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.
Dave Towne on e-AppraisersDirectory.com
- Marcia Fudge leaving HUD! - March 12, 2024
- UAD Redesign Timeline - January 31, 2024
- Is the Iceberg Turning? - January 5, 2024
Dave, I could not agree with you more. Whatever happened to match pairing or market reaction? This imaginary “threshold” has been out there for years (40% to 60% of cost). Fannie Mae claims it doesn’t exist. Underwriters and reviewers claim that it is an “un-written rule of Fannie Mae). Every line item adjustment (no matter what it is) should be in terms of differences in VALUE recognized by the market you are appraising in NOT COST! When I see an appraisal with $1 or $5 or less than $100 dollar increment adjustments, that is the appraiser’s way of telling me that a typical buyer would say “Hmmm….this house I’m thinking about buying has 2 sq. ft. less than the one next door, so I am going to offer $80 less”. I did a review of a $3.8 M dollar property where the GLA adjustment on one of the comps was + $12 and (same comp) for having a pool was – $138; these aren’t adjustment factors but the TOTAL adjustment. MR. APPRAISER YOU ARE NOT THAT GOOD; YOU ARE NOT BETTER THAN THE MARKET! Actually they are saying ” I don’t know how to make an adjustment without a mathematical formula or a computer giving me an adjustment factor”. All adjustments require SUPPORT! If you look the word up in a dictionary, its meaning has words like “evidence” or “proof”. Not “…..based upon my knowledge and years of experience in the local market” or “…….based upon my conversations with other appraisers or real estate professionals in the area”. All adjustments require SUPPORT and should be CREDIBLE. When it gets to the point where Fannie Mae, lenders or AMC reviewers are “suggesting” adjustment factors, I’m glad I’m retired because if I weren’t I would be seeking another profession.
I’ve seen a lot of thresholds in my past working years. Most thresholds call for a new start in a different direction.
Think of the new buyer having lost the last three offers. Or think of the experienced investor, finally being able to afford the market.
Two different markets each involving big emotions. These emotions come from both parties The seller and the buyer, and an agent waiting a commission.
Whoda think that a piddly percentage would make a THRESHOLD, or close a sale.
The appraiser doesn’t make market, the appraiser reports it.
IF a ‘threshold’ becomes significant then I can see it. (99/SF not adjusted out of habit, etc). Compared with a comparable that is 99 SF smaller, AND we under-measure the subject by 80 SF as a result of rounding off, the actual difference now becomes 179 sf. Where 99 sf may or may not have been ‘significant’ by our consistent practice, 179 sf most likely is.
Considering we have people in the industry like the appraiser coach who for years taught his disciples to measure to the nearest 6 inches, there have been problems in this profession long BEFORE you even get to the question of adjusting to full difference or a threshold.
Seek the truth.
This article is biased towards adjusting to the exact square foot. And an adjustment calculator – I wish. Read the definition of fair market value. ONLY adjust for what you believe (because you are market informed) is BUYER behavior. DO NOT think all decisions are so rational that differences will necessarily make a difference in buyers behavior. And to be very honest with you, if your comps are good and bracket the subject value – I don’t care if you adjust anything as long as your willing to narratively explain the difference thereby narrowing the spread. And by the way, for every match pair there is another that is different, drop kick that procedure.
Ain’t the matched pair’s wonderful?
The opposite position there, is where does an appraiser get a crystal ball from to know with certainty what exactly is included in a buyers decision making process and what is not. Just do the math and adjust everything. Simple. Imagine actually performing detailed buyer motivation research for every single comp selected. Then you discover this buyer thought the little size difference matters, but the next buyer thought that did not. So you follow this silly theory about buyer behavior and adjust down to the individual sq ft for one comp, but then round out your adjustments for the next comp. As I mentioned below, don’t get too caught up in theory.
Add market variance… Just because its the same house, one may sell for more. Then do that math LOL
1100 sqft 3 bedroom 2 bath vs 1200 sqft 3 bedroom 2 bath
I truly wonder how many typical market participants would even realize the difference.
Oh, this one is larger let’s pay more for the functional utility of the improvements than the other one.
I am of the camp it may sometimes not be the best practice to make an adjustment just because math says one should.
What do you do when the smaller unit sold for more than the larger unit.
Cookie Cutterville and the real world are not necessarily textbook case studies.
I have done it both ways to the exact square footage difference and no adjustment for a variance of 100 square feet or less and quite frankly it does boil down to the market reaction in varying price points. So I do not pigeon hole myself to one way or the other. As for the rounding could not agree more. I have seen odd numbers for adjustments like $10,236 or something like that and agree we or should I say the Market is NOT that precise. Round up! It looks better and you can never prove such an exact adjustment amount.
I participated in the survey. As far as adjusting, I think you are asking the wrong questions, it doesn’t matter how a builder might price a home to a buyer, or how a real estate sales person would deduct a certain amount off the presumed accurate square footage when pricing a home, what really matters is how a buyer reacts to GLA, if at all. The overall functionality, efficiency of the layout and the room placements are far more important, an excessively large dining room or family room is pretty useless, buyers are not likely to pay a premium. If the home is large a reasonable appraiser would absolutely use a threshold figure, I seldom adjust for GLA if the comp is withing 5% of the subject, I’ve also sold a fair amount of homes, and I’ve never had a buyer bring a tape measure to a showing, they just don’t care that much about this element of comparison. Adjusting to something like a $100 increment gives the impression that the appraiser is precise on this adjustment, this is misleading in my view. Applying adjustments in the appropriate order is paramount, adjust for elements that are easily supportable from clear market data, then go down the line. More often than not I am left with a GLA adjustment that is pretty small, applying a larger adjustment results in a wider adjusted value range, and I think we can all agree that is not the purpose of adjustments.
I interviewed a builder a long time ago, both he and his wife were accountants. They got into building by buying out one of their clients. They priced a new tract by studying the competition, limiting models, not competing with themselves, and teasing the market with a defining spread from high (The biggest profit maker to the Lowest price a breakeven). They were very successful, and their several sons were also successful.
Businesses are successful because they studied marketing. When the appraisers came along, they learned from costs and incentive and ambition. Things have changed from when TOM MIX went bankrupt.
I don’t think there is an exact correct way to do it. On a 4000 square-foot home I don’t think 100 square-foot is gonna make any difference, on a 800 square-foot home, now that’s a different story.
I take a depreciated value per square foot from the median of the sales used in the report. This is market data from closed sales that are “viewed” as being similar to the subject. Then round the adjustment to the nearest $1000 to account for any margins of error and acknowledge that being a dollar and cent precision in your report doesn’t assist in credibility and I don’t believe there is a single appraiser that is that good to be that precise in their final opinions and conclusion. This is a method that is accepted by AI and should be taught more. This recognized each square foot difference of the subject and comparables used and eliminate thresholds, odd depreciated cost to replace figures. You have bonified market data sitting right there in the top of your grid, why not just use that instead? I can’t think of any other method that would represent the market trends of similar homes than what you, the appraiser, deemed comparable for substitution purposes than this.
that $/sf figure on the grid is pretty useless, and really should be eliminated, this calculation throws everything in – land, garages, pool, patio/deck, high-end upgrades, etc. into the calculation – remove everything not directly attributable to GLA and you might have something, but who would do that to the subject and ALL the comparables? Not me.
