Real Estate Appraiser, Determining Appraisal Adjustments

Copyright 2000-2015 Richard Hagar, SRA 1

Copyright © 2007- 2015 Kinja LLC / Hagar Institute

Determining Appraisal Adjustments

Opinion really doesn’t count.7 hour web based CE class for appraisers.

by Richard Hagar SRA

2016


Richard Hagar, SRA• Real Estate Agent,• Real Estate Appraiser,• SRA with the Appraisal Institute,• Fraud Profiler for Law Enforcement,• Bank and Mortgage Broker Compliance Instructor.

• Co-authored:– Washington’s Mortgage Brokers Practices Act (RCW 19.146)

• This law became the basis for the Federal SAFE Act– AMC Licensing laws (multiple States)(RCW 18.235)

• Sections were incorporated into the Federal “Dodd/Frank” Act– Foreclosure and Distressed Home Owners Act

• Foreclosure notification requirements and anti-fraud statutes• Washington’s Administrative Code

• Contact the instructor: [email protected]

2


Before We Go Further…

• Different people reading the same regulation, often come away with different opinions about its meaning.

• Often the differences come because they:– don’t comprehend the sentence structure (due to

“government speak”) or,

– fail to pay attention to small but….very importantwords.

• Here’s an example…


Definitions - Small Words Big Impact!Based upon the law, the terms:

• “Must” “Shall” and “Should” = A positive requirement, similar to law.

• “May” = An optional obligation.

Example:

The lender may review an appraisal = optional, your choice.

The lender must review an appraisal = requirement

The lender shall review all appraisals = requirement.

The lender should review all appraisals = requirement.

If you should do it you must do it!

STATUTE LAW COMMITTEE - Office of the Code Reviser(ii) "Shall" should only be used to mean "has a duty to." That is, to require the performance of an act. For example, "the governor shall appoint a director . . ."


“Whatchu” Talking About?

First thing’s first.

• There is no law, regulation or, Standard that requires an appraiser to make an adjustment.

• However…. if you are going to make an adjustment there are laws, regulations, guidelines, and court rulings that must be followed…

… and that’s what this class is about.


Qualitative vs. Quantitative

Qualitative Terms• More than• Less than• Better than• Inferior• Superior• Average• Good

• AKA. Subjective terms• Your opinion

Objective Terms

• 2,000sf

• 3 bedrooms

• Price per SF

• Adjustment per SF

• Quality Definitions 1-6

• Condition Definitions 1-6

• Definitions, facts, proof

• Not opinion based



Qualitative: adjective

• Qualities that are descriptive, subjective or difficult to measure.

• When qualitative terms and descriptions are used, no specific adjustments are required.– Obviously very opinion based.

• Specific adjustments, like $100 per sf., would be impractical.– Comparable X is superior so the subject’s value would be less.

– Comparable Y is inferior, so the subject’s value would be higher.

• A weak method, but at least readers would understand that the conclusions are very opinion based.


Quantitative

Quantitative: adjective

• a type of information or data that is based on quantities obtained using a quantifiable measurement process.

– Price per SF– Adjustment per SF– Quality Definitions 1-6– Condition Definitions 1-6

• Measurable facts, proof


The Wrong Way

Supplied by a very stupid, if not

dangerous, instructor


Advantages and

Disadvantages


Advantage - Agents

Experienced agents are good at “feeling” what the adjustment should be. Why?

• They meet buyers and sellers every week.

• They get to listen to how buyers think or make decisions.

• Most decisions for residential purchases are emotional and agents are good at measuring emotions.


Disadvantage - Appraisers

Appraisers:

• don’t talk to buyers and sellers every week;

• don’t get to listen to what buyer’s are thinking or what influenced the decision;

• don’t walk through dozens of homes with the buyer.

• Appraisers are not allowed to be emotional about their decisions or adjustments.

• Requires us to find and use the facts.



Problems - AppraisersAppraisers

By law:

• Are not allowed to make adjustments based on emotions.

• Appraisers must prove value and adjustments.

• Adjustments must be what the majority of people want not a minority or individual person.– Hence the term “Market Value”

(support)

There are always oddball sales and individual ideas of value.


But ..But..Richard…!You don’t understand!

• “I’ve been in this business for 30 years. I know what the adjustment is supposed to be.”

• “Since I’m an appraiser, adjustments can be based on my opinion.”

• “The adjustment’s I’m making are the same the other appraisers are making.”

• “The adjustments are supported by my knowledge.”

• “In my area things are different. There are insufficient sales to prove an adjustment.”


It’s My Opinion

• Many of us have heard:

An appraisal is my opinion of value.

