I have Google Earth and I know how to use it

Originally published in Appraisal Today, thank you Ann O’Rourke for allowing me to republish

I have Google Earth and I know how to use it

Seriously though, as a reviewer, it is one of the first tools I reach for when I look up the property that is the subject of the appraisal I am reviewing. Assume all reviewers do. We use it to make sure that the property does not back up to, side against, or face some type of externality such as a major 8-lane freeway, massive shopping mall or toxic waste facility. Hopefully the appraisal that has one of these externalities addresses it. Sometimes the appraisals go to great length to discuss externalities and any effect on marketability and value. Sometimes there is a sentence or two. Sometimes crickets.

Yesterday I pulled up GE on the house that was the subject of an appraisal I was reviewing and it backed up to a bunch of buildings. Looked possibly to be a school, but the street view maps took me around the side and to the entrance of what turned out to be a large condominium complex. Absolutely no big deal, but there wasn’t one single word related to this in the appraisal. I asked a group of appraisers whether they would make a comment if their subject property backed up to a condominium complex, and the responses ran the gamut from “of course”, to “no way, it is already covered in the neighborhood check boxes”.

While the check boxes for the neighborhood include multi-family, they do not include condominium, and in this instance, there was nothing in the appraisal even hinting that there was a mixture of single-unit uses in the area. This property didn’t raise a red-flag insomuch as backing to a freeway, commercial shopping center or toxic waste facility, but it did raise a question and warranted a bit more research. This is fine as it part of my job, but as someone who actually reads the reports in front of me, I was just left confused as to why it wasn’t even mentioned. I was even more confused by why so many appraisers say that it is not worth mentioning.

Maybe it is being old fashioned, but I grew up with the understanding that an appraiser was the eyes and the ears of the client, and that anything that would likely raise a question for the client should be addressed. Of course the freeway, mall and toxic waste facility are givens, but wouldn’t anything that was literally in the backyard also be something that would get questioned? How many minutes does it take out of the process to write a few sentences about a condominium complex? Couldn’t it be as simple as saying “The subject backs up to the XYZ condominium complex and has a seasonal view of some of these buildings. There is no negative effect on marketability or value of the subject property related to its location adjacent to this residential use” or some such rot?

While it is easy to overlook potential concerns due to the amount of reporting we have to do (and remember, there is no such thing as a perfect appraisal), stepping into the mind of the client and asking yourself “what would the client be concerned about” is a very useful exercise. While the client may not care about the house backing to a condominium complex because it is a residential use like the subject, they may care about it backing to the complex if for some reason it does affect marketability and/or value. It is up to us, as appraisers, to report and analyze what it is we see, and although we can never catch every little thing, our value is partly measured by our ability to communicate and to analyze these nuances.

Remember, reviewers have Google Earth and other tools at their fingertips, and most use them.

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What is the purpose of the adjustment process?

This article was originally published in Appraisal Today, http://www.appraisaltoday.com. A hearty thank you to Ann O’Rourke

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Some appraisals can take a narrow range of unadjusted sales prices, for example the range of $115,000 to $122,000, which is a spread of 6.09%, and through the process of analysis, it widens from $96,000 to more than $132,000 (spread of 37.5%). In case you think this is made up, it was a real world example, which spurred this short article,

This begs the question, if proper analysis of the units of comparison were applied, why would the range widen?

Sometimes it is due to the mechanical act of extracting adjustments from the market and putting them in the grid, without actually analyzing whether the adjustments extracted are actually valid. Alternatively, if there are a number of adjustments to be considered, do some of them weigh each other out? This means does the smaller house that is highly upgraded; possibly have more worth than the larger but dated house? If condition is not adequately accounted for, it is easy to see how the adjustments could make the dated house look more appealing, when in reality the market may well be more concerned with cosmetic condition than anything else. Because of the way buyers actually buy in the market place, it is critical that the appraiser step back from the process and look at the big picture to see if the value opinion ends up passing the curb test. The curb test is that of asking yourself, either whether you could see yourself paying that amount for the property, or if you would feel comfortable lending your own hard earned money for a buyer purchasing that property. If the answer is “heck yeah” then probably either it is too good a deal, or you are just that good. If the answer on the other hand is “heck no” then the value opinion is likely too high. Just right refers to that sweet spot where you consider that the price you would pay is fair to you as buyer, or lender, but also fair to the seller where it would be attractive enough to sell without any duress

What is the purpose of the adjustment process?