People buy the houses based on the culmination of everything that is there. SO adjust in that manor. Let me guess, you adjust for decks, water features, type and amount of fencing, etc? How did you verify the sizes and materials use? What is the basis for comparison? I doubt it. The method that I’m presently using accounts for everything that is there as the market buy’s it. I’m sorry that you view this data as useless, but others find it as more market data that can lead to more credibility. The appraiser should also be looking at this data to view if they are bracketing the sales price square foot of the subject and the closed sales used in the grid. Not doing so may suggest and missed value point. Furthermore, if the market is being trained to buy and sell homes around this figure point, wouldn’t it behoove an appraiser to acknowledge the figure and what the market is doing based on it. Don’t get it twisted I’m not suggesting value the house based solely on the sale price psf, but an adjustment can be arrived at using this subject specific data.
I do adjust for things like decks, views, water features, parking spaces, bath counts, upgrades, lot size, etc. and those adjustments are based on matched pair studies, and I have years and years of data in my workfiles, and am constantly adding to my data base – after I adjust for these items that I can actually quantify with market data, then I take a look at GLA – usually what’s left is pretty small – that figure on the grid might say $550/sf – the adjustment for GLA applied might end up at +/- $50/sf. If you over-adjust for GLA you are likely double-dipping – use whatever method you prefer, but don’t doubt mine. I do stand by the statement, that figure on the grid is useless, its an underwriter tool as a double-check on conformity, nothing more.
I disagree. Again, how are you doing matched pair for decks because every house has different sizes, materials, condition, etc. for such features. Cost to replace on these feature does to reflect what the market is willing to do when buying a house that has them. Dollar in does not equate to dollar out. I’m not adjusted for decks, porches, water feature, etc because there is no basis to compare with the lack of consistent reporting of data in the MLS sheets and the lack of similar level of inspection as the subject. Match pair on those items assumes all decks are equal. Covered parking, totally get that one. If car fit, then it fits. Decks and such are in such great variance there is not basis. With a covered parking space, a compact sedan could service the basis for any appraiser to start, but for open parking? An open field could be used as open parking, what’s the starting point?
in my area a roof deck can be $75K, a deck over a garage, maybe $35K, some have nice decks, some none at all, easily extracted by matched pairs, lake views, easy again, matched pairs, crystal clear, no fudging – an elaborite stone patio with built in kitchen/bbq area, again, pairs, and you can always temper by costs – I guess I am lucky, we have a lot of sales and high values. Is it exact? of course not, but its close and a lot more accurate than just lumping everything together on the $/sf bucket. I wouldn’t say it if I couldn’t support the adjustments. I think we are working in very different markets
Yes, when these features run real world costs that stack up to tens of thousands of dollars, per individual feature, you can better believe there are at least some well informed buyers out there whom recognize the difference. Otherwise if you ignore those features you’re saying there is no market value influence. One does not need to itemize down to the minute portion but generally, yes some features are better than others and they deserve their own individual line item estimate. An old deck is worthless compared to a new amazing one, and perhaps a super awesome pool offsets the $35k deck. There is no rule, just the importance of standing in the shoes of a buyer and a seller at the same time, understanding the human factors which drive market comparability. If they have a 100 ft hardy boy statue in the back yard, such is not going to be popularly appealing to market and would be better noted as personal property or not contributing, regardless of it’s cost. Conveniently for issues like fencing and such, if everyone has them, the adjustment amount for new vs old is minor, likely already reflected in general comparisons. Because if you’re matching low depreciation vs low depreciation, there is less need for individual adjusts, as many would have offsetting comparable relationships. So what if they chose granite or silo stone, they all have some material upgrade. So what if it was this type of deck or that, they all had one. Where as the home without the feature, well, that’s a little short and deserves an adjustment. Ask yourself, if you were a buyer and two identical homes, one with deck, the other without, which would you buy and would you negotiate the one without deck downward? Of course you would. Sometimes appraisers get lost in the market value theory and should step back into the real world where every single component of that home costs a pretty penny. Tell me one contractor on this entire planet whom will just toss in the extra hundred square feet of free hardwood floor finishing, I’d love to link up with that guy.
Agreed.
Spot on Chuck – I agree with his approach 100%. I would just add that we make adjustments because we are expected to, that does not mean that they are mathematically accurate; it means you are applying logic to narrowing the bracket – rarely does my profession bother to add that narrative or even describe the sub-market search parameters.
Paul, I was taught through Appraisal literature and classes to NEVER average. And reducing to a $/sf is nothing more that a modified cost approach which I hope we all agree is smoke and mirrors! If the sub-market search is accurate and I don’t mean a search by PRICE, then a good appraiser should not be afraid of pointing out the major difference in a narrative thereby having the adjustment process seen as only a vehicle towards finding the sweet spot within the bracket – not really rocket science, but does require serious data search within a defined sub-market definition.
My name is Spencer and I never said anything about average. Median means the middle point. I don’t see how your process is better than mine. Not at all. It is not a modified cost approach. The appraiser selected sales based on similar size, feature, blah, blah. You have the statistical data range the market is willing to pay for similar improvements in a price per square foot. Why is the median (not the average, look up the definitions) sales price per square foot to be used as an adjustment not more credible that potentially dated cost to replace figures? This is present market data that you, the appraiser, deemed to be the most credible for substitution purposes. You the appraiser are not going to be good enough to extrapolate an adjustment for drives, landscaping, decks, patios, etc. The market simply isn’t consistent enough for that to take place and remain credible. If an appraiser starts making adjustments for those types of amenities I would shred you on the court stand asking what was the basis for comparison? How did you know what the materials were used, its condition? How did you actually know the sides of decks, patios, plants, etc where? My method is negating adjustments for this items because they are already accounted for directly in the median sales price per square foot.
Let’s talk about ‘the market’. What is that and where does it come from, what drives this supposed market standard? I’m now standing in the isle at home depot looking at real world cost differences for all those materials, pondering the mind numbing labor fees. To posture that it’s impossible to come up with reasonable ‘market adjustment values’, that’s not accurate.
That is ‘the market’, as far as that individual home component is concerned, the cost of the feature. If you’re the only home with that feature, that feature has real world cost relationships. That’s what drives the market valuation trends, you either have the feature or you don’t. After that, it’s just regular depreciation
.
Again, if you’re comparing high end to high end or low end to low end, there is likely an offsetting character and no adjust would be necessary, or only a minor one for obvious differences in quality and/or age.
Don’t get so immersed in appraisal theory that you forget you’re a real person standing in a real home. If in doubt, and you don’t know what in the hell these feature benefits cost in the real world you have two effective options; Learn what they really cost to drive defensible adjustment application, or take a wild ass guess and fall back on some book theory. One is a more reliable method than the other. An appraisers specialty is simple, to have a solid understanding that there are thousands of components to a home, and all of them in one fashion or another, contribute to the total whole home value. Pieces of the pie.
