GLA Adjustment: Adjusting Full Difference vs a Threshold Amount
Appraisers, on Thursday, before the Memorial Day holiday, I circulated across the US an email asking for response to a simple two question survey about how you “adjust” the GLA square footage between the Subject and Comparables. The questions: adjust 100% of the square foot difference, or adjust the difference after a ‘threshold’ square foot amount (meaning not the full 100% difference).
I received a respectable number of responses compared to emails sent out, and also posted to 3 different web forums, nearly 200 replies. So that’s enough to validate the percentage of both responses, and report the trends.
As I started tabulating the responses, a majority trend began being evident fairly early over a couple of days. Frankly, it caused me to scratch my head and wonder “Am I doing this process incorrectly?” Because the trend is not the way I was trained. And it’s not the way I produce appraisal reports.
After finishing tabulating, I consulted two appraisal textbooks I own, The Appraisal of Real Estate, and Valuation by Comparison. I wanted to see if those would reveal anything about what the response trend showed. In fact, neither of those textbooks even mention what the response trend indicated.
Then I contemplated how a builder might price a home to a buyer. Would the builder exhibit benevolence and not charge for all of the square footage constructed? I doubt it, at least not by that direct process. I then wondered if a real estate sales person would deduct a certain amount off the presumed accurate square footage when pricing a home for listing. Also doubtful. When assessing properties for taxation purposes, would it be considered proper for the jurisdiction Assessor or contracted Appraiser to exclude a portion of all known square footage? Again, the same answer.
Some of what we appraisers are admonished to do is based on doing our work similarly to what our peers do. But when peers are doing a process that the textbooks don’t teach or recommend, how can that be considered proper appraisal practice?
Okay, I think you can get the gist of the results. Here is the tabulation:
- Adjust the actual calculated difference between Subject GLA and Comp GLA sq. ft.: 23.2%
- Adjust the difference using a threshold amount (50 sq. ft. & 100 sq. ft. common answers): 76.8%
- (In other words, don’t adjust for the first 50 or 100 square feet difference)
While I didn’t ask for explanations, some appraisers offered one – mostly for the second option. When I read them, it appeared to me that not adjusting the full difference was based on speculation, supposition, innuendo, odd theory, or the belief that doing so is proper. Some even said “‘the market’ tells me if I should not adjust the full difference.” There seems to be a viewpoint among some appraisers that the 10′ by 10′ room which can be used for living space is immaterial in the valuation.
Not adjusting the full square foot difference between subject and comps (i.e., using a threshold amount) presents report preparation and writing issues that are more complicated to address than just adjusting the actual calculated difference.
- Using a threshold figure makes it difficult if not impossible to use the appraisal software built-in adjustment calculator – if your software has that feature – because it is based on exact difference in GLA.
- Using a threshold figure means you have to provide a cogent explanation why you didn’t adjust for the actual difference.
- Using a threshold figure makes it difficult for report users, readers and reviewers to understand your adjustment process; if they can’t understand it without diving into your explanatory addendum, they will question the validity of the entire report.
Granted, in some cases, the sq. ft. difference of 100 or less produces an insignificant adjustment amount. There’s an easy way to process that, which I’ve written about in the past: Use Rounding of Adjustment Figures.
I don’t really care if you set rounding on line items to $50, $100, $500 or $1,000. But consider doing that. It makes your reports look more professional when all adjustments look similar, rather than having one line, typically the GLA line, with even dollar amounts, while all other adjustments are ‘rounded’ to $100 increments. That, to me, is goofier than a $3 bill! I have my line items set to round to $100, and no adjustment is made if it is less than $500. We just ain’t that good!
Use your own market data: I think you’ll find that most contract sale prices are in $100 increments. If that’s the case, why can’t appraisers use a similar process when making line item adjustments in reports, and then report the appraised value in the same $100 increments? Truth be told, most of ‘us’ already report the opinion of value that way!
Now I’m sure there will be comments back to me saying that I’m way off track, kind of like the $3 bill.
But, before you send such, consult an appraisal textbook to see if making GLA adjustments between the subject and comps using the threshold process is recommended. If so, I’m open to seeing that info. Send the exact verbiage from that text with your comment, and reveal the source document. I’ll distribute that info in another article – if it exists.
Thanks everyone who responded. The survey results has been enlightening, intriguing and interesting.
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