• That statement is only half right.

• The truth is, an appraisal is an opinion of value …supported by facts.

• Unfortunately, many appraisers miss the important part of the statement “supported by facts”

• Every part of the appraisal must be based upon facts.


Rational Evidence – The Wrong Way

• “Rational evidence - Reason or reflection alone used to determine the truth or falsity of some propositions.”

• Appraisers often use:– “rational evidence,”

– their “feelings” or,

– their “experience” to determine an adjustment.

• This is absolutely, without doubt, the wrong way to determine adjustments.


Empirical Evidence

• Empirical evidence - A source of knowledge acquired by means of observation or experimentation.

• Empirical evidence is information that justifies a belief in a claim or theory.– In the empiricist view, a person can only have knowledge when

they have a true belief based on evidence.

• The term empirical refers to the gathering of data using only evidence that is observable.– Empirical = superior, best, top of the food chain.

• Testing of a theory. Testing, using evidence, to determine the accuracy of a theory.– Adjustment per square foot.


Failure To Understand The Difference

• Failure to understand the difference between “Rational Evidence” and “Empirical Evidence” is one of the leading reasons for appraisers to lose their certificates and pay fines.

• Agents can use their “feelings” appraiser cannot.

• Examples of failures…



Appraisal Licensed RevokedFindings:a) Failed to provide proof of analysis and supporting data in

the workfile.

b) Made adjustments in the appraisal report that contradictdata contained in the workfile.

c) Failed to make accurate and/or consistent adjustmentsregarding comparable sales.

d) Used inappropriate comparables.

e) Failed to accurately describe subject property site conditions.

• Action: Revoked for 3 years.

• Patricia P.


Jeanette C.

Findings:

1. Failed to disclose methodologies used to arrive at adjustments made for comparables.

2. Failed to make adjustments for views and fireplaces of the comparables.

3. Signed an appraisal report without inspecting the property or the comparables.

4. Failed to report the listing history.

• Actions: License suspended 1 year.


“Workfile was Incomplete As It Contained No Data To Support The Dollar Adjustments”

• These are some of the Government’s numerous charges.

• Does the existence of additional charges somehow eliminate the failure to “support” adjustments??

But that’s what the blogs say…


FNMA and State Licensing Agency

From the State of Washington disciplinary action against an appraiser:

Failure to support an adjustment will get you in trouble with Fannie Mae, the state, and in trial.


“I Support My Adjustments”

Common statements:• “The appraiser must have support for the adjustment.”

• “I have support for my adjustments.”


Define “Support”

• Let’s talk about it.

• What does the word “support” mean to you?

• How should we define “support?”

• If you get a moment, please email your definition of “support” to the instructor. [email protected]



“Support, Evidence, Proof”

Support:

• the truth of; corroborate.

• synonyms: verify, prove, validate, substantiate, back up, corroborate, confirm, attest to, authenticate.

Evidence:

• The strongest type of evidence is that which provides direct proof of the truth of an assertion.

Proof:

• evidence sufficient to establish a thing as true.

• the act of testing or making trial of anything.

– You can’t test “feelings” or “your experience”


• Alison - Washington

“Failed to support with evidence…the adjustments…”


Appraisers Have No Choice

• Standards Rule 1-1 (a): be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.


SCOPE OF WORK RULE

• “An appraiser must gather and analyze information about those assignment elements.”

– Adjustments are an element.

Credible:

• “Credible assignment results require supportby relevant evidence and logic...”


USPAP Advisory Opinions

• “The analysis of the effects … on property value must be based on market data, rather than unsupported opinion or judgment.”

• “Describe the analysis that was performed and the supporting information that was used in valuing the property.”

• “In a market value appraisal, the appraiser’s scope of work decision carries a burden of proof to support the appraiser’s conclusion….”– What’s your proof.. your opinion or something more?

AO-9


OpinionDefinition of “Opinion” -

• a view or judgment formed about something, notnecessarily based on fact or knowledge.

• a belief or judgment that rests on grounds insufficient to produce complete certainty.

• based on that which is less than absolutely certain, and is the result of emotion or interpretation of facts. – What distinguishes fact from opinion is that facts are verifiable,

• i.e. can be objectively proven to have occurred.

• Opinion may be the result of a person's perspective, understanding, particular feelings, beliefs, and desires.



The Objective Requirement

Appraisers are required to be objective.

The term “objective” is listed:

• 9 times in Fannie Mae’s Appraisal Guidelines,

• 33 times in USPAP and,

• 21 times in the Advisory Opinions.

• OK, it’s important but what does the term mean?