That’s when we turn to general market values and reasonable ranges, because we’re not providing an audit of every single item, only a general analysis that this measure of improvement and quality has been shown by recent sales to drive X market value. Remember, the appraisal grid is not a place for theoretical application, but rather a simple mathematical formula grid meant to express real property as a simple math problem to be solved. Which is why the new FNMA forms are so awful, they spread out a single math question across multiple pages. Of course you adjust for every last sq ft difference of land and home size, because those are the units of measurement you are working with. Think of the ppsf figure as a pie, a 100%, and for all the individual components, those are slices of the pie. Therefor the adjustable amount would be limited to that little slice which comprises the total home value. The market reaction to cost may indeed be less, but such is not nill.
Otherwise your formula is incomplete and you’re working with less than 100% of the pie. ‘Distributed allotment’ of the necessary adjustable amounts. The closer your comparisons are in terms of all the possible differences, the lower your adjustment amount needs to be in the first place. If the market value difference is nominal, then the adjustment would be nominal too, but it should still be applied down to the individual unit of measurement you are recognizing. Unless you round out your reporting of home sizes, you should not round out your adjustment down to the individual square foot. This is not knowing the unknowable, but rather merely being consistent with the units of measurement.
Paul, come on Median is MEDIAN AVERAGE, the middle instead of adding it all up and dividing by number of entries. Please don’t take us as fools. As for $/sf, it is a modified cost approach because you are taking the depreciated $/sf inclusive of land and land improvements and THEN as in the cost approach multiplying it times the subject GLA. This info has always been a part of education – where were you?
Again, my name is Spencer. Median means the middle point. MEAN is average. There is a deference. I’m AQB qualified, so in class I guess. I still stand by what I’m doing over what you are doing. I can support my adjustment with direct market data, rather than adjusting for items that you can’t determine a correct starting point, verify materials sizes, functional utility, etc. I’m not say it is perfect, but I can defend mine over yours, I feel, in court easier.
Do I understand what is being stated correctly? We shouldn’t have a variance for a difference in square footage when we adjust BUT we should round for the adjustment made? It seems like we have a double standard and that this is the writer’s personal preference or specific preference to their market areas.
Always adjust for every square foot difference even if it is 5 square feet so that the reader isn’t confused? I don’t know about you, but having a $0 adjustment for a difference of 5 square feet seems reasonable if explained and supported by market reactions.
Wouldn’t the reader be just as confused if the adjustment per square foot was stated to be $50/sf but then each of the adjustments didn’t actually calculate to the exact $50/sf because it is rounded. If we are going to toe a hard line on being specific down to the exact square footage, wouldn’t it stand to reason that the same hard line should be followed in the actual adjustment?
The problem with coming up with an overarching “best practice” scenario is that it never takes into account that each market area and different geographic locations respond differently to different elements of contributory value. Nor does it take into account that appraisers are allowed to have some flexibility in how they interpret and report the data they research.
In most of my areas, buyers/sellers don’t even know what the square footage of their home is, there is no standard of measurement amongst appraisers (outside the newly enforced ANSI for conventional lending), agents aren’t required to know how to measure and accurately report the GLA within their listings and unless there is a noticeable size difference, a buyer doesn’t make monetary decisions for negligible GLA differences.
In the end, it is best to follow a consistent procedure within your reporting that can be supported by the market, regardless of which side of the fence you fall on. 🙂
Good post Brianne. Also how about this concept; Most readers of appraisal reports are not well versed in market valuation theory, or practical applications of market adjustments. So in the end the appraiser is up against a laymen with a handheld calculator whom perceives rounded adjustments as rudimentary math calculation errors. In terms of liability defense, one can eliminate half of the confusion and a hefty portion of complaints, simply by using classical accurate math which recognizes units of measurement. Otherwise appraisers could be left answering incredibly complex questions such as why the rounding or lack of adjustment was applied at a greater or lesser scale for this feature vs that feature. Down to the single unit of measurement is just easier for most people to understand. This is helpful for more efficient grid adjustments too. With rounding also comes the possibility for more human error, which can happen now and then due to the redundant nature of the task.
Brianne – when was the last time you interviewed a buyer and asked him what motivated him and how he ranked his decision given alternatives – NEVER.
Nope. Especially in refinance scenarios that’s a routine point of conversation, how they ended up with this home and why they chose this one over the others. Especially for high end best quality, an appraiser can learn a lot about home character and perhaps special home features from the owners. Nobody knows a given market place quite as well as the people whom actually live there.
David- This is not meant to puff out my chest but to respond to an assumed accusation. Just because most appraisers don’t do their full due diligence does not mean that we are all guilty.
As a Realtor Appraiser and Realtor Salesperson, I speak with buyers, sellers and agents all the time. My main administrative assistant is also an agent and we have plenty of discussions. I show up at Realtor meetings and social events for the very reason of keeping a good relationship with those that can provide me the information I need to know.
As far as keeping up with my peers, I attend at least one (sometimes 2) annual appraisal conferences every year and I have belonged to a nationwide mastermind group for over 10 years.
As general practice, I speak at agent sales meetings a few times a year where I have discussions with agents regarding real life scenarios as to what they know and what they experience. Additionally, I send out email confirmations for each sale I use in a report asking the agent to provide feedback and keep them filed away on my hard drive… so yes, I talk to, get information from and find out what is motivating buyers to make the decisions they are making as part of my every day life.
Paul – never been on the losing side in court for over 40 years. Never represented myself as smarter that the buyer or that a mathematical algorithm can predict buyer behavior. An appraisal report is ONLY a summary of your research, there is comparable, almost comparable and not very – time to ask the expert LOL!
Okay Bucky your defense is, “the computer told me so?” That won’t hold in court. You need to show what the algorithms do, all information entered and why it told you what it did. I can fully explain what I did. So you want to trust your reports to the algorithms that Zillow used to buy up houses and tell you what is wrong with your reports? AI will replace you if that is your mind set. I’ll do an adjustment, any adjustment because the algorithms told me to!! I wish you well to keep writing for the risk score and adjust for every little thing, even if the market typically won’t because your click forms said to. Time to ask the expert, I mean Misty’s algorithms. I take it you use regression analysis too?
If you’re not writing up these reports with risk score in mind, you’re just asking for trouble. My typical 1004 internal eo reviewer in Alamode is 12 non uad alerts, half of which I could eliminate but are inconsequential such as; ‘you answered no to this question but there is still a comment.’ It’s always a time drain to have to pop back in for another few paragraphs of free writing if there are meaningful non uad alerts, but such is the right way to give the underwriters what they need. On the underwriter side of things they have long checklists with specific questions for every possible alert the appraiser receives, because they receive that same alert. Specifically they have to answer this question often; If so, did the appraiser provide commentary? What was the appraisers commentary? Within the realm of the intended report user, is the underwriter whom relies on similar tools as the appraisers internal error review software.
I typically respect or concur with Dave on most topics.
