There are no reported sales! Now what?

How many times have we, as reviewers, heard the following: “But there aren’t any sales within the subject’s development.” Or, “But the subject is the finest house in its development.” Of course there are rare instances when this is true; however, even in the instance where there are no sales that have taken place in the subject’s development within the last 12 months, the appraiser should be able to show sales at some previous point in time if the development is not newly developed. New construction appraisals will be a topic for a future post, but for the sake of this discussion I am going to focus on well established developments.

Oftentimes appraisers will find a property that has been improved beyond its development, or will be faced with valuing a home that is located in a development where there has been no market activity in the last 12 months. First, we will address the non-conforming property appraisal, then we will address an appraisal in a stable market.

When a property has been improved to a point that it is now larger than any other home of similar age, quality or location, this property is often referred to as an over-improvement for the area. A property that was once 1,000 square feet in size with a garage conversion, had an addition and now totals 2,000 square feet in gross living area is a great example.

It, of course, would be best to find a home that had a garage conversion and addition exactly like the subject on the subject street with the same prevailing winds which sold and closed on the date of value; however, in the real world appraisers have to demonstrate two things with this type of property.

First, they must demonstrate what improvements were made and how those particular improvements have affected the value of the property. This is generally accomplished by showing all of the sales in the subject’s development that were similar to the subject before any changes were made. Then, in lieu of a model match sale, the appraiser should find other competing developments that share the same basic location that was built in the same decade, had similar homes (prior to improvement) and find homes with additions and conversions that would reflect the same functional appeal as the subject.

This research project is not as difficult as it once was because of the MLS systems that are prevalent in most major markets. The appraiser can export the sales data to excel and easily demonstrate the market reaction to garage conversions and homes with additions and then apply this pairing to the valuation of the subject. The selection of the comparable sales should reflect as many of the subject’s characteristics as possible in order to minimize the required adjustments. Nonetheless, when an adjustment is warranted and has been proven in the market, the appraisal report should reflect the proper adjustment.

It would not be an appropriate comparison to simply find other homes that were built in the same year as the subject that originally contained 2,000 square feet in gross living area. The reason that this comparison would be inappropriate is for several reasons. 1) The quality of a home originally built containing 1,000 square feet and 2,000 square feet are quite different; 2) the functional design and appeal of a home that was originally designed by an architect would have a logical flow and professional design as compared to a home that converts the garage to living area and adding additional space generally will increase the number of private rooms or public rooms.  However, the functional utility of an existing home with an addition or garage conversion is not the same as a home that was professionally designed to contain 2,000 with a garage.

Remember market reaction is what the appraiser is measuring, thus, if the appraiser does not select comparable sales with similar features and characteristics, the market reaction can not be accurately measured. Oftentimes to develop an accurate market reaction the appraiser may have to consider sales from differing time periods. This is a reasonable approach. The reaction should be measured as a percentage of price so that this percentage can be applied to data that sold within the time period that represents the date of value.

The second thing the appraiser must demonstrate is how the subject relates to its particular marketplace. This market reaction is closely tied to the first question, but what you are really asking is: “How does this additional space add to or detract from value in the area. In other words, if a 1,000 square foot home is in a homogenous area of other homes of same size, design and quality it has one value. A home that has had an additional 1,000 square feet added to it with neighboring homes that do not share the same additions will suffer functional obsolescence because the marketplace will not pay “full price” for the improvements. This obsolescence should be addressed and proven within the market data.

When appraising in a stable marketplace, the first thing an appraiser or underwriter/reviewer should look for is how many homes have been listed for sale in the last 12 months and what was the market reaction to these sales. A truly stable market area has very few listings and when these listings are placed on the MLS they sell in a short time frame. When this is the case, a simple historic comparison between the subject development and an active competing development should be sufficient to demonstrate the location adjustment.

Well – I realize this post became pretty hands on and technical – but that is the advantage of a blog where there are few responses. I get to write about anything and everything on my mind.

See you around the water cooler!

Market Conditions Form

Has any appraiser found this form to have changed the way in which they analyze or report the market conditions within a residential report? I have read several other blogs and forums regarding this form and it seems to me that there were several appraisers who were already considering this and report these conditions long before Fannie Mae felt the need to provide us with another form.

Still as a review appraiser for several thousand reports in the last two and a half decades, it has not been my personal experience to read more than a handful of residential reports where the appraiser ever addressed the market supply, or absorption, until they were forced to with the creation of this form in 2008.

Still, my concern is that even though Fannie has created a form to force all residential appraisers to address this issue, I am not confident that many appraisers have sought adequate training to understand the point of the information or to present their findings that are representative of the marketplace.

Of course, there have been some training classes to tell the appraiser to fill the number of sales, the number of listings, and calculate the absorption by dividing the number of sales by the number of months analyzed. And then take this absorption rate and divide the current listings to demonstrate housing supply.

