.

          I don’t like effective age, it presumes consistency in care but that’s not how people really manage their individual homes.

          One guy will spend all his time outside and the exterior will be great, interior trashed. The next guy upgrades half is house and never finishes. The next guy all bells and whistles but never shells out the utility updates because they prefer to only spend a few thousand at a time and never actually afford the 10k for new electric panel revamp or whatever.

          Individual line item adjustments are the winning play where the rubber hits the road. Effective age analysis is a tool for those looking in from far distances. Appraisers whom have been on site don’t need such loosely defined estimates, we would rather deal with verifiable individual facts and parsed but reasonable estimates for those individual considerations.

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  17. Scott says:

    I quit doing age adjustments a while ago because a reviewer wanted me to support them but I do believe they are appropriate if for nothing more than changing fads. But then I sold houses for years and know appraisal is an art as much or more than a science. Selling for many years also makes me realize most will never get all the fine points of the appraisal trade.

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    • Baggins Baggins says:

      “I have applied a nominal but expected age adjustment, and focused more on the individual aspects of comparison and adjustment.”

      Old, 100 per year, new, up to 500 per year.

      Easy.

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  18. James says:

    I believe you mean principle of substitution.

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    • chris says:

      yup…and the principal of contribution. I have reviewed many. It doesn’t matter what path the appraiser walks, we should all be able to get to the right market value within a few 1,000.

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      • Baggins Baggins says:

        You’ve just given me a headache…

        What’s the discounted rate of your multiplier and yada yada yada over under noi irv, and where the hell is my whiskey!

        Simple is better. These are individual homes and we’re dealing with as is market value, not projected capitalization rate or whatever.

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Schizophrenic Adjustments

by Dave Towne time to read: 3 min
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