Not this one. I still respect him but strongly disagree with his arguments.
I also took the survey which was restrictively worded. One of two answers. Absolutes.
The key is “market significant” or “demonstrably market recognized.” It has nothing to do with price a builder seeks to charge.
Thats why resales in new developments are often lower than builder prices were originally.
In Q2 of 2022 the median residential price in America was $400,300. Assume either paired sales or DRCN suggests a value per SF gla adjustment on a 30 year effective age property is $80/sf. Multiply that x 50 = $4,000.
Thats Less than 1%! Anyone here really THAT good? Even “the market” isnt that good. 0.9%???
I concur with Dave that our explanations are typically too abbreviated or, in some cases are simply wrong as stated. Improperly explaning this simple concept relies on the charity and professional leeway peer reviewers may extend since they know its a quibbling item at best.
It doesnt alter the FACT that certain differences are too small or too subjective to be quantified.
In such cases instead of claiming the market doesnt quantifiably recognize such small differences at all, we should be working on our communication skills.
“Adjustments for differences that mathmatically would or could infer a level of precision not credibly attainable are not made quantifiably.”
” Instead the appraiser considers those differences qualitatively in the sales comparison reconciliation. Examples of such differences may in some cases include gla differences from 1 sf to 100 sf depending on overall improvement size. ” (Or 5th fireplaces in a ten million dollar property, etc).
Use your own verbiage but dont feel bound by other appraisers perceptions. Including mine.
Try to wean yourself away from misleading or outdated boilerplate language.
Mike, you’re taking me back to the early days of appraising, as I would take a million notes and then struggle to come up with a meaningful pre written page which would accomplish all these goals of providing liability defense, informing the reader of methods, other compliance points. That’s some great language you referenced.
In the end, it’s best to not get locked down with too specific of a method, because you’ll turn around and then have to use some different method in a quirky a-typical scenario. I’ve taken many a CE class where appraisers got themselves in trouble by leaving pre written language in there which was not applicable to how they actually developed that specific report. If they would have just not locked themselves into a corner describing a specific method which was not applicable, they would not have shouldered the liability and claims.
I dealt with this borrower in a golf course condo once. He was telling me about the view premium the builder has applied to his unit. He had me stand next to the window and look out just past the outer wall, to see a sliver of the course. I had to explain to him how the market trends tend to find more logical straight forward balance during periods of resale, compared to how the builder approaches that. Sorry, no view credit from me, but as I was only selecting other comparables which were not directly on the golf course either, won’t make a difference.
Quantitative and Qualitative approaches may be used, and logical appraisal development is not an exact science. / Pleasantly open ended. Best of ability methods.
I’m with you Baggins, with any job using the right tool makes the job easier, and letting the tool do the work brings things together. As appraisers, especially the old ones, have a variety of tools/methods to choose from, experience tells us which one to pick up first. And as always you try a second tool just to check if the first one was a good choice. It’s always pretty satisifying when you can run two models and end up in about the same spot.
Thanks. Run two different models, that’s interesting. I have only one workfile, and only one brain to analyze the data their in. Personally I don’t run models or use advanced tools, I just look at market data a hundred different ways until I feel I’ve identified the market segment I’m needing, and the market set with most logically oriented trends. Constantly applying internal checks to balance to assure I’m providing credible conclusions and research.
All that data is in the end, just reflections of the participants behaviors and decisions they make regarding the real property at hand. How much they paid, which unit sat longer which unit people fought over, how the larger economic trends stall everyone out or get the whole thing moving again. Every few months, some sort of language adaptation is necessary to reflect the current conditions, and I end up reiterating the current market statements quite a bit, constantly with a substantial set I may need to select from. That’s why I type entire reports up manually and never rely on pre written commentary. The only pre written in my entire report are a few one liners and the intro page.
And we have fun with it, sometimes identifying quite unusual situations and just looking at them in more detail just out of interest, even though I know I will not be able to use them. If only I could have had future glasses, I’d have known that sometime late 2021 I could have sold to an i buyer whom was buying substantially higher than market based on anticipation, and when the market slumped I could have carved out an instant $50k equity to buy again on the dip. Perhaps stay in a hotel for a few months or something. Who could have known? Other times I will get to know a lot about properties just by reading assessors sales records. Oh sad, looks like another divorce or estate, an llc fllip gone wrong, etc. Really there is a lot of benefit from experience in this industry, because the complexities of home management and persons motivation is truly unlimited and open ended. Some agency is better than others but few will admit such. This PDC and bifurcated report approach really misses the mark. Quality valuation service happens in the real world, as much as the desk. Much of the desk portion merely captures the information learned in the field. Thanks Chuck, this thread really took off, lots of fun.
Baggs, Almost the entirety of my thinking these days is colored by the many appraisal complaints I read from states all over America.
While I think of FNMA as an actual criminal organization that simply hasn’t been caught yet (or should I say recently, again?) they do influence a lot of lenders and appraisers. Often incorrectly.
Anything I post or suggest is usually to suggest a method to reduce the frequency of phony FNMA complaints.
Understand that they do not in my reasonably well-informed opinion promote the best or accepted sound appraisal practices. They promote many ideas and concepts that will enable them to keep misleading their investors.
Going back to basics is an excellent idea for many of us today. Dumping FNMA completely is a better idea, but not all appraisers are in a position to do so…yet.
FNMA is all about plausible deniability today. Even as they continue to undermine the public trust; and their own credibility. Eventually, even the FHFA will be forced to wise up to their collateral fraudulator’s egregious and fatal flaws.
A number of years ago a friend, was driving on a Saturday viewing some comps for an avigation easement and expansion of LAX, He noted new owner, recent buyer mowing his lawn, and also noted that this buyer paid a seemingly high price. My collegiate approached the new owner asking about the price paid!
He said “HUH”
The author states that most contracted sales prices are rounded to/or stated in $100 increments. Remember the contracted price is the FINAL value/price the buyers places on the subject property; not necessarily the increments that went into that decision. The point being that (over) rounding throughout the adjustment process in an appraisal can possibly skew the indicated value. It use to be promoted to – be as accurate as possible throughout the appraisal process and with the adjustments; and round at the end/final value conclusion. And this begins with measuring structures to the nearest inch of 1/10 of an inch. Then we have the inappropriate comment that “we just are not that good” and/or an “unrealistic degree of accuracy.” If your are going that route then you better not state a single value point, but instead include a range of values indicated by market data, because you are not that good. I usually include a minimum of 6 comps and when possible several more. Why, because we have to dance around seller’s/buyer’s specific motivations influencing their pricing positions which in and of itself results in different prices for an exact same property – inconsistent sales prices. If you use the statement “we are just not that good” in court, a good opposing attorney will pick you apart. I am out of time – wish I could develop this further. Appraisers are their own worst enemy.
