Should Adjustments Actually Be Done?

Dustin Harris

Certified Real Estate Appraiser at The Appraiser Coach
A multi-business owner and residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and President of Appraisal Precision and Consulting Group, Inc. He owns and operates The Appraiser Coach where he personally advises and mentors other appraisers. His principles and methodologies are also taught in an online, Mastermind group. He and his wife reside in Idaho with their four children. Dustin Harris on e-AppraisersDirectory.com
Dustin Harris

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Should We Real Estate Appraisers Stop Making Adjustments?How much credit should we give ourselves when it comes to making adjustments? Making adjustments is controversial. USPAP says nothing about adjustments – it does not require us to make them. They are a GSE construct. So, should we real estate appraisers stop making adjustments? Clients pay us for opinions of value, so our adjustments are really opinions based on what the market tells us (or that’s what we should base them on), but they are still opinions we form; they are not facts we find. So, maybe, should we stop making adjustments?

We derive our adjustments from sources such as paired-sales, regression, ranking, and so forth. There are classes, seminars, and webinars out there on making adjustments (I know there are – I’ve taken them). Yet, since real estate markets are not logical and have no basis in science, it’s highly possible that the adjustments we derive are overrated in the sense that we impart to them too much importance. I wonder if we shouldn’t get rid of adjustments, and the entire adjustment process, completely?

So, if not for the adjustment process, where does value actually come from? I am a strong advocate for appraisers. I firmly believe in the importance of, and the need for, what we do. I also believe that you cannot throw a bunch of numbers into a computer and then expect the results of that to be accurate. There is something to be said about the experience, the qualifications, the education of the appraiser, the human brain & heart, to pick the proper comparables and to do their jobs as appraisers correctly. All the algorithms in the world cannot add the human essential into the results of a computer run. Remember, we do not value property, we do not value property rights. Rather, we value people’s reaction, people’s opinion, to that property and to those rights.

But, what about not doing adjustments? Appraised value is not solely the result of the adjustments process. Rather, it comes from the proper selection of comparable sales, etc. This is the most important component of the appraisal process (especially in rural areas where there are relatively few sales). Value comes mostly from comp selection, not adjusting the comps. This is not to advocate that comps never need adjustments. They may. Rather, it is to say the best comps need the fewest adjustments.

My support for this conclusion is that on some appraisal forms (clearly not Fannie Mae, et al), there is no place for adjustments; just space for the appraiser to show the differences there are inherently between properties (but not to quantify those difference. Lest you start jumping down my throat, yes this conclusion is totally USPAP compliant (according to the experts I’ve consulted) since USPAP does not require adjustments. USPAP does not even mention the word adjustment (I’ve done the word search in a PDF copy of the USPAP document). Thus, adjustments are a requirement of specific lenders, not of appraisal theory, not of state statute, and clearly not of USPAP. So, an appraisal without adjustments, and an appraisal report without adjustments, are both totally acceptable (unless your client demands you show quantifying adjustments).

Recently, in my office, I gave my associate an appraisal assignment that she completed in the traditional manner, which included adjustments. She had a copy of the purchase and sale agreement, as well as knew the contract price. I knew about the agreement, but for my purposes I chose to ignore it until after I had reached my value opinion. So, I did my own sales search for comps, choose them, and then, via my gut alone, came up with what I considered to be a credible value opinion. So you’ll know, the purchase and sale agreement had a contract price of $250,000 which, we both concluded, was under-market. My associate, via the traditional appraisal methods, came in at $265,000. Without a “formal” set of adjustments, just using qualitative analysis, I came in at $270,000. I did not see her appraisal until I had deduced my value conclusion. My choice of comps was different from hers, too (we had only one comp in common). Again, I was not aware of the contract purchase price until after I deduced my value conclusion (without the aid of a formal adjustment process).

There is about a 6% difference between $250,000 and $265,000. There is about a 7% difference between $250,000 and $270,000. There is about a 2% difference between $265,000 and $270,000. So, my associate and I were very close to each other; and we were not that far away from the contract price. Again, we both agreed the contract price was low. I conclude this range of difference is normal and acceptable.

Now, I realize this is nothing more than an anecdote. There was nothing scientific about this experiment. The same type of comparison on a really complicated property might have given different results. But, just so you’ll know, we did this again on another property and came up with a similar split between the appraisers.

So, does this tell us that adjustments are bogus? That the adjustment process is artificial? If you carried out the same experiment (with the same unscientific approach), would you achieve the same results? I don’t know, and will not speculate. These results, however, have led me to question if the adjustment process is all that necessary and, if it is not, why do the GSE lenders want us to go thru it?