We make adjustments for the units of comparison that buyers recognize in the market, and through this process, narrow a range of unadjusted prices to something tighter, from which we reconcile. If for some reason the range actually broadens, there is a piece of the puzzle missing. This means we have to step back and reanalyze the processes and our adjustments; or perhaps even, our comparable choices. This is the very reason “bracketing” with a superior property and an inferior property is an important application. The unadjusted sales price of the inferior property sets the logical lower limit of expected value. The superior property also sets an upper limit of the expected value opinion. As soon as the appraised value is higher than superior, or lower than inferior, we know that there is something off in the analysis. If there are also similar properties to the subject included in the analysis, these become benchmarks for a generally expected value range.

Think of the way that buyers normally purchase property for a minute. Although there are some buyers who try to quantify everything, most do not. Most buyers simply like one house over another, and they do so because of location of the property, the site, the overall size, the flow/design, the condition and the amenities. Buyers will opt for the property that best meets their needs and is to their liking, for the most advantageous price. They will expect to pay less for a house that something that is superior to it and more than something inferior to it. Of course there are exceptions, such as the buyer who is under pressure to buy because they have sold their house and need to move, today. Or the buyer who wants to locate next to the grandchildren, or any other myriad reason that does not appear rational in the market as a whole. Often it is those very sales that throw off the appraisal in terms of widening the adjusted sales price range. Sellers also sometimes have undue motivations, which could cause them to sell at a lower price than expected, such as divorce, death, or other mitigating circumstances. Sometimes a seller will have an undisclosed sweetener, which might induce a buyer to pay more than expected, like that fancy new Mercedes that the buyer took a real fancy to that was parked in the garage of the otherwise vacant house. Verification of any unusual buyer circumstances with a party to the transaction is very important in this instance (it is in most, but when something is off in the adjusted range, this is often the best place to start reanalyzing). A conversation with the agent who sold the property will often uncover why the buyer paid what they did, such as the need to move, or even lately, having been outbid on so many prior offers that the buyer would simply have paid whatever necessary to buy the house.

Because houses are purchased and sold by humans, and humans do not always make rational decisions, understanding the “why” of a transaction can be critical. Because humans are making the purchasing decisions, it is important to understand what drives buyers to certain properties over others. Conversations with agents in the field are critical in understanding shifting buyer sentiments. So too is visiting builder models and seeing what the builders are installing in newly built properties. The builders are reacting to buyer desires and demands, and are a good source of information. Open Houses are also an excellent source of information, not only from the standpoint of seeing your future comparable sale, but also in listening to what buyers are saying while they are at the property, and talking with the agent if no one is there. A house with a much desired feature may sell for far more than others, and will skew the adjusted sales price range if the desired feature is not adequately analyzed or even isolated.

Market fluidity also affects sales prices. At times when there is an abundance, buyers have many options and can become very picky about features and condition of houses, and this will be shown in what they pay. Conversely, when the market is tight, and there is little to no inventory, buyers may pay far above what would be considered rational. This is one reason that we need to be aware of supply and demand.

After everything is considered and analyzed, there is no good rational reason for the unadjusted range of $115,000 to $122,000 to widen to the degree it did ($96,000 to $132,000). When this happens, step back from the process and ask what is missing. Pick up the phone and call the agents involved in the sales to get buyer motivations. Next time the adjusted sales price range widens, start asking if the various factors involved in the sales that were used in the appraisal report were adequately addressed –because through the very process of adjusting, the range should narrow, not widen.

Lake Appraisal

Thanks to Working RE for permission to re-post my articles. Hope you all enjoy this one.

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Lake appraisal

What motivates a buyer to purchase a lake property? Is it the tranquility? The beauty of the water? The excitement of a speedboat and waterskiing, or casting a line into the water in hopes of landing a trophy? It is all of these things, and none of these things. The motivations are almost as numerous as the buyers looking for a lake house are, and one buyer’s paradise is another’s hell. Different types of lakes attract different buyers, and the buyer looking for tranquility is going to be very unhappy purchasing a house on a lake crowded with jet skis and powerboats. The same would be true for the buyer who wants to have all the lake toys buying on a small quiet fishing lake.

