Paint a Picture with Words
- Who Are You Going to Call? - October 22, 2018
- Bye-bye 1004MC, Hello Analysis - August 17, 2018
- Paint a Picture with Words - July 2, 2018
The reconciliation is precisely the place we want to avoid any boilerplate…
A common complaint among couples is a lack of communication. “He should have known I wanted that bracelet for my birthday” “She should have known I wanted to have sushi for dinner” “She should be more considerate of my feelings”, etc. How are we supposed to know these things? Are we mind-readers? It would be much easier if we would somehow communicate our wishes with our partners, without having to come right out and say something, but at the same time, it takes away from the spontaneity of the moment, receiving that beautiful bracelet without asking, or having made reservations as a surprise for your partner, at that new Japanese restaurant everyone is talking about. If we want to get it right however, we need to communicate with each other and express what is important to us.
Appraisers relationships with their clients has similarity with other relationships, but mainly in that we have to really communicate with each other to avoid misunderstanding. This goes for the engagement of services and why we are being hired in the first place, and also goes for communicating our assignment results. In this article, the focus is on the reconciliation section of a written report.
Within the reconciliation, we address the different approaches to value we considered and why we considered them, as well as the ones we did not use and why. We also discuss the relevancy and adequacy of the data within each approach that we included. Therefore, if we only used the sales comparison approach, and we have an appraisal where five sales made up the primary indicators for the analysis, and one of those sales was the most reasonable and relevant, we would want to address the reason why. Ideally, we want to address how each sale that we are using compares to the property being appraised, in both the ways that they are similar, and how they differ. It would be rare to have a group of sales that are all equal in level of similarity and dissimilarity, therefore it is also uncommon that each sale would have the same level of applicability for comparison purposes.
For example, in this made up scenario, we are appraising a 1,200 sqft single story house built in 2000 on a five-acre site. The house is modular construction with standard features and the five-acre site is open and mostly pastoral, but with a 30×40 pole barn with three horse stalls, and a three-acre pasture. There were five available sales that were relevant in this analysis, including a similar 1,200 sqft, modular single-story house built in 2001 on four-acres and containing a 40×60 pole barn with five horse stalls and two fenced acres. The other houses were on varying site sizes, from three to ten acres, and two others had pole barns. Three were stick built of similar quality and two were modular houses similar to the subject, including the most similar property. All were but one of these properties was built in the 1980’s to the mid 1990’s. The most similar sale had the lowest gross adjustments, as would be expected with this type of scenario. Without getting into the weeds of the adjustment process, take the following sales:
- Sale 1, 1,200 sqft modular/ 2001 on 4-acres/40×60 pole barn, $200,000
- Sale 2, 1,100 sqft ranch/1980 on 3-acres without a barn, $170,000
- Sale 3, 1,500 sqft modular/1985 on 5-acres with 50×60 pole barn, $220,000
- Sale 4, 1,000 sqft ranch/1990 on 10-acres with 30×40 PB, $220,000
- Sale 5, 1,200 sqft ranch/1995 on 5-acres without a barn, $180,000
Before any adjustment, it is clear that sale 1 is most similar to the subject property. As such, the value of the subject is likely to be closest to this sale. The unadjusted sales price range of the comparables is between $170,000 and $220,000, which is fairly wide at 29.41%. It would not be unexpected however, with acreage and barns thrown into the mix. Hopefully after completing the analysis and supporting the adjustments made, the adjusted range is narrower, perhaps in this instance from $190,000 to $209,000 (10%). From there it would be simple to explain how sale 1 has the greatest similarity and was weighted most heavily, and that the inferior properties, those with similar acreage but older houses and no barns (sales 2 and 5) sold as high as $180,000, setting a logical lower limit of the value range. Those sales that were superior due to greater acreage, and/or size of the barns (sale 3 and 4) sold for $220,000, setting the upper end of the range.
Without making any adjustments it is pretty compelling if the opinion of value is around $200,000, but if the opinion of value is $220,000, or $180,000, there is going to be more explanation needed as to how the adjustments were supported and why the higher or lower end of the value range was chosen. In the event the market is increasing, or declining, discussion of changing market conditions, and support thereto, could be sufficient added information. In the event that pole barns are a highly desired feature, over and above acreage, discussion of this as well as the cost to construct one would be relevant.