Extracting adjustments from the market results, at best, in a range of indicated adjustment quantities, but never a single dollar figure. This is because the real estate marketplace is not rational, and it participants generally do not follow the dicta of the definition of market value. Thus, we end up with dollar ranges when we try to determine how much say, a view, contributes to overall value.

Therefore, I must grab hard onto that third rail, when I say that the adjustment process has a subjective component to it. (There! I said it! The deed is done!) In layman’s (layperson’s?) terms, when it comes to adjustments, there is some guesswork involved. Now, I know I’m going to get a lot of hate mail on that conclusion, but that’s OK. I know some of my “experts” are going to question me on this, but that’s OK, too.

It’s OK because if appraisal were nothing more than crunching the numbers, we would have no purpose, no value, and AVMs could do what we do (a lot faster and a lot cheaper). Nevertheless, since appraisal is not merely about crunching numbers, but about deducing from the market data a unique market value, then we are necessary. We are important to the process. We are a necessity to our clients.

Adjustments are not the end-all and be-all of market value. This is because, comp selection is the key to a credible opinion of market value, not how elegantly or scientifically we choose adjustments (and remember, I am a rural appraiser). This is simply because the best comps would merit no adjustments at all. Until such perfect comps come along, however, we still, somehow, have to account for the significant differences there are between a subject and the comps. And, when all is said and done, there is a subjective component to that accounting. I’d love to see the day when we no longer have to take comp photos, nor make quantitative adjustments.

For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: 148 Should We Really Be Making Adjustments

Dustin Harris

Dustin Harris

A multi-business owner and residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and President of Appraisal Precision and Consulting Group, Inc. He owns and operates The Appraiser Coach where he personally advises and mentors other appraisers. His principles and methodologies are also taught in an online, Mastermind group. He and his wife reside in Idaho with their four children. Dustin Harris on e-AppraisersDirectory.com

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19 Responses

  1. Vincent R Simon on Facebook Vincent R Simon on Facebook says:

    Just like the bracketing . A true similar comparable is a model match in SFR, TH and Condo. But yet some dipshit wants to see an inferior and superior unit . How does that solidify value

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  2. Why are so many appraisers hell bent on re-inventing the wheel? The open market is the basis of the adjustments. The appraiser’s job is to interpret those differences based on the actions of the market participants. Does a buyer typically pay more or less for a pool, a 4th bedroom, a 3rd bath; and do the prices generally move up or down according to GLA. Why not bring some good old fashioned common sense back into the equation a leave and perfectly good wheel alone.

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    • Baggins Baggins says:

      So either they did not recognize the quality difference of features, like superior hardwood vs mini prefab wood deck, something like that, just matching the feature on paper and not adjusting, or the sellers agent provided inadequate representation and listed the property too low. Why didn’t buyers compete and drive the number up if it was underpriced? It’s sort of one way or the other without much in between room. Perhaps the lack of detailed analysis per individual adjustment or lack thereof, is why the appraised value was notably higher than the price. When I finally get to the final stage of grid work, after all other analysis and form filling is completed, I always lay out all 6 comps printed on paper at the desk, mls, assessors and other data stapled to them, and then work line by line down the grid while reviewing listed property photos vs my thorough 100+ photo set of the subject. It’s so easy, a caveman whom is not using outsourced services could do it. If I wanted that nicer deck at my house, that bigger AC unit, that hardwood instead of carpet, you can bet your bottom dollar the contractor would have me pay extra for that compared to the lower priced materials. If appraisers want to get better at their jobs, ditch the analysis software and go to the hardware store, then stay there until you know what everything actually costs. If you’re lucky enough to deal with contractors and laborers, ask them a million questions and take notes about what services are actually costing today. If you have perfectly matching comps you don’t need adjustments, in a perfect world.

      Dare to dream I suppose.

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  3. Brian Kirkpatrick on Facebook Brian Kirkpatrick on Facebook says:

    I’m afraid that if we did this than the AVM model would definitely put us out of business.

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  4. Avatar Trisha Jennings says:

    I do not make adjustments unless they are supported and get ouch back all the time

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  5. Avatar Bryan says:

    I’m still trying to figure out why we shoot original comparable photos (one of your prior articles that I truly agree with). Talk about carbon imprint for NOTHING substantial. The adjustment thing I will have to think about.

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    • Avatar Bill Johnson says:

      Forget the carbon imprint Bryan and consider the human effect. I spent 1.5 hours (+1.5 hours driving) today walking several large condo complexes trying to find the specific comp units in question even though each were all the same but just a slightly different earth tone exterior color. There are those who take random air pictures and call it a day while completing 4 to 8 appraisals a day, and there are those who seek the truth.

      Seek the truth.