Realist you’re the best. This is why avm programs will never be as good as they think. The differences in values, as perceived by the many different parties involved. Value in use, value in market, value in income. Technically limited because talk to anyone in the real world, value in use can encompass a million different motivations which have tangible effects on purchasing and selling conditions. The term appraisers should use more is; reasonable to the local market, in fair alignment with current benchmarks to value, that sort of thing. Which is where the appraiser and reviewer turn to the clean one page 1004 grid, and review the special table slots for sales price/gross living area, and the net/gross from the adjusted sales price line. The new 1004 forms are going to be a nightmare without these simple tools, the adjustment equation spread across ten pages like some purposefully confusing math puzzle.
NONSENSE Realist, unbelievably naive of the current world order. If you need more than 6 comps then you do not understand your subject. You’re file is the place for all of that. I lender client should be able to expect a competent summary without turning it into a narrative. None of us would be in business very long if we were to follow your business model. You are getting paid for your knowledge of the market – research – not for how much data you throw at the wall in your final presentation.
Couldn’t disagree with you again Bucky! It’s called a proper sampling pool. I typically have 5-7 comps in my report, from highly complex to the simple stuff. This leaves the reader/intended users of the report fully aware of what the subject’s is and how it relates to the homes near it that are similar. There is no place for any Realtor’s, buyers, seller, or the CU to determine comparables that are better. Your approach to value with 3 comps 1 active and (assumed) scant for commentary would lead many people to have more questions reading your reports then when they started. Oh wait, you have the computer tell us all what commentary should be in the report. CU or an apposing appraiser would have a field day asking why you didn’t include other sales, higher or lower depending on the stream of complaints, or concerns and risk scores. You leave your backside exposed otherwise. With a proper sampling pool there is no room to argue. A poor sampling pool leave you a target. My mentoring appraiser was huge on that. While the value points maybe the same, the work going into it and clarity of where the subject is placed requires it to be laid out in the report, not your work file. The lender/client doesn’t get to see that. Does your software pick your comparables too?
There is an appraiser around me whom always uses 9-12 comps and then just scoots the ones which have narrower net/gross adjustments to the front, yet leaves the others in there, despite them having insane high net/gross adjusts and adjusted sales values which are at times a quarter or more difference. They’re like anti comps. He’s demonstrating incompetency by not recognizing the importance of ‘streamlined adjusted sales value indicators’. A result of dependence on automation and comps sharing. This is how the appraiser knows if they have their finger on the pulse for accurate adjustments or not, if the applied adjustment levels result in logical relationships of adjusted values, for all comparables selected. Sometimes there is mismatching benchmarks to value in volatile markets but otherwise reading the net/gross takes you there as the most valid indicator if applied adjustments are market based or not.
My target number is 6 every single time and only in challenging scenarios will I use more or less sales examples. As far as Davids comment on a narrative vs summary, that’s complicated. Here is a simple equation; Summary = easier to lodge complaints. Narrative = requires more cost for review, more time and effort, to lodge a complaint. The days of ‘the defensive material I need are located in my workfile’, are yesterdays news. That’s not good practice in this age of automation. Defensible reports now require a more self contained approach.
I would stay clear of the term; ‘sampling pool’. They’re not market samples, they’re carefully identified manually selected most similar to the subject market sales examples from recent sales that you could identify, after performing thorough market research. When I hear sampling pool I’m reminded of Bills Coach reference where the lady was selecting comps in one minute flat, all the day long. I’ll spend two hours on the workfile and the very last step is selecting comps, probably something like five minutes per comp and that’s only possible after I personally developed the workfile and have come to know the market. Then everything is well organized and tied up, the report writing is more just routine data entry and narrative how the research shook out at that point. Liability protection begins and ends with competent filtration of market data and competent comps selection. If people are annoyed about long narratives, that’s fine, as long as the check clears.
I agree fully with you on this post. That being said, I still don’t understand your point the phrase sample pool. You manually picked comps, let say the average workfile might have a total of 8-10 sales, of which you rank and file the most similar to the 5-7 that you place in the report. Why would this not be called a sample/comparable pool? What would you call this in a two wordish phrase?
To say sample implies there are other options. Perhaps there is but I like to reiterate that after extensive market review, I have selected the most meaningful most pointed sales for detailed grid analysis. If there was actually more than six best choices, I may at the end of the report write up, detail the considered but unused comparables. I don’t know, maybe it’s just perception of language, it’s not necessarily bad to say sampling, I suppose I put so much effort into comps selection they seem more like bonafied examples of similar to subject market evidence, rather than a sample. Others may perceive the language differently so that’s probably getting too much into the weeds.
A lot of times I’ll roll to the field with 8-12 possible comps. All of which are at least close to providing the necessary bracketing and other aspects I will need to pass underwriting. Especially in situations with limited information ahead of time, I may have a variety set just in case home is a trasher or a gem. In the end I usually only need to drive 6-8 and then sort them out at the desk.
That’s when you really get to know a lot more than regression or automation provides. Because I’ll look at details to the photos, listing terms, detailed listing data, historical sales for each comp, etc, and have personal reference from actually having seen the subject and comps in person. I may toss a few out if they just don’t jive well. Lately I’ve noticed this is a more frequent event if dealing with llc buyers and i buyers, their purchase prices don’t always align very well to market, as if they had good personal realty agent representation.
I think that we agree. I don’t use regression because a math professor once stated that you can not properly run regression if there is more than one unknown variable in the equation. Comparing one house to the next, there are at least 50 on the exterior, let alone the interior. To me that increases the margins of error, nor shrink them. In either case, as long as an appraiser can show what they did and why the did it and it remains in compliance with USPAP – it’s okay. If you can’t explain it, you shouldn’t be doing it. Not pointing the finger at anyone or anything.
In the early 1960’s I attended a class given by a U.W. professor, Dr. (?? can’t remember). He was attended on the stage as his mother had taken strange drug’s.
That was only distracting for moments as he got into his client’s Fast foods and Commercial locations. He introduced us to
multiple algorithms. He said that r squared would check for accuracy, and that a Shell station with a 300′ sign on the freeway would do more gross sales than one without. His clients included a Queen and several generals.
Evan today the queen and the generals are still very believable, because of their algorithms I believe that the speaker is long dead.
I studied pools, and owned one years ago, wouldn’t again. Did you know that the average age of a pool is 8 years or so. The cost of the chemicals are frequently treated beyond the sales price. Many buyers are open to buying a house with or a house without.
Some of the most tragic things happen among pool owners, some of the pool owners are the happiest. Talk about it in your community and find out some of the bad stuff. One our streets had had 3 kids drown, one house three times, or was one of those when a pipe broke and the pool floated out of the ground.
My family invited the football team over for spaghetti just before a big game, and my job was to separate the kitchen ware from the paper ware. What a wonderful memory, but it included getting soaked.
Interesting Don. Pools are an animal to themselves, often difficult to explain to people on account of their personal fears or personal attachments to the pool. Their costs may not have alignment with market value. In Colorado pools used to be much more popular, lately I rarely see them, most were over time dismantled and removed. All it takes is one season of poor attention, one extreme temp swing, costs nearly as much as installing a new one, just to fix them.