Think of the reconciliation section of the report as the place where you can take the analysis and thought process and tie it all together in one neat little bow, which helps the client understand why you are where you are in the valuation. This is where our judgement and thought process can shine, and where we are different from algorithms and bits and bytes. The more complex the valuation problem, the more descriptive we likely have to be.
In this made up, simple example, we could have a reconciliation such as:
The report includes two sales that are inferior to the subject property (sales 2 and 5) and two that are superior (comparable sales 3 and 4). One sale was similar in most respects, and due to it requiring very few adjustments, and having the overall lowest gross adjustments in the report, is weighted the most heavily in this analysis and report. The inferior sales sold for $170,000 and $180,000, which provides a benchmark for the lower end of the value range. Logically the opinion of value would be greater than $180,000. The two superior sales both sold for $220,000 and therefore logically the appraised value would not exceed these prices. Sale 1 was similar in many respects to the subject, with the main differences being that it had a smaller site and a larger pole barn. Careful analysis showed these features were offsetting, and the $200,000 sales price of this property provides a good benchmark of the most reasonable expectation of value for the property.
After analyzing the various elements of comparison, the adjusted range did narrow from the initial $170,000 to $220,000, to a tighter range of $190,000 to $209,000. With sale 1 adjusting to $198,000, I have placed most weight on that sale, and have also placed some weight on sale 3, which was the only other available modular house sale in the area. The adjusted sales price on that sale was $203,000. With consideration for these sales, and support from the others included in the report, I have opined to a value of $199,000 which is considered well supported with the data provided within the report, and through this reconciliation.
The reconciliation is precisely the place we want to avoid any boilerplate… The above description can be a guideline for how to handle complex properties as well, as one or two sales will be more similar to the subject than the others, even if completely disparate, we still have to find a way to explain how they are the best we have. The reconciliation is precisely the place we want to avoid any boilerplate, or the unfortunately ubiquitous “all sales are the best available and weighted equally”, even if the range of value is 40 or 50% before and after the adjustment process. Although the sample above may be considered “overkill”, the idea is to paint a picture with our words. If a camera failure resulted in the need to submit the appraisal report without any photographs, how could we paint a picture of the problem and the solution with words? This would be an extremely interesting exercise, but not far removed from the days before digital photography, when we were very limited with photo exhibits placed in an appraisal report for delivery.
The description above would be roughly equivalent to telling your loved one that you would really like that beautiful bracelet you saw on sale for your birthday and how lovely it would look on your wrist, or that as much as you like Chinese food, you are hankering for some sushi. Of course, you could abbreviate it and just say “I want that bracelet” “take me out for sushi”, but even though that gets the point across, it does not do it in a way that provides warm feelings and could be thought of as harsh and demanding. Like it or not, we still have an element of customer service that we need to provide, and words do matter.
End note –
As an aside, while the current version of lending appraisal forms do not have sufficient space for communicating a robust summation, these forms are in the process of being reconsidered. If possible, we do need to have our collective voices heard related to how they are developed, including the expandable capability that was floated before the 2005 iterations that we are now using.
I completely agree a good reconciliation is necessary in an appraisal and the authors point is well taken.
It is a bit of an oxymoron though as this is not what the GSE’s want nor are they promoting. Take UAD for example, check boxes, The hybrid appraisals, again check boxes. Then there are the waivers, where they want nothing at all. Add in the suppression of fees by AMC’s and it is clear as day what the GSE’s want and think of a professional appraisal.
Even with a very good reconciliation, who is reading the reports? The reviewers are only interested in what the score is and what the check boxes are. Yes, that is general statement, but it does apply to most residential reports. After all 80% of them go through AMCs and most appraisers have experienced getting stips for additional comments when they are already in the report.
Let’s not forget about the push from the Appraisal Institute to lessen our standards with non USPAP compliant Evaluations.
So the question really becomes is your report good or good enough?
Advocate, THANK YOU for saying that!
And I’ll keep saying this: the next crash will happen in most part due to what you say above. We can sit back, wait for them to ask us to clean it up because appraisers are warning them now and are certainly not going to let them blame us PERIOD!
I could not agree more!
Hello, good enough isn’t what most of us strive for. Most of us want to have excellence associated with our names. How do we get rewarded for it is a major question? I contend there are clients, even in the mortgage world, who do want excellence. That would likely be the private lending divisions of some major banks, trust departments, and perhaps smaller lenders who portfolio their loans.