This article is geared towards residential appraisers who are providing lake appraisals for mortgage lending. Because of increased scrutiny from the underwriters, reviewers, and GSEs, and moves towards more and more repurchase demands, I hope this offers some insight into how to provide a more defensible appraisal on these complex properties.

I’ve heard many comments about the value in a lake property being all about how many front feet you have on the water, but that is not necessarily so. The amount of frontage usually relates to space that you have between neighbors and how much area you have for docking and beach toys, but consider the house sitting on the edge of a bluff, with 200 feet of frontage and 100 steep steps down to the water. What if the shoreline is also rocky and reedy? Five lots south the topography has sloped in to a gentle almost level lot and the frontage itself is a natural sandy beach. This lot is only 50 feet in width at the lake. Which is more valuable?  The value could be tied not only to the ease of the access and the quality of the frontage itself, but also very much related to the lake. For a clean swimming lake, the less wide, 50 foot lot might be much more valuable than the less accessible 200-foot lot, but for a lake that is picturesque but not a good swimming and/or boating lake, the 200-foot lot with the elevated views might be the more valuable site. It all depends on the lake and why buyers look to that particular lake.

What about the lake itself? I live and work in Michigan, and in Michigan, we are surrounded by lakes. The Great Lakes are a treasure, but not exactly the private and quiet of some of the smaller inland lakes. Many of our inland lakes are massive in size, deep and clean. Some of the inland lakes are shallow, reedy and mucky and more of a view amenity than anything else. Some lakes allow all the toys and others only a kayak or canoe. Some are merely ponds in buyer’s eyes. What one buyer wants for the lake can be completely different from another. There is starting to be a shift, as our population ages, to the desire for quiet lakes that do not allow gas motors. It used to be that these quiet “no-wake” lakes had less appeal, but in many instances now they are attracting buyers that would not have considered them 10 or 20 years ago. There is something to be said for the quiet of a lake without loud motors and loud reveling at all hours of the day and night.

All of this is a prelude, my appraiser friends, that when developing and communicating an appraisal for a lake front property, it is critical that we also address the lake. We need to talk about the lake itself, and what lakes are alternates if nothing is available on the lake which we are doing our appraisal. How large is the lake? How deep is it? What types of activities are allowed on the lake? What are the other lakes that the buyer for our property would reasonably consider and why. Spell it out for the client. Help them understand what the potential buyer is looking for. Write about the subject site, not only about the size and the frontage, but also about the topography, about the frontage, and the access to the water. Write about whether the beach is sandy, mucky, rocky, reedy, and so forth. Write about sunset/sunrise views, about parking, about docking, etc. Know your market and write about what is important to your market.

I have spelled out many reasons why most buyers consider lake properties and the subject in particular. I have laid out logical comparable search criteria, which is particularly important in lake properties because often buyers consider lakes comparable that are 20-30 miles apart; something that might scare even the most experienced of underwriters and reviewers and make the appraisers life hell if it is not well explained. Once you have spelled out the reasons for what draws a buyer to the subject lake, talk about the lakes that are competitive and why they are competitive. It sets the stage for using sometimes very distant comparables.

Take the following example write up that I completed for a lake property in my market. The lake is isolated from others, and is more of a market unto itself, but if there are inadequate sales on this lake, you cannot just make them up, so communication is critical.

The subject is located on Pleasant Lake in Freedom Township. It is on the south side of the lake. The “neighborhood” consists only of water front properties on Pleasant Lake proper, and is therefore very limited in number and has a wide variety of styles, sizes, ages, etc.

 

It is an unusual lake for the area due to size and access to area amenities. The lake is 202 acres in size, and has depths up to 36 feet, much of which is in the 10 foot depth range. The northern shore is sandy. There is a mixture of sand and marl on a large portion of the lake, some of which is directly north of the subject that provides good water frontage for the site. There are three areas in the lake that have deep spots. These include up to 25 feet deep along the mid-east section and another 24-foot deep spot towards the narrows in the middle, not far from the subject. Much of the lake is weedy and there have been problems with Eurasian Milfoil on the lake. Mitigation plans are in process to combat this nuisance plant.

 

The lake, which I consider most competitive to the subject include Clear Lake in Waterloo Township, Independence Lake in Webster Township, and Winans Lake in Hamburg Township. Only Independence Lake is within Washtenaw County and the other two are in adjoining counties (Jackson and Livingston).