Given our simple advancements in low cost mechanical and safety items, there should be zoning coding rules for every outdoor pool in a residential setting to have a big deal durable closing cover, complete with emergency recall on the underside and top side. Complete with in ground pole mounts where temporary railings can be installed around them. Creeps me out, just the body of water in the middle of a residential environment, yet the pool is more of an industrial item, unlike any other real property component. Too high of a risk factor. Pools are luxury items which fit in better in ultra lux very high end neighborhoods, as the costs to maintain them over time clearly exceed their install costs. Lately the market has shifted to above ground pool structures for cost maintenance concerns, but those still do not go far enough to mitigate the every day usage risks.
Interesting. All I do is write narrative reports that win cases. I won’t touch a form report. They are inadequate and too often deceiving.
My reports are very inclusive and long – to the chagrin of the opponents typically lazy appraiser. What is funny is that, it is not uncommon for the opposing attorneys to attempt to engage me for future assignments.
Too many appraisers are naïve to the point that they have let the “current world order” dictate the residential (particularly mortgage) appraisal world – that is soon to be out of existence (so much for your business model). Good luck with the demented “current world order”.
Just finished some self storage work and included 25 rent comps in the report based on a survey I conducted. It lowers the opposing attorney’s ability of bringing up the issue of overlooked comps. Too many I guess, right David.
Having a large data set helps me understand my subject better. It allows me to better observe trends and changing preferences in that market segment. Lots of my work is of properties highly unique to the point the values are based more on inferences because more directly comparable does not exist. Using many comps each with one or some of the various nuances of the subject property allows me to provide a more complete picture and to piece the puzzle together.
I have had attorneys obtain my complete work files of which they make copies to scrutinize. I often have full 1,2 and sometimes 3 three inch binders. This is in addition to the inclusive appraisal report.
I made a business decision over 2 decades ago to not do typical residential mortgage work and to never use form reports. I have done work for banks, but only narratives, typically for unique properties.
Oh well, back to my nonsense world!!
The forms were meant to be the base minimum. If you are working in the mortgage industry and you aren’t writing a near narrative report, I just fear that when it craps, they will come back to blame the appraiser and having little data to support your opinions, without additional consideration to those higher and lower being included in the report just opens up your liability. I don’t want to get sued by FNMA later on, or whom every buys up the shorted mortgages because they want my insurance money. More relevant market data is needed in the report AND the workfile. Just my 2 cents in agreement with Realist.
That’s next level Realist. You won’t catch me going to a government building on purpose, lol. I’ve had many an appraiser try to pull me in with good advice. I’ve always appreciated the easy nature of mortgage lending work. Not because the job is easy, that took a lot of work. But just dealing with people in their homes, vacant houses, this used to be a really great career until amc’s ruined the industry. There will be a wave of PAREA graduates coming for your work next, and they just may be lawyers too. Only time will tell.
There is a big difference between criminal and civil trials. One is used to protect the public from Charlatan’s the other to sell a concept. One will expose the testimony to provable positions, the other carries little liability. Acquiring a site for emanate domain taking may not involve any criminal intent.
Spencer, you obviously have not been reading my posts. Listen up, no one is interested in your data, they are interested that you have extensively researched the CURRENT market and are willing to say so, present the best data, and then have the good sense to not suggest that there are magic algorithms meaning you narratively (not quantitatively) explain to the user why the data presented supports you conclusion. Qualitative not quantitative. We don’t need a lot of unsupported adjustment based upon your years of ratio studies. Mabey you should retire to being an assessor where the cost approach fraud is perpetrated. I finally got your name right Mr Paul.
.
David, my adjustments are take directly from the sales used in the report. What part of that is not CURRENT?? I don’t use algorithms, of which you have stated you do and never address whether or not you use regression analysis, or even know if your algorithms do or not. That you should know.
I will not retire and will call it like a see it as I have been trained and educated by the same courses that 70% of people on here take. Each report has quantitative and qualitive data. Ignoring one over the other opens the door for errors. There are no magic algorithms that work all the time in all cases. That just isn’t how the markets work. Zillow found that out the hard way. The present administration and FNMA will also find this out to be fact. The algorithms will fail and when the appraiser’s that use these (which is okay) they will have to explain what was done and how it was done. If they can’t state this and replicate it without the aid of the computer (blaming the computer) it will not go well with the state boards. You can go do your thing and I’ll stop condemning, if you stop. Just because an appraiser wants more data in the report to solidify (sorry to use this AMC word) their understanding of the market data relating to the subject, should not be a reason to accuse another for not having a solid knowledge of what the subject is. That is just silly. Stop suggesting people should retire, offer more CE and courses that support your position. My mentoring appraiser and all of the CE I have taken, along with legal courses with Peter C. have guided me to the sampling pool sizes, defensible documentation in the report (backed up by the workfile) in a more narrative style report, so all readers and intended users know what I did, why I did it and rest easy on it. People don’t always like the value points shown in the reports, but I leave little room for any arguments to be created. 99.99% of that is shut down with little revisions to be completed or asked for because it’s already addressed in the report, not the workfile.
When reading the comments on this particular subject, I can’t help but notice that the dialogue in a couple of cases becomes really petty. The blog states that “We value robust & civil discourse”…”please avoid personal attacks”. So, since this is supposed to be a peer post, it would be helpful if it stayed within that realm. I would say that very few of us have a relationship with another appraiser (save your son or father, uncle, etc that you work with). If you are lucky to work in a firm or office with several appraiser’s, you probably don’t read these blogs very often. I am a one man operation, so I rely on dialogue form my peers. I also spend a lot of time studying past materials, new material, and USPAP. I have saved articles, old text books, AI text books, Realtor blogs, etc that help me in determining the mindset of our industry and help me in making sure I know what “best practices” are being used. So, with that said, let me begin:
1. The order in which adjustments are developed is critical; they are pretty much in that order in your UAD grid. Condition of sale, time, location, type of ownership, site, view, etc.
2. The method in which you arrive at your adjustment is critical. If you are in a market where the Realtor Board actually reports seller concessions, deem yourself lucky.
The topic is “adjust 100% of the square foot difference, or adjust the difference after a ‘threshold’ square foot amount (meaning not the full 100% difference)”.
In most text books, the paired sales used in the examples are not what we see in the real world. In my 2000 era appraising real property and making adjustments text book, the example is the subject at 1200 sf, sale 1-1100 sf, sale 2- 1250 sf, sale 3-1200 sf. The subject and sale 1 and 3 have 2-car garages, sale 2 has 1-car garage. All other information is the same. The sale prices essentially led one to a $50/sf adjustment and oddly enough the adjusted sales were all the same: $130,000, $130,000, and $130,000. This was the beginning of an appraiser’s understanding and was an example of how to work through the problem and extract the adjustment. I noticed the one of our colleagues argues for a method using the price per square foot at the top of the grid for the sales- I believe “median” was the term used; which by the way is a statistical term that means the value separating the higher half from the lower half of the data sample- “middle value”. If you use the middle value in determining the adjustment, you have skipped several adjustments or assumed there are not any for condition of sale, time, location, type of ownership, site size/lot, view, quality of construction, age, and rooms. The GLA adjustment is taken before basement, functionality, heating/cooling, energy efficient items, garage/carport, porch/deck/patio, or any other amenity or improvement you add.
