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.
And sometimes it is what it is. As long as you have the support for your conclusions and an explanation your good to go.
This is a really good article with practical and theoretical appraisal application.
I understanding you using the Net adjustments however, If you have several positive and several negative adjustments the NET could be very small or even zero. Since this property has several adjustments it could very likely be less similar than one that only has one or two adjustments. The gross adjustments may be a better measure the similarity of the comps.
Sort of, but they both carry important weight for consideration. The net and gross both can indicate base similarity and gained dissimilarity from quality inclusions. Two identical homes can have substantial adjustments, depending on what needs adjustment for. The net indicates relative balance, smaller the better. The gross indicates whole difference, larger means best matching comps were not as readily available. If comp #1 keeps both numbers below 10%, that’s an ideal scenario.
Great article Rachel! BTW, did you hear your name in Phil’s Voice of Appraisal podcast? 🙂
Great article! As I like to call that; streamlining the adjusted value indicators towards a narrow range. And if they don’t match up exactly; Some mismatching benchmarks in market value due to.. Explain explain explain!
Great article. Many appraisers are focused on the technical application of forms filling, developed by non appraisers primarily. They miss the point that it’s o.k. to apply variable scale adjustments for excess sometimes. But try telling that to the robot minds and non appraisers whom review reports for ‘adjustment consistency’. So a good solution is to bounce excess or individual adjustments into line items and unique inclusions. Even then, I still take a generalized ‘nickle and dime’ approach. One of the challenges for appraising is to get your mind around how much price value influence material inclusions and features have. And we’re dealing with big money and large numbers, it can blow the mind. So; Simplify the equation with relative approaches. $2.5k porch, $5k sunroom, $7.5k garage addition. That’s nickle and diming the adjustments. Take 3 zero’s off, and take a relative generalized approach for more simple pieces of the pie make a whole, sort of simplified analysis.
Great article, thanks Rachel.
Excellent article…albeit it a bit into the weeds for most everyday appraisals where a large supply of sales data exists.
Even after the obvious (but unstated) concern about making rote adjustments is eliminated; and we assume such adjustments as are made are all market derived and supported, we can still face the unreconciled (widened) value range.
In my area if I cannot readily determine and verify the cause of the disparity, its frequently better to simply find alternative comparable sales that are more similar.
Sometimes finding (and proving or credibly supporting) the specific percentage or dollar values for adjustments is simply not possible and qualitative rather than quantitative analysis is the only viable solution for some items.
Here is a specific example: Property appraised about 25 to 30+- years ago by myself under mentoring of SRPA for $1,150,000 and a second (MAI) appraisal of $1,180,000 [many unidentified owners ago so no confidentiality issues remain]. IF you google it use satellite to street maps view and pan to the right. Its the water tower house NOT the ‘normal’ one that pops up under the address search. Zoom in -big number “1” above entry.
1 Anderson Court, Sunset Beach, California.
270+- degree ocean and harbor view; 360 degree panoramic view. Five level (four story). About 1,500 sf (then); (2) built in G1s. Two bedrooms plus third guest room and wine cellar or exercise room on first level to either side of main entry and elevator. Spa deck elevated outside “2nd floor”. Exceptional and extensive special features list. Use: “SFR” but (then) zoned M1 and on a 30′ x 30′ site. Beach sand and access about 200 feet away. Boat marina & harbor to landward/inland side.
I defy anyone to accurately quantify AND definitively SUPPORT the contributory market value; OR perceived market value of any identified main feature by regression; pairing or GIM (It COULD be used for weddings back then). Area “agent opinions” did help both independent appraisers arrive at such similar results. Such informed opinions have fallen into disfavor these days.
In the end both appraisers independently conceded that there were many features that all common sense dictated had ‘value’ but for which no specific adjustments could be segregated.
Attempting to use surrounding area market adjustments for all significant (further) identifiable differences produced the kind of widened range Ms. Massey pointed out. IE: extensive marble; large gauge electric train racks built into walls that could carry items from kitchen two floors below up to bar / recreation area on top floor; computerized window shutters, fireplace, cylinder door to bath; steam bath, etc., retractable to near-ceiling (small) dance floor.
Sometimes we just have to be prepared to tell clients that (1) appraisers do not manufacture data; and (2) this is the closest anyone can come; AND that not all items warrant adjustment just because a ‘difference’ exists.
BTW – THIS is why we all appraise real estate and used to love it! Back when we recognized it was as much an art as a ‘science’. Thank you for sending me down memory lane Rachel.
And precisely why you want to explain these types of widening. They can happen. They don’t often happen, but when they do, we simply need to explain the heck out of it (my opinion at least). Thanks for your interesting example. Think we have all had some doozies, but that one takes the cake over any of mine 🙂
Apologies-post was to article-not necessarily Baggs!
Good article, although I do admit I HATE the term bracketing, as I feel it unnecessarily causes appraisers to have poor comp selection, many times you just need one good piece of data on a complex report, that can be a closed sale, pending sale, active listing or expired listing. I still see too many reports where appraiser’s are trying to appraise within 15% & 25% net & gross adjusted guidelines which were removed 2 yrs ago.
FNMA realized appraisers were not making true market derived adjustments, but just appraising within those arbitrary guidelines in order to not have client revision requests, or add more commentary. Bottom line, it is very difficult to prove adjustments using 3 sales, which is why I feel that the industry will eventually adopt a value range reconciliation. Residential real estate is priced and sold more on emotion unlike commercial which is numbers driven. That’s why I love the 2-4 family world, much easier to prove your value when you have market rent!