 

Clear Lake is a smaller lake in Jackson County. It is 138 acres in size and is a natural, spring fed lake that has state land adjoining in parts. The lake has depths up to 34 feet with much of the lake around 10-15 feet in depth, much like Pleasant Lake. There is a public access point as a county park, but the access point is not for boating. Instead it is for picnicking. The lake allows for all sports but is typically quiet other than a few weekends a year. That makes it similar to Pleasant Lake. Although distant to Ann Arbor, it is in the Chelsea school district, and has a similar “vibe” as Pleasant Lake (PL) and is expected to draw many of the same buyers. Prices on the lake over the past three years have ranged from a low of $195,000 to a high of $455,000 for the sold properties, with the median sales price at $325,500 for a 2,081-sqft house. This is in the same price range as Pleasant Lake.

 

Winans Lake in Livingston County is a unique lake. It is not heavily populated, and is an “electric motor” only lake, which renders it much more peaceful than lakes that allow all sports. Some buyers prefer this type of lake due to the quiet and lack of worry about being hit by a boat while swimming. As Pleasant Lake is a fairly quiet lake in spite of allowing all sports, there is similarity in that respect. Winans Lake is a natural lake which is deep (up to 54 feet deep) with much of the lake in the 20 foot depth range. It is not particularly weedy and it does not have excessive housing along the lakeshore. There were only three sales on the lake through the MLS in the past three years, with the low price of $170,000, high of $452,000 and median price of $450,000 for a 2,309-sqft house. Even though this lake is not a motor lake, the fact that it is natural, is independent from other lakes, and has a wide range of housing prices and appeal, does make it similar to the subject lake.

 

Independence Lake is unique in that it is also very close to Ann Arbor, independent of other nearby lakes, much like Pleasant Lake. Independence Lake is surrounded by mostly State-owned land, with a state park on the north and east side of the lake. The lake itself is 192 acres and has depths up to 34 feet, with four deep areas and a lot of sandy beach area towards the north of the lake. There are cottages and year round houses only on the west and south side of the lake, and most of these properties are substantial in size (other than a number on Pellett that are seasonal). There have been four sales in the past three years on the lake through the MLS, from a low of $397,500 to a high of $630,000. The median price is $461,250 for a 2,511-sqft house. These houses are mostly much larger than those of the other lakes and the price range has been greater. Part of this relates to the size, but part also relates to the size of the lots, which are mostly an acre or more. Overall the prices on Independence Lake are slightly higher than Pleasant Lake.

 

Part of what makes these three lakes competitive in my opinion, is that they are natural lakes that are spring fed, are stand-alone (not part of a chain) and have a good variety of housing, plus some larger sites. There are other lakes that are also competitive, but the three noted are considered to be the best alternatives if nothing on Pleasant Lake is available. Buyers of lake properties tend to focus mainly on the lake first, and then the frontage of the property (i.e., is it sandy, a gentle slope to the lake, free of weeds and rocks, etc., as well as the amount of front footage). Houses are important as well, but with lake properties often 50% or more of the value of the property is the frontage itself. Therefore it is not at all uncommon to find lake properties that sell from $100,000 to $150,000 and have the structure torn down to build a new house. In fact, on Clear Lake a sale was located that was uninhabitable and sold for $73,500 cash in 2011 (market has increased since that time) even though it was listed for $31,000. This is land value plus the cost of demolition.

The subject Lake Frontage at the time of appointment was entirely snow covered and the actual frontage could not be observed. Per the owner the lot is sandy at the beach. Per the GIS maps this appears reasonable, as does the DNR lake maps which show a sandy area. Therefore the subject lot is expected to be a good sandy lot, which should have good appeal. In addition, the lot is a gentle slope out to the beach, which makes for good usable lake frontage of higher appeal than typical or for a lot that has a steep slope. Frontage is substantial, allowing for good privacy between the subject and the neighbors. As such, sandy beach properties with good frontage were sought as comparable sales when possible.*

Realizing this is rather a long-drawn out write-up, it may be overkill. However, given the reasons that buyers buy on lakes, and how distant comparable lakes can be (my sales were from 12-20 miles away other than one on the lake), it may be time well spent developing this type of narrative. Often it is easier to explain things at the outset, than to try to defend your report a year or more down the line.

*truncated, I eliminated some of the write-up because of length.

Grouped data analysis

This article is reprinted with permission from Working RE. The original can be found here

Editor’s Note: Author Rachel Massey offers more help on how to make supportable adjustments.