So, if you use a median adjustment sale price/gross living area, then you would not make an adjustment anywhere else on the grid, based on the example our colleague gives us. If an appraiser were to do that, it results in double dipping the adjustments if any other adjustments are made in the grid. Also, how are you supporting the adjustment chosen- how did you arrive at X% of the median sale price/gross living area adjustment?
The square footage adjustment is for gross living area- how much more or less is someone paying for the gross living area of a home, not for all adjustments related to the price paid.
Realtors and builders often quote- the homes are listed at $xxx/square foot. They argue with us over comparables and value based on $xxx/square foot. Subject is under contract for $190/square foot, the realtor listed for $190/square foot because she/he found sales at that price range and it makes for a good listing or sale. We argue back- well, the sale you are talking about have pool, 3-car garages, 3-fireplaces, were remodeled, etc. The subject does not have a pool, 2-car garage, no fireplace, has original components from date of construction. Essentially, yes there are sales at that price, the subject is different than those, I have sales similar for less or more- whatever the case may be.
When appraiser skips pulling lot sales, getting information from Realtors on seller concessions/sale details- personal property that may have been included or repair rebates, etc, fail to analyze time adjustments, and site size adjustments, and move right into GLA adjustments with the $/gross living area sale price, it seems to me to be in error. To arbitrarily say “I use a % of the median sale price/gross living area” can’t be accurately supported any more than holding your finger into the wind as saying “its $50/sf, it has always been that and will always be that”. You may find that $0 is attributable to the difference in square footage and the market cares more for the lot and condition of the home and whether or not it has car storage suitable for someone to stay out of the rain when bringing in groceries.
I don’t think there is any issue with adjusting for every square foot or less if the data you pull supports one or the other. Just show your data and support your findings and opinions with narrative explanations.
The bigger problem that needs to be resolved will be the accuracy of the reported square footage of any home you use when comparing that to the subject. ANSI Z76 is the standard and has been in my state for 16 years–adopted by the Appraisal Board before FANNIE MAE. However, the assessor doesn’t use it, the home owner and most Realtors have not clue what it is or how it is determined. Are you measuring your comparables? Was the same standard used by the reporting party that your are using for the subject? How will you know…you may need to start making time to measure your comparables or start making statements in the report- like extraordinary assumptions and the reasonable basis for which you have used it.
It concerns me that my peers will argue and call each other names or make snide remarks about their statements. If someone calls you out because you are potentially using a method that is flawed, maybe you look at the method, look at what they are saying, and then make a decision one way or the other. We use statistic modeling, averages, etc, all the time. There is no way an appraiser can say “I don’t use averages”. I for one do- I like the weighted analysis of the sales and the value it gives based on my adjustments. I also like looking at the sales price/gross living area of my data. It is helpful…for instance, I have an appraisal now with a sale price of $162.12/gross living area and none of the sales in the immediate neighborhood or that are similar is above $143.69. This is useful data…very useful.
All we have is each other…the dialogue, the accountability, the new ideas, and old ideas. If we can’t learn from each other, we give way for all the things the institutions want that will and is replacing us. We should be getting better and learning from each other or we will fail individually and as a whole.
Excellent post. Thank you!
Agree. Actually, my response was ‘wow’.
I admittedly made snide remarks. I apologize for them and to David for them. I agree with you, we only have each other.
‘If an appraiser were to do that, it results in double dipping the adjustments if any other adjustments are made in the grid.’
The whole enchilada, from extracted regression tools. What about the extra features? Quite right.
The alternative is a classical simple mathematical approach. Distributed allotment. Each component a piece of the pie, no more than 100% should be applied.
Three comps of a matching model in the same neighborhood, sales prices 100, 125, 150. Comps selections represent one better, one worse, one similar. Theoretically a maximum of 25k would need to be applied on the high or low side. Because regardless of the scale of cost, there will always be a margin of difference there, that margin would represent the 100% of adjustments which might be applicable to apply. The closer one can identify comps, the less the total amount of adjustments that would need applied.
Stick around the blogs more, the tone and pace changes depending on the article.
Baggs, I don’t think David is saying what you are understanding. Maybe Im was mistaken.
Order of adjustments is something that is taught in basic classes on appraisal (at least AI does). Im not convinced how critical they are in relatively lower value ranges that most SFRs fall into, but they can be. I DO strongly agree on market conditions adjustments, and cash equivalence (to the extent we ever know in SFR / FNMA appraisals).
Im just not seeing the double dipping you alluded to.
FNMA’s recent percentile of site adjustments article touting the infallibility of FNMA CU (or as I prefer to call it, [FNMA FU 2.0]) does suggest that site adjustments MAY be taking place as an afterthought. Maintaining the textbook-recommended order of adjustments could be a good way of forcing ourselves to address this inconvenient characteristic with something other than ‘nominal or token’ $1.00 or $2.00/sf adjustments that have zero credibility.
Im usually in built-out suburban or urban areas. Vacant land or lot/site sales are not common. Or where they are common (Hollywood Hills for example), they are all over the board. Actual extraction properly performed is still a valid method. Regardless, of whether we have vacant land sales/ lots or sites, or extract site values, we do have to consider the value influences of the site before we can hope to get the condition and GLA right.
Virtually ALL of our techniques or the tools in the toolbox can be (and have been) abused.
I think David gave us all an excellent and probably much-needed reminder. We can all find excuses or exceptions. The point is to be able to recognize legitimate exceptions vs default / rote assumptions that order is not required because we are using lump sum rather than percentile adjustments. It can go downhill from there.
He’s a LOT more polite than I have been known to be on occasion. Another good reminder.
Order of operations is sometimes applicable, not always. Each component of the home, an individual part of the equation. That is now an adjusted part. A factor. However, we would not allow the individual factors to then alter other individual adjustments downstream, or upstream. Appraisal is in the end, a rather simplistic math problem. Which is why when appraisers use advanced mathematical programs to extract ‘market data’ for what constitutes a fair median or average adjustment for beds, baths, agla sq ft, or even land sq ft, they have then created an order of operation which necessarily does effect other individual line item adjustments or quality adjustments downstream. The whole enchilada of possible adjustable amount, applied in extracted adjustments. This leaves no additional room for validation of quality of materials adjustments, and the real world cost differences for materials and deck size, presence of feature or not, depreciation of materials on an individual basis, etc.
Those generic appraisals are easy reads, they just ignore all those real world differences and fall back on extracted data to apply adjustments. Where as the alternative distributed allotment of recognized valuation differences, leaves one with a nice clean and transparent amount which is to be adjusted, for individual items of the home. All else being equal, we don’t need massive market data sets and regression tech to point out simple price and value differences which are obviously attributable to the feature differences.
Using regression is like appraising in the abstract, and distributed allotment would be more like what’s right in front of us in the real world. That’s how I approach it anyways. All we need for valid market reaction adjustment identification can be extracted from a final set of six comparables, selected after all the other standard chores involving competent market research and selecting reasonable comparables, etc. One can’t just use that method selecting random comps, but if you’ve done the research and have your finger on the pulse of the market, those limited comps selections tell an appraiser all they need to know about what is reasonably accurate adjustment, and what is not.