Almost becomes a Catch-22 however; as we have to produce that excellence consistently for it to start to matter.
As a reviewer, I love it when an appraiser tells a story in a report. It makes me get up and fist bump the air with glee, because I am seeing something above and beyond the minimum. There are reviewers who read the reports, both backwards and forwards, and sometimes back again. It is just problematic when the report is 95% boilerplate. Give me good original content any day 🙂
Thanks for your comments folks.
Those of us who truly love appraising understand and appreciate a good written report. Unfortunately, residential appraising has become form filling and not true appraising. There a many reasons for this and AMC’s are at the top of that list. At some point in our lives, we all come to the realization of you get what you pay for. Low fees with inadequate turn times results in a lesser quality report. It has nothing to do with licensing, USPAP, or ethics. It is pure and simple economics. If I have to produce twice as much to earn the same living, there will short cuts. I am not advocating for boiler plate coments, but certainly a template in which to build from can work. Also on that list is scope creep. When is the appraisers job or repsonsibilty to verify straps on water heaters, or working smoke dectectors? Why are appraisers verifing the functionality of appliances, running water, etc.?
As mentioned above, the Appraisal Institute is also on that list. Not only did they do nothing to prevent the destruction of residential appraising, they have been promoting it. Why have they not made amends with TAF? Why did they walk away in the first place? Why haven’t their members insisted on positive change?
I mean no disrespect to you, Rachel, or your accomplishments, but how can you place those letters of designation behind your name when they represent an organization promoting the opposite of what you believe and write about?
How can a non qualified non licensed worker with no real estate experience of note sit in that chair and provide effective review and management services for a super low wage price? Checkboxes, auto review software, and illusionary grading matrixes. Asking these people to read is asking too much, their daily review and production quotas are climbing. What’s your fee and turn time?
Hello Baggins, I actually work both as a reviewer for a mortgage lender and am able to do some fee work (ERC mainly) on the side. As a reviewer, I love seeing explanations that tie loose pieces together, which is a main reason I wrote this piece. There are many reviewers who do read, and re-read, the report. It is, in my opinion at least, impolite to not do so. Doesn’t mean we catch every word, but those of us who take reviewing seriously do try to read the report. My method is read it back to front, and then front to back. Seems to work well, although sometimes walls of text (unbroken paragraphs in bold caps) make it impossible.
Do not want to discuss fees as that is a bad idea, but my typical turn time on ERC is 2-weeks. Most of the time the relocation companies are fine with that. I don’t do mortgage work because it would be a conflict with my day job, but I seem to go in and out of the field (lender jobs are not usually too long lasting, I happen to like mine a lot and hope I keep it). When I do, it is pretty typical to be two weeks out or longer on those as well. I am not a super efficient person as you can probably guess.
Yes, thank you. Just to be clear, not directed at you. I’m a free typing sort of person as well, the power of detailed language. Like many appraisers I’ve grown more than weary at the lack of expertise with so many of the various desk workers at assignment, origination, and management outlets. They could not muster a similar detail as your article presented with, they’re lucky to spell fee and turn time correctly, sometimes they miss that.
I’d be interested to learn about the required efforts on the processing side, what sort of minimum standards apply, etc. There is an obvious contrast for working mortgage lending appraisers, new client, completely different quality standards with processing and assignment. It’s such a free for all out there, one presumes that some of the purchasers of the loans really are not caring much about appraisal related compliance rules. How else could these 48 hour expectations and such continue to be so commonplace, unless there was a high quantity of appraisers whom are click and filling, using typing services, not actually putting unique writing into reports. What gets me is the disconnect where a quality reviewer at the end of the line has no influence regarding assignment trends and panel approval. I’ve gone through so many clients where if a quality reviewer could have just made the call, I would be ahead of so many others. Instead the expected rhythm is appease the underqualified person to attain the work, then cross fingers the qualified person at the end of the line approves the finished product one had to produce under such unpredictable high pressure circumstances. Thank you, great article.
“What’s your fee and turn time?” A quip directed at the management industry. Disregard for quality selection rules is so commonplace. Appraisers steeped in origination work understand off hand that’s directed at the shoppers.
I’ve been a residential appraiser for about 15 years and I have never forgotten a bit of advice I was given early on…”Appraisals should be developed and not written. Wrapping up the reconciliation is like bring a ship into port, the closer you get to the dock the more important your navigation skills become.”