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    • Bryan we ‘shoot’ comparable photos to achieve three purposes: (1) prove we personally observed & considered them; (2) provide others graphic evidence of the more obvious physical differences, and (3) to assure we went to the neighborhoods they are located in and were exposed to whatever surrounding market characteristics there are. MLS & other pictures augment this. They do not adequately eliminate its need or benefits.

      When Al Gore or the Chicago Carbon Credits Commodities exchange dba Chicago Climate Exchange start augmenting MY appraisal fees with the money they collect from carbon credit trading I will seriously consider my carbon footprint as a part of all appraisal assignments commensurate with the compensation they are providing me.

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      • Avatar Bryan says:

        I personally drive every comparable for my reports. It is a huge investment in time and energy. I understand “why” we do it. Dustin stated in an earlier write that with all of the technology we have at our hands today our time might be better spent. I agree.

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      • Avatar Bill Johnson says:

        Mike it’s the 100, 5, 95 rule (Did I just make that up?). In other words, you have to drive 100% of the properties to find the 5% that may differ from your original analysis, meaning nothing changes 95% of the time (your opinion). When appraisers spend one month of the year driving in circles where nothing changes 95 out of 100 times, it’s no wonder companies like Proxypics are around and they have a booth at Valuation Expo.

        Seek the truth.

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        • I don’t accept the percentile relationship at all…nor do I ‘analyze’ property before I have seen it. Appraisers that never go into the field are no better than ‘reviewers’ that never go into the field. Neither should be calling themselves appraisers.

          We go into the field to learn. Every single time.

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  6. Avatar Bill Johnson says:

    Speaking of adjustments. No thank you Solidifi I will not take that 2.5 million dollar detached condo property that is 2 blocks from the Pacific Ocean for $365 due in 4 days. Just another Tuesday in the big city Dustin where everything is model matches and cookie cutters.

    Seek the truth.

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  7. Dustin, one sample in an undefined market is not enough to support any conclusion of percentile variances that may result across the country.

    I agree with Ms Potts on this. There are cases where quantitative adjustment is simply not possible, but in the large majority of cases ‘market significant’ differences are quantifiable using long-established commonly accepted, sound appraisal practices and techniques.

    These include a market survey of participants including local area agents. It’s a great data source that has fallen into disfavor by GSEs and some ignorant regulators alike. It is every bit as valid as paired sales or regression. It does require judgment and proper interpretation of the information just like any other data source. An experience-based subjective opinion is necessarily used to consider source credibility. Agents were not dismissed out of hand as ‘vested interest’ parties. Individual agents overall credibility was opined by appraisers and decisions were made to include; modify, or interpret the data we were being given through life experience veracity filters. Hence the art part of our profession.

    I think the real issue here is appraisers lacking either the willingness or the confidence to push back against non-appraiser ‘reviewers’ or highly suspect “Big Data” risk rating algorithms.

    Agent / buyer / seller surveys have an element of subjective opinion to them, but collectively on an ongoing basis, they tend to capture market perceptions pretty accurately. These are the source ALL other data collectors try to emulate.

    Paired sales in certain textbook instances are great and self-explanatory. In the real world in mixed property type or eclectic market areas, PS is not nearly as neat and pretty.

    Big Data; Data Science or regression is incapable of capturing or accurately measuring more than about 70% of a property’s physical characteristics; has built-in errors where public records information is incorrect and does not even consider the other 30% of market characteristics that contribute to recognized values. It simply reallocates their numeric ‘value’ as a percent to the other characteristics that are being measured. The result will always be skewed. SUBJECTIVE data scrubbing is used to minimize this.

    An ill-informed belief has arisen that any difference in a forms or grid line item description also requires a specific adjustment. Nothing could be further from the truth. Pre UAD we used to ‘qualify’ relative comparisons in line items JUST LIKE THE MARKET did. Ratings were not absolutes and no one tried to foist that particular mental petard off as being an element of good appraisal practice as GSEs; MISMO and some regulators do today.

    To avoid misleading reports, we used to write ‘see cmmts’ in the adjustment box. Telling readers that there is an explanation that goes along with a visual dissimilarity in descriptions. We used to utilize ‘half ratings’ or conditions to demonstrate where in a category a property characteristic may fall.

    Lastly, we would also identify that some differences may or may not be recognized by the market but IF they were, data was inadequate to quantify such an adjustment, and qualitatively we subjectively considered their impact in our reconciliation.

    Not all of us have the same formal educational credentials of our professional peers and many of the self-serving broader industry advocates. We tend to be accepting when a more formally educated person; or study by such persons is presented telling us how we should be doing things.

    We do however have something they lack. That is a collective educational foundation more similar to the other broad market participants whose actions we try to emulate; measure and predict.