Because we can read the net/gross adjustment differences right down the lines as all applied adjustments are located in one comprehensive section of the 1004 form. The 1004 form is a math equation, on one single page. (which is what makes the new forms such a disaster, no net/gross indicator, and spread out over many pages.) It is also essential to understand the concept of diminished value due to effective age differences with this method, how to competently estimate, and to know real world cost of material and labor factors.
‘The point is to be able to recognize legitimate exceptions vs default / rote assumptions that order is not required because we are using lump sum rather than percentile adjustments. It can go downhill from there.’ Yes. When you’re into high end a-typical, different more dynamic approaches are necessary. There are too many components, too many functional differences, it may become important to move to a percentage and overall approach, not dive into too many individual details. But for an average suburbia home, appraisal is not as complicated as people think. I like to say, if you can’t do it with a pen and a piece of paper, you’re missing the point. Complex charts graphs and market presentations are simply not necessary for credibility in comparing well matched individual sale examples. I always try to present data in simplistic ways anyone can recreate and anyone can understand, no fancy subscriptions or math degrees required.
Just today I ran across a builder sales record, that when verified via county, was +81k higher on MLS compared to lower county figure. That is agents gaming the avm systems to bring aggregate numbers upward, creating illusionary anticipation. Big data is too easy to manipulate.
Baggins – seems you have time to waste – Have you read Daniel Kahneman who won the Nobel Prize 2002 for his work in integrating psychology into economics, particularly how human decision-making impacts economic decisions in times of uncertainty. Essentially, ECONOMIC economic human judgment and decision making are made under uncertainty not regularly rational or quantified. Too much subjective adjusting particularly to the $ (that does imply a level of unsupported accuracy) is frankly convoluted.
On this I agree with you David.
Baggins – seems you have time to waste – Have you read Daniel Kahneman who won the Nobel Prize 2002 for his work in integrating psychology into economics, particularly how human decision-making impacts economic decisions in times of uncertainty. Essentially is ECONOMIC reasoning was economic human judgment and decision making are made under uncertainty not rational or quantified.
Math 101 – the precise or detailed the adjustment or estimate implies a level of accuracy which can become very damaging. All of my training included a statement as to the level of accuracy and level of confidence. Making adjustments to the 1,10,100 dollars implies that you are that sure of your analysis results and more importantly you have a skill level to lowest number used. That erodes your percieved competence. Economics 101.
Are you analyzing the whole market in that grid, or a small set of carefully selected individual examples? Convoluted would be intermingling the theories for macro economics into micro analysis of individual sales examples.
My entire life is a waste of time, I’m a mortgage lending appraiser.
Had to edit, I said sampling! Try to stay away from that language.
Spencer, multiple regression is easy to run, but it does involve creating. a ranking matrix and I emphasize it only provides correlation which must be explained. Years ago McKissock attempted to peddle a package which would derive adjustments, but it failed. I have no knowledge of getting from regression to actual adjustments. FYI regression can be very useful with limited data – Take 8 land sales and rank them be flat, frontage, size and you can show the effect of each on value/acre. Make a good class
To Realist!
I made a decision 2 decades ago to never write a commercial narrative report again for less the 10K. We will assume that is your base fee. The bigger the files, and the greater the words printed is just smoke. In every report there is a hook to take throw information at the wall appraisals down. As a hearing officer it was hours of listening with a one sentence note as to the decision. I’m sure the few commercial narrative appraisers left have experienced being 100 pages in and still not having a clue as to the final value. Never again! For the readers benefit my 2021 residential appraising exceeded 1/2 million income.
So didn’t a lot of appraisers income, including me, but that doesn’t make you more credible.
Spencer, as usual, you missed the point. Why sit down and labor over a narrative report for 2-4 weeks for peanuts when you can make the more money looking at a property on a Monday, finish it Wednesday and get paid Friday times five. That is the way to make more money and continuously have new entertaining work. 100 plus pages of narrative report mostly BS – not for me.
I look at 5 properties on a Monday and write them on a Tuesday. Same style and still make long the same base fees I was during the pandemic. Around here that has been very hard to do. Don’t assume everyone is earning less than you because they put more work in the reports
Brianne, You seem to be doing everything right if your main source of information is other real estate agents and maybe buyer feedback. That said tell us all how you quantify that to a $/sf adjustment or a site adjustment, etc. My point being these two things (qualitative/quantitative) do not have to be mutually exclusive but one requires a little of the other in the reconciliation. And for sure, in the end do the comparables represent and BRACKET the submarket and the subject; and then, why!
As with anything involving the valuation of real estate, its not a simple answer. Those bits of information that are gathered over time from the sources help to test analytical data programs that I use in addition to basic excel spreadsheets, plot graphs, etc. I use many tools and sources which is one of the reasons I try to keep up with what my peers are using. I am the last one to think or say that I am all that smart so I try to keep informed about what all the smart kids are doing 😉
There is no right tool or answer because they all have to be weighed in relation to the subject property itself, the “tool” input/output, the drivers in the particular market and market segment I am analyzing, and overall common sense.
Just re-read all the comments here – they are thoughtful and educational – we have a book started. If only CE could approach this dialouge. As for AI, no comment! Don’t confuse artificial intelligence with the holy institute. Once there was the Society.
“(In other words, don’t adjust for the first 50 or 100 square feet difference)”
The threshold doesn’t mean knock off first 50 to 100sf. It means that 50 to 100sf is residual and near impossible for anyone to determine. What if you have a home that is a little larger and also has copper toped bay windows. Did you adjust for quality where the the others did not have this amenity. If so you double dipped because they more than likely made the 50-100sf difference that you adjusted out. Then you adjusted them out again for being a quality/design feature.
“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.”
That’s just completely wrong. You can do this in the software by several means.
“Using a threshold figure means you have to provide a cogent explanation why you didn’t adjust for the actual difference.”
The entire report is supposed to be a cogent explanation.
“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.”
No they will not. Never in 40 years have I had that happen nor heard of it happening. The reader will look across the grid and see GLA figures.. 1000 — 1200 — 980 — 1060 with adjustments Subj — -10K — 0 — -3K They can clearly see you used a threshold and can tell it’s over 20sf and under 60sf. They will realize the reasonableness of this. If they don’t see this they probably should not be trying to understand the report.
“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.”
How about you go read a couple textbooks on music theory. Then go write a hit song.
Hell I just sent a report in yesterday. Investor bought it, renovated it, converted a porch to GLA that added 200sf on an 1140sf original home. They put it in MLS as 1140sf instead of 1340. Did the investor get paid for all his GLA? Of course. Had I used a comp that was 1370sf would I adjust it? No.
If it works for you, great but it seems you are suggesting others try a method that you feel is a solution to a problem that 77% of appraisers feel doesn’t exist. I don’t think anyone involved in the real estate process needs a textbook to understand this simple concept.