Crystal Ball & PFA Techniques
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PFA figures & opaque crystal balls don’t work when reporting market trends! Nor does the MC Form!
Appraisers, by now you’ve heard that FNMA finally has decided that their 1004MC form is basically worthless. That form is no longer required in appraisal reports for properties sold to FNMA, as of August 7, 2018.
poorly designed form which never has reported accurate trends…However, sidekicks in mortgage lending have not come to the same conclusion… yet. Hopefully, in short time, they will also remove the MC ‘inclusion’ requirement in reports of this awful, poorly designed form which never has reported accurate trends – despite the FNMA propaganda saying otherwise.
What does this really mean for doing credible appraisal work when reporting market trends?
Many appraisers are wondering “what do we do now” if we don’t have the MC Form to rely on?
It means polishing your crystal ball and using Pull From Air (PFA) techniques is not enough!
Ever since FNMA (and FrMAC) took over residential report forms design (originating in 1986), they have had a requirement that appraisers do more than just check a box to report trends or other info. Most appraisers never did anything more than that (I’m also guilty as charged until 2008), which lead to the mandated MC Form in 2008. Some still don’t do anything extra.
The part of the residential appraisal form that requests specific (comparable) market data is this, outlined in red:
I put (comparable) into the sentence above on purpose!
For years, the propaganda of FNMA, and others, has taught us wrong. For decades they said, or appraisers have interpreted, this info should reflect “all” the properties in a named or defined neighborhood. The implication was inclusion of incompatible and non-comparable properties was important.
In 2014, after the MC form had been in place for 6 years, and their UAD and CU review & data capture process had been implemented, FNMA issued a FAQ saying that the ‘red lined’ data above should reflect COMPARABLE info corresponding with the MC Form. Many appraisers didn’t see that FAQ, and to this day continue to report ‘all’ properties. Many appraisers also incorrectly report a too broad price range in the One-Unit fields.
Before hurling broken clipboards and spears in my direction, ask yourself: “” The answer is NOTHING of importance. Including those can make your report be inaccurate and non-credible.
Now that we have established this factoid, let’s see if we can turn the opaque crystal ball more clear. What follows are some ideas about how to find and report the trends by checking boxes or filling in numbers on the form.
Property Values – this actually means SALES PRICES, not ‘values.’
- Using a downloaded (or exported) list (chart) of Comparable sales over a time period, such as from your MLS, ideally more than 12 months to show a long term trend, you can plot those sales on a spreadsheet graph, ask the software to include a linear trend line, and you will see what the actual sales price trend has been up to a recent date. Adding a polynomial trend line will indicate price trend ‘turns’ more precisely than the linear trend line.
- You can possibly do this graph within the MLS data software, but beware that their included sales data may not define specific comp CHARACTERISTICS of the subject as precisely as you would.
- Some MLS systems have a secondary ‘Statistics’ process which produces graphs, but again, their data may not directly correspond to your subject property.
- Various versions of “MC Form filling” software also have graphs available. However, these are only reporting 12 months of data, to correspond with what the MC form asks for. Some of these form-filling software may not include more than 1 trend line. The polynomial line may not be included.
- National statistics mentioning a sales price trend for a particular region may not be highly accurate. Those don’t define specific property characteristics matching your property. Some of these products don’t include properties in your specific area. I recommend that these types of products and media reports not be used to report specific trends of your subject property. They can be useful for broad market info… but that’s not what the ‘form’ wants.
Demand/Supply – In other words, how does the current availability of comparable listed homes compare to the sales of similar properties?
- Your list of MLS generated comparable sales and listings will reveal that trend. If roughly the same quantity of each, “In Balance”. If listings are more, then “Over Supply”. Fewer listings than sales indicates a “Shortage”.
- Some appraisers also look at and analyze Off Market and Cancelled listings to see how the full list of properties inter-relate.
- There are some text books that say this trend relates to ‘marketing time’ of properties. Well, maybe. But factual reporting has to start with basic numbers of related properties. Marketing time may be different across a region for various property types. Therefore, don’t use info from ‘over there’ to report what’s happening ‘here.’
Marketing Time – The anticipated time to sell the appraised property, after the Effective Date of the report.
- You can develop this from the DOM or CDOM as shown on the comparables MLS print-outs (or display). Generally speaking, there will be a range of ‘days’ for the comps, which relates to our term ‘Exposure Time.’ You can choose an appropriate checkbox correlating with your opinion of how long it will take to sell the property as the USPAP. #2 & 3 are how I report this info in my appraisal reports. . Reporting of Exposure Time is required in reports, per
- The Opinion of Value in this report is linked to the appraiser’s opinion of Exposure Time. Per USPAP Std. 1, the opinion of Exposure Time is always presumed to precede the effective date of the appraisal. This is the estimated length of time the Subject property would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date, assuming a competitive and open market. Development of this opinion can be a range based on a) statistical information about days on market; b) information gathered through sales verification; and c) interviews of market participants. Comparable sales and listing CDOM information was entered on the sales grid. Based on that info, the range of Exposure Time is to days, with the appraiser’s ET opinion placed approximately at the low end ***mid point ***high end of the range.
- Marketing Time is an opinion of the amount of time it might take to sell the Subject property at the concluded market value during a period immediately after the effective date of the appraisal, and can be expressed in a range. In addition to items a) – c) above, it also includes analysis of anticipated changes in market conditions. It is a function of price, time, use and anticipated market conditions.
One-Unit Housing Price & Age – Fairly straight forward info developed from your chart of comparable sales,. The high and low prices, and the oldest and newest ages of comps.
- Where the rubber hits the road is with Pred, i.e., the Predominant Price and Predominant Age of the properties. either price or age. Seldom is Predominant obvious, because it may not exist!
- If a true MODE does not exist, you can develop this number by using what I call the ‘mid-point’ between the Average and median of the low to high Range. It’s basically the Median between the original calculated Average and Median, and will report the appropriate number between those. This technique is supported by others in our appraisal world when there is no true Mode.
- You CAN report Pred as a , per instruction from FNMA.
- Don’t forget to include an explanation when your appraised value is SIGNIFICANTLY different from the Predominant figure you report. SIGNIFICANTLY is the word used in the Selling Guide, however, most report reviewers expect an explanation when your value is just, different.
Some of what I’ve discussed in this essay has to do with using spreadsheets, and formulas that you can use within spreadsheets to generate the data points you need. Once basic parameters are understood, it’s not difficult. Some of this becomes semi-automated if you have a particular report software with a built-in spreadsheet worksheet which can export calculated results to a specific field on the form. You can also design custom spreadsheet worksheets and export downloaded data to those.
I would encourage all appraisers who don’t have experience with spreadsheets and basic formulas to seek out either live or on-line training classes/seminars so you can become more proficient in your work.
Secondly, use ‘visual indicators’ such as data graphs in your reports to backup your conclusions. And yes, this does relate back to the checkboxes so prominent on the appraisal forms.
PFA figures and opaque crystal balls don’t work any longer! Nor does the MC Form!