Extracting an Adjustment – One Way to Measure
By Rachel Massey, SRA, AI-RRS

Because I often get calls from both Realtors and homeowners asking how much a certain feature in a home is worth, I thought a brief discussion of one method of extracting an adjustment from the market might be worthwhile.

This method is described in detail in The Appraisal of Real Estate, 14th Edition (as “grouped data analysis” starting on page 398) and is not a new technique, but one that appraisers may find useful in their daily practice. It can work well because if the appraiser uses care in the isolation process, the sheer number of sales will provide a range of answers, which can then be used for extraction, and support of that particular adjustment.

Instead of writing about theory, I think a simple example from my market is a good starting point. I work in a market where there are usually enough sales to use this method, but it can be useful even in markets where data is more limited. I have to go back two plus years for most of my studies to get enough data points for an adequate sample. This is not perfect but it does work for me when determining certain adjustments, such as basement finish, basement versus no basement, garage stalls, and swimming pools. I have not found it to be very effective with gross living area and it has had mixed results with bathroom counts. There are drawbacks to using it, mainly that the underlying site value is not extracted, but if the sales that are used for the study are relatively similar, the volume of sales generally resolves the issue.

The following show two different examples of an extraction for basement finish; one in my main market big-city area, related to a generally newer house in the $400,000 +/- price range, and the other in an outlying district about ten miles away, in the under $200,000 price range. Both use the same methodology and show substantial differences in results, which is why an appraiser cannot just provide a number or a percentage when asked. Instead, the appraiser has to look at the market.

For the first example, I went back over two years and narrowed my market data to houses between 2,000 and 3,000 sq. ft., built between 1990-2010, on the west side of my market area, and then downloaded all these sales to Excel and segmented the sales between houses with finished basements and those without. The results included 37 sales without finished basements and 62 identified with finished basements. Here is what it looks like on a spreadsheet:

I then looked at median and average sales price differences and median and average amount of basement finish, and came up with between $21,647 and $24,500 difference in price, favoring those with the basement finish and between $24.24 per sq. ft. and $27.75 per sq. ft. of basement finish. This provided me with some support for whatever adjustment I considered most reasonable. This would be anywhere from $21,500 to $25,000 based on sales price differences, or between $24 and $28 per sq. ft. of finished space, if used in that manner.

From experience, I know that basement finish typically costs around $40 per square foot in this market, which suggests that both physical depreciation and functional obsolescence are playing a role here, since the difference is more than what would be expected from physical depreciation alone.

For the second example, I used data from another proximate market with my target properties between 1,200–1,700 sq. ft. in size and built between 1985-2010. I also went back just over two years. I had 48 sales without basement finish and 36 with basement finish, and the median difference in price was $8,953; the average price difference was $14,420. Here is what it looks like on a spreadsheet:

The median size of finish was 625 sq. ft. and the average size of finish was 703 sq. ft., supporting adjustments per sq. ft. of $14.32 to $20.51. This means I could be comfortable using adjustments anywhere from $9,000 to $14,500 for the basement finish as a whole, or between $14 and $21 per square foot if I chose to address it that way. This data gives me something to work with and in the end, I use my experience in the market and what the comparables are telling me for my final determination, but I have support for whatever I do.

As you can see, there are differences in price between the areas and the sizes, as would be expected. Cost remains about the same to complete. Each appraisal may be different, and the numbers presented in these two examples could change depending on how far back the appraiser goes when collecting data and what they set as the perimeters for the data search. I offer this to fellow appraisers as a simple study showing how I often go about trying to extract an adjustment from the market.

Ranking and Reconciliation

This has been reprinted with permission from Working RE

Ranking and Reconciliation

Road to Supporting Value: Ranking & Reconciliation
by Rachel Massey, SRA and Tim Andersen, MAI

Because the Sales Comparison approach and both the Income and Cost approaches are meant to reflect the actions of knowledgeable buyers and sellers active in the marketplace, a brief discussion of ranking andreconciliation is beneficial. The acts of ranking and reconciliation help set the stage for the appraiser’s opinion of value.

We appraisers tend to get caught up in the minutia of the adjustments, as well as supporting our adjustments, as is appropriate. This means we sometimes miss the big picture, and get way too caught up in the details. It is a rare buyer who breaks out each unit of comparison in a dollar amount. Instead, the typical buyer (of residential property at least) expects to pay more for a property than those that are inferior to it, and less for a property than those that are superior to it. This is just common sense and serves as the foundation of ranking properties relative to the subject.

