Seeing the Forest Through the Trees
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Focusing on individual adjustments to the detriment of the bigger picture…
Growing up, my parents used to refer to my inability to see the forest through the trees. This simply meant not being able to see the bigger picture because focus was so narrow that I only saw what was right in front of my eyes. Fortunately, I am older now, and (usually) better at seeing the bigger picture. I suspect this is a common phenomenon in all walks of life, and particularly in our work.
This can happen in many aspects of the appraisal puzzle. One of the most common places it is seen is within the Sales Comparison Approach. When the unadjusted sales price range is widened by the adjusted range, something is likely wrong and we have failed to see the forest through the trees, or have focused on individual adjustments (trees) to the detriment of the bigger picture (forest).
Individual adjustments could skew data…Simply put, the sum of the parts may not equal the whole. Individual adjustments could skew data to widen the range and if we don’t step back and examine the bigger picture, we could end up with incorrect results. A simple way to double check that we look at the bigger picture is to ask if each sale used is overall superior, inferior or equal to the subject. If we believe that the sale is inferior to the subject, then logically it should have sold for less than the appraised value. If we believe the sale is superior to the subject, then logically it should have sold for more than the appraised value. That is the basis of bracketing that we hear so often.
The direction of adjustment at the bottom of the grid can also help show whether overall the sale is superior, inferior or equal, or at least that we presented it is as such. Small adjustments on the net side, may show something relatively similar, while larger net adjustments will indicate that a sale is inferior or equal and can help determine if the adjustments were logical. For instance, if the comparable sold for $200,000 and adjusts to $210,000, but in our opinion it was a superior sale, something is off and not adequately analyzed. In case this is an unbelievable scenario to many of you, unfortunately it is not. Here is a typical example – Three closed sales ranging in closed price from $240,000 to $295,000. After the adjustment process they have widened from $217,000 to $296,000. Does this make sense? When something like this happens, the best thing to do is step back and ask why. What happened? What is missing? Is there a locational element in play? Could the high sale have some superior feature that was not adequately addressed?
Remember the purpose of adjustments are to render the comparable properties equal to the subject. If the comparable has greater square footage, it is usually thought of as superior, however this is not always so. Think about larger houses with awkward additions. Sometimes the awkward addition can detract from the property, not add to it. What about a six car garage in a market that expects a two car? Would it be possible that the third car stall adds value, but after that most buyers do not care, and some buyers find it is a negative? Maybe the market recognizes an increase in value per square foot to a certain level, but then, after a certain size, it becomes a negative. It could make sense that 8,000 square feet is overkill in a market when most buyers are happy with 4,000 square feet. Maybe the additional 4,000 square feet is not universally desired, in particular in climates with excessive heating and/or cooling costs.
In the end, the appraised value should ideally not be higher than the sales that are adjusting downward as that shows overall superiority (unless it is a nominal amount). The converse is also true. If for some reason, in the opinion the value is greater than something that would otherwise show as superior, explain, explain, explain.
Do not look at the adjustments mechanically, but look at them in this larger holistic manner and see the forest through the trees.