    I humbly submit anyone who read & understood Hans Christian Andersen’s “The Emperor’s New Clothes”; and Miguel de Cervantes Don Quixote has a better foundation to become a great appraiser, than those that can’t make dinner decisions without consulting a spreadsheet.

    After all, most of our profession involves exposing naked emperors & tilting at bureaucratic or vested interests windmills.

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    • Baggins Baggins says:

      I have never once seen this author actually answer a comment on this board. It’s doubtful he reads them and more likely he just uses this website as a marketing tool.

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  8. Baggins Baggins says:

    This is what passes as appraisal advisement and training these days? In the real world, a deck costs so much money. The bathroom and remodeling efforts have a relatively fixed range of cost depending on materials chosen. The AC unit costs so many thousands of dollars, so does the new furnace. Paint and trim cost money. Laborers cost money. Not every real property feature is the same and there is a quantifiable difference in quality and cost.

    Stop doing adjustments and just appraise them all categorically? I think I heard that before more than 10 years ago. From the now washed out mortgage brokers whom insisted everything be appraised highest and best.

    I keep telling appraisers, if you’re reaching into advanced tech analysis to extract adjustments from a larger body of data, you may get misleading results. Those programs must operate under proportional allotment of difference, then drop such total difference into the proportional categories. So much $ for ppsf, so much for beds bath, so much for whatever feature is being recognized in the mindless automated tech analysis process. Don’t bother with quantifiable differences of worth and quality, because if you use regression then also try to apply a sensible principal like that, you’d then be over adjusting and skew your own result.

    If you’re not making adjustments, you’re doing it wrong. If you think there is no quantifiable difference in quality with the majority of housing comparables, either you truly are working in cookie cutter everything is exactly the same, or you’re doing it wrong. Did not know the contract price prior to providing the end value? Oh boy that’s rich. How exactly did this appraiser analyze the whole market, did his assistant redact the subjects address from those pointed data sets he looked at? Probably he just picked data, entered data, then dealt with the statistical computations presented. That’s not appraisal, that’s something else. If the subject is listed in MLS, and you’ve performed adequately thorough market research, you do know what the subjects listed price is. If you have completed an appraisal without looking at the contract, you’re doing it wrong because you may have missed special inclusions, exclusions or special terms which influence the final valuation results. This experiment sounds like it did not utilize the scientific method adequately, but rather formed the test parameters around preconceived results being sought.

    The beat skips on.

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  9. Anyone who actually believes that paired / matched sales in the real world comes remotely close the text book samples, needs to reconsider. The text books afford hypothetical examples. I apply matched / paired analysis to the overwhelming majority of my assignments with similar verbiage to this: ‘Adjustments are based on a combination of aggregate comparisons, matched / paired sales analysis, sensitivity and/or trends, with no two or more approaches returning consistent results, with the adjustments deemed ‘reasonable’. While not always strongly independently supported, collectively, the adjustments serve to narrow the adjusted value range of the bracketed comparables in support of the subject’s most probable selling price commensurate with the definition of market value set forth herein.’

    I went down a deep, dark multi-linear regression (MLR) rabbit hole several years ago only to learn that MLR wasn’t the answer either, in most cases, after I spent an extraordinary amount of time and money. MLR affords no more support than the other conventional methods, IMO.

    Again, why are so many hell bent on writing articles that over churn and burn the same old topics and criticism of age old methods and techniques that have yet to be improved upon? We work in the real world and changing markets that have so many different fluctuating variables that it becomes impossible to quantify adjustments with the ridiculous level off accuracy that many contend is necessary / required. That’s not how real world markets work. Factor in changing trends and you’ll find yourself chasing a moving target every time. Stop over-complicating what we do. For me, I’ve come full circle.

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    • Baggins Baggins says:

      Talk to me about the idea that adjustments should be based, at least in a sensible proportion, to real world actual costs of features. I mean, like, that’s what actually drives market value at its core right, the quality and dressed up features, or lack thereof? Thank you.

      I actually found a meaningful matched paired sale once. Yes, it’s true! Two houses on the same block, immediately across the street from each other. Matching model, similar everything. One backed to park and the other did not. The park adjustment was obvious and irrefutable, sort of, well as good as it could be. Boy that was a good day. Still remember that like 8 something years later.

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      • You can have 20 sales. 10 with pools, 10 without. Most of the time, the contribution of pool won’t make sense. So do you make any kind of pool adjustment? Stop seeking out definitive, exact answers. Generally speaking, certain amenities contribute and warrant an adjustment. Why are so many overthinking this?

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  10. The first sentence in the article says “How much credit should we give ourselves when it comes to making adjustments?”

    Wrong premise out of the gate, or poor choice of words.

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Should Adjustments Actually Be Done?

by Dustin Harris time to read: 5 min