When we are at the point in the appraisal process of analyzing sales that we consider to be the best representatives of comparison to the subject, we should also look at the larger picture and analyze the sales as a whole. Ideally, we have gathered sufficient and meaningful sales data to have properties both inferior and superior to the subject, as well as ones that are generally similar. It is not always possible to attain this data but in most markets it is generally not too difficult.

The process of analysis and summarization of the sales that we use in our reports should guide the intended user to follow us to a very logical conclusion. The following is a type of real-world example, imperfections and all*:

Example

Comparable sale 1 is a similarly sized, ranch-style house with an updated roof, windows, kitchen, and bathrooms. It has a quiet location off a main road, but does require some travel along gravel roads. This house is superior to the subject in the following manner: It is larger and includes an additional half bathroom; has a deck, a finished basement, and a newer kitchen. It is inferior to the subject in that it lacks a breezeway and the quality is not to the same level as the subject.

Sale 1 is similar to the subject in location because its quiet location is offset by the greater distance to town than the subject. Overall, sale 1 is slightly superior to the subject due mainly to size, bathroom count, and basement finish and it sold for $208,000, setting a logical upper limit of the value range.

Comparable sale 2 is noted in the MLS as being newly remodeled, but the selling agent indicates the house needed work, and the exterior of the house is not in good shape. The house has an addition off the back, which may not flow as well as a house built this size to start. This house is located in a different school district from the subject, right at the district border. In our opinion, there is no marked difference in value between the districts in this location and buyers will consider both equally. The house is inferior to the subject, due to overall condition and its location, which is closer to the other community, which is not as good. The road tends to be very busy at certain times of the day. There is a commercial property across the street and south by only a couple of lots, and an animal hospital/dog play park just a few lots south. As an inferior property, this house sets the logical lower end of the value range and it sold for $153,000 in September 2014. As the market has been increasing, and we can measure an increase of approximately 5% from the date of contract to the effective date of our report, the expected value of this house were it to go under contract as of the effective date is $161,000.

Sale 3 is a good comparable property of similar overall quality and appeal. This house is superior to the subject in that it has an extra half bathroom and two fireplaces as well as being larger overall. It is inferior to the subject in overall cosmetic condition and is more dated cosmetically. The location is closer to the subject community and the road does have traffic, although not as much as the subject’s location. The features that are similar, other than style, are that it has a breezeway and updated furnace and A/C (equal to furnace and electrical). Overall, this property is similar due to the size and amenities such as the deck and fireplaces being offset by the inferior condition. This house sold when the market was about 3% lower, with an approximate value on today’s market in the same condition of $183,000, setting another benchmark in value for the subject.

We have also included information about a pending sale that is located in close proximity to the subject and is similar in age, site size, and overall appeal. This house is superior to the subject in having an additional half bath and being slightly larger. Due to having electric heat, and a more dated decor, it is slightly inferior to the subject overall; it is listed for sale for $184,900 and went under contract within 37 days on the market. We expect the house to sell within 3% of the list price based on the list price to sales price ratios found in this market place. This pending sale provides good evidence of current market activity.

This type of ranking description is not extensive, but it provides the client and intended users a good place to start to understand some of the appraiser’s logic in arriving at a value conclusion. The appraiser has already indicated that the subject has a logical lower limit of value of $153,000 and an upper limit of value of $208,000. This is a relatively wide spread, however, of 35.95 percent based on the unadjusted sales price range. Through the adjustment process, such as with the use of paired-sales data, grouped paired-sales data, regression, depreciated cost, sensitivity, and more, it is logical to conclude this range should narrow considerably as a result of the adjustment process. Consider the following reconciliation of the three sales that were addressed above:

We have included three closed sales in the analysis. The closed sales present one inferior (sale 2), one superior (sale 1), and one generally equal (sale 3). Looking at these sales without any adjustment for any of the units of comparison other than changing market conditions, the superior property sold for $208,000, presenting a logical upper end of the value range. The inferior property sold for $161,000 (accounting for the changing market conditions only), providing a logical lower end of the value range. The similar property sold for $183,000. Together these sales provide a means to indicate that even without adjusting for anything other than changing market conditions, the subject would have a low range of $161,000, high range of $208,000 and a logical price range around $183,000.