But there should be more training for the appraisers and the underwriters to understand the following:

1) This is a sampling of data. Statistically speaking, a random sampling can be an effective measure if the data has been properly qualified and accurately presented; however, if the sample is not reflective of the subject or the subject’s marketplace the results can be quite misleading.

2) The form, as it was designed, only focuses on active listings and sales within a set period of time. It does not take into account the total number of properties that were exposed to the market for that same period of time. For any given neighborhood you could find 10 active listings, 12 sales within 12 months, and 78 properties that were exposed to the market for sale but were withdrawn or expired unsold. In this scenario, even though the absorption rate would show as 1 on the form with a month housing supply, the reality is that 100 properties were exposed to the market for sale and only 10% were reported as sold within 12 months and 10 are actively listed. This information is lost, if the appraiser only fills out a form and does not bother to address the actual market conditions as of the date of value.

I urge appraisers to take the time to understand the dynamics of the market areas in which they appraise and urge underwriters to look for continuity between reports.

There needs to be more extensive training of all real estate professionals to understand the dynamics of the real estate market so that we are not easily mislead and become simple form fillers. If appraisal is simply filling a form and reporting facts why do they require the education? Of course, educational standards of appraisers slipped when they did away with the requirement that an appraiser should be a real estate broker for five years, and the apprenticeship requirements were structured so that hands on training was limited and sponsoring appraisers were able to run sweatshops instead of mentoring the next generation of professionals.

I blame all of us. The ones with unsupervised trainees and the those of us who either never took a trainee or have had one or two in the last several years. It is time that the remaining professional appraisers, and you know who you are, take a stand for the integrity of this profession and take on a responsibility as a teacher, a mentor, or a industry leader of one type or another. Most of us (and I blame myself as well) failed to engage with others. We “fought the good fight” with regard to our personal work, but we stayed quiet in classes, or in forums, or professional meetings when we should have dared to speak up and hold the line of professionalism.

If you agree with me, let me know. If you disagree, good, please allow others to hear your thoughts as well. Remember silence can be considered agreement.

See you around the water cooler!

Who is Our Client Anyway?

This post is not intended to suggest any form of legal advice. To define the client within a particular assignment the appraiser should understand the guidance as provided in USPAP.

This post is written to suggest that our client is not necessarily the intended user of the report. They are not the party that ordered the appraisal service, or the party that will “promise to pay” and sometimes even pay for the service.

My suggestion is that our client is someone who we all too often forget. Our client is someone who never actually reads the report, uses the report, or even realizes they are affected by our report. The client does benefit from an accurate report and suffers great losses from the indirect effects of an erroneous report.

The client that I am suggesting that all professional appraiser’s work for is the general public. This is  not a new concept. But this foundational precept is worthy of repetition.  It is the general public that is currently suffering that fact that appraisers failed to understand the products that they were led into producing. And, for the record, I am not suggesting that all appraisers are inept or crooked – but I am suggesting that we all share responsibility of allowing the common practice of misleading appraisals to be used to shape the destiny of the lending industry.

Appraisers are like rating agencies, or judges. We are supposed to maintain a level of expertise that allows us to understand the service that we are providing. We are supposed to cause no harm with our service. The service should be accurate and meaningful. Unfortunately, the reality is that many appraisals are none of these things. They are reports that are generated by a group of people that who either do not know, care or understand what their function in the marketplace is supposed to be.

The appraisers of earlier generations were required to be people of good reputation, who had a level of expertise to render a reliable opinion of value for the property that was being appraised. For example, my mentor was a man who had an international banking/finance degree, an engineering degree and a law degree and was a real estate broker and property manager for five years before he became a real estate appraiser. When this man stated a property was worth X it was not because he ran the MLS and grabbed three comparable sales that supported the client’s opinion of value or the sale price, it was because all the data (Cost, Income and Competing Sales and Listings) was considered, analyzed and an opinion was formed to demonstrate the findings of the analysis.

What am I suggesting? I am suggesting that those of us who do know our role in this society should take an active role in mentoring our peers, taking part in appraisal organizations, encouraging all appraisers to join an organization that will help to foster growth and professional understanding. We cannot mandate associations, but we can encourage as many appraisers as we can personally influence to take part in building a better product and providing a reliable product that our client will benefit from and can rely upon.

For those appraisers who are reading this blog entry, that are “fighting the good fight” and have always taken the necessary steps to provide professional appraisals then I personally applaud your efforts and want to encourage you that you are not alone.  For those of you who may be new, or simply never had the proper training or education from your “mentor” then I want to encourage you that if you are sincere in your desire to provide a professional service that can be used to correct the errors of previous appraisal decisions, then you can join our ranks by finding a mentor and not being embarrassed to ask. We are all in this together and we are all able to affect positive changes that can improve our industry.

But, for those who are in this industry 1) to only make money 2) without concern of how they affect others and 3) with the “moral flexibility” of a professional assassin – I hope that you will consider changing professions because there are easier ways to take advantage of people and you can make so much more money without leaving a devastating wake of destruction.