After applying the units of comparison that we considered most relevant, namely market conditions, site value, condition, size and bathroom count, the adjusted sales price range narrows significantly from a low of $179,000 to a high of $186,500. The most similar sale adjusts to $179,000, and a similar competitive offering is for sale for $184,900 and expected to be close to list price. All of this information causes us to consider the most likely value for the subject at $183,000, which is the appraised value. This takes into account both the adjusted and unadjusted sales prices of the comparables as described above.

Logical, isn’t it? Notice how the adjusted sales price range has narrowed from 35.95 percent down to 4.19 percent? This would be typical of a well thought out and analyzed adjustment grid. All too often appraisers average these sales data rather than reconcile as to which sale has the most meaning relative to the subject and why. Remember that the Uniform Standards of Professional Appraisal Practice (USPAP) actually requires us to “…reconcile the quality and quantity of data available and analyzed within the approaches used…”(Standard Rule 1-6 (a). It also requires us to “…summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions and conclusions…”(Standard Rule 2-2(viii)) when using the Appraisal Report format.

Why is this important? It is important because it shows the logic the appraiser used to go from the general information of the unadjusted comparable sales, to the specific rationale behind the appraiser’s value conclusion. Not only that, it also reflects the way that buyers buy houses. Buyers may consider the cost of a new house as an alternative, as well as weighing the time to completion, particularly on newer houses. When buying a house, most buyers also consider the cost of renting on a monthly basis, so the income approach is also often applicable to the formation of a credible value opinion when buyers in a particular market could rent just as easily as they could buy. At the very least, knowing that their mortgage payment would be in the range of a rental payment is at the forefront of many buyers’ minds, in particular after the recent mortgage crises.

Recall that standards rule 1-6 requires us, when developing a real property appraisal, to reconcile two areas of our analyses. First, we reconcile the quality and quantity of data available and analyzed within the individual approaches. This means that we discuss the analyses of construction costs, depreciation estimates, site values, comparable sales, comparable rentals, and availability of data, ability to confirm the data, and so forth. Then we reconcile between the various approaches to value that we have applied in the appraisal process. Please consider this language as one example:

Because there were sufficient data from reliable sources, the appraisers were able to analyze the subject using all three of the standard approaches to value. While the Cost approach indicated a value conclusion approximating that of the Sales Comparison approach (after adjustments), it is best used as a secondary method on a house of this age. There was plenty of comparable sales data by which to form a value conclusion. All were relatively close to the subject. Since the houses in the subject’s neighborhood are generally not purchased and sold as investments or income producing properties, the Income approach was not able to yield a reasonable indication of value. For this reason, its details are in the workfile, but the appraiser has omitted it from the report as neither applicable nor necessary to the formation of a credible value opinion.  

Next, Standards Rule 1-6 requires us to reconcile the applicability and relevance of the approaches, methods, and techniques we use to arrive at a credible value conclusion. As we pointed out earlier, this is nothing more than a process where we assign a specific weight to the conclusion of a specific approach. Typically, the more comfortable we are with the value conclusion of a specific approach to value, the greater weight that approach receives in this reconciliation. Consider this language:

For the reasons cited above, the appraiser chose to give the greatest weight to the value conclusion from the Sales Comparison approach. For those same reasons, the appraiser gave some weight to the value conclusion the Cost approach indicated. Finally, for the reasons cited, the Income approach merited no weight in the final analysis. It is for these market-supported reasons the appraiser concludes the market value of the subject property, as of the appraisal’s effective date, was $183,000. 

Notice how we ranked the sales and then provided the “why” behind that ranking? Then we ranked the data in the individual approaches, as well as the “why” of that ranking. Finally, we ranked the individual approaches and, again, explained why we did so. With this ranking we showed both the sales that merited the greatest weight in the final analysis, as well as why we concluded they merited that weight. Then, via the reconciliation to the individual value indications, we indicated (a) which was most persuasive in forming the value opinion, as well as, (b) how and why we arrived at that conclusion. These two steps are in compliance with SR1-6(a, b) as well as the Fannie Mae Selling Guide. This is the quality of appraisals and reports clients and intended users look for, and that, over time, will merit more professional fees.

*We took a real world example and cleaned up some of the language, eliminated a sale to make it more readable and to eliminate any telltale signs of the subject property.