Handout


Objective

• Standards, laws, regulations, and guidelines require appraisers to be “objective” in reporting information and reaching a value conclusion

ob·jec·tive adjective

• not influenced by personal feelings or opinions in considering and representing facts.

• based on facts rather than feelings or opinions.

Just the facts ma’am.

• Webster’s Dictionary


Fannie MaeRequirements for Appraisers and Lenders:

“Fannie Mae expects all appraisers to observe the following requirements. Consequently, lenders must:

• ensure that unsupported assumptions or interjections of personal opinions or perceptions about factors—whether or not the factors affect the use and value of the property— are not used;”

Part B, Origination Through Closing; Subpart 4, Underwriting PropertyChapter 1, Appraisal Guidelines, Appraisal Document Standards; Report, and Property Inspections 2013


The Appraisers Role – We Are Not God

• Appraisers do not establish value– The Market (buyers & sellers) establishes value.

• Appraisers provide written support of value. – If we’re good, lucky, and have access to proper data - the

supported value may also be the sales price.

• FNMA’s description of the appraisal and the appraisers role:

"To provide a lending institution with an accurate description of the property and an adequately supported estimate of market value.”



MethodsAdjustments

andCommon Sense Rules


Out of Balance

• Things that are foreign are often rejected (at first).

• Some of what you’ve learned so far today has created an imbalance between what you believe and the legal reality.– You’re going to feel uncomfortable and combative for a

while.

• It will take time, but you should reach an equilibrium (what was/what is), and once you do, things will get better.

• Taking notes will help insert the new information into your head and make future appraisals quicker to write.


Adjustment: ad·just·ment

noun

• a small alteration or modification made to achieve a desired result.

Appraisal Adjustment:

• Displaying market reaction through an objective mathematical process.

• Mathematical changes demonstrating differences between the subject and a comparable.

• Changes made to a comparable’s selling price quantifying the market’s reaction for differences.

• Adjustments can be made as a percentage or dollar amount.


Rules Of Evidence

Deciding what is evidence, support, proof.

“The appraiser’s opinion

is not persuasive to the court”

Supreme Court the “Daubert Ruling”


Non Reliable Method

Supreme Court:

• “We conclude that the appraisal report is not admissible because the author [appraiser] did not apply reliable principles and methods.”


According to the courts (Daubert Ruling)

• “Support” can not be biased.– Appraiser problem? Opinions are biased.

• “Support” must be reliable.– It happens again and again.– It can be repeated by others.

• Expert’s methods must be based upon a recognized or identifiable technique.– Opinions are not a recognized or identified technique.– Opinions are not a technique that’s described in any

appraisal text.



Adjustments MustSupported calculation that assists in reaching a value conclusion.

a) Reason– The reason for the adjustment must be evident.

b) Logical– The reader must be able to understand the why & how.

c) Justifiable– Must be based on the Market’s reaction.

d) Sensible– Subjective, erratic, non-supported, conflicting adjustments

invalidate the report (and conclusion).e) Defendable

– The method for determining the adjustments must be based upon a recognized, standardized and/or repeatableprocess.

• Feelings and experience are not repeatable by others.


Even The Standards Say

Standards Rule 1-1:

a) … an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.

Notice how the word “method” keeps popping up.


Method Meth-odNoun:• a procedure or process;

• a systematic procedure, technique, or mode of inquiry employed by or proper to a particular discipline or art;

• a systematic plan followed in presenting material;

• a way, technique, or process of or for doing something;

• a body of skills or techniques;

• a body of methods, rules, and postulates employed by a discipline;

• a particular procedure or set of procedures;

Appraisers must follow systematic procedures to produce credible results. Methodologies are published and taught in beginning appraisal classes.


Support + Method = Adjustment

• The methodology employed in determining an adjustment mustbe based upon a recognized, standardized and/or repeatableprocess.

• Does the method have a name recognizable by others?

• Could a competent appraiser understand your methods?

• If someone doesn’t understand, could they read a published article or book that explains the method or process?

• Can a review appraiser, looking at your work file, create the same result?

• Market data + a method = an adjustment?


Concepts and Exposure

• In the limited time we have, there is no way to provide detailed explanations of every adjustment methodology.

• Convey conceptual information about only 13 of 30+ different methods.

• Simple explanations, simple examples.

• Examples apply to homes and commercial properties in all price ranges and areas.

• The goal is to expose you to different methods.

• I’m not teaching rocket science... at this point.


Common Sense Rules Of Thumb



From A Scientific Point Of View

• Observations lead to forming a Hypothesis.

• The hypothesis is tested by various methods.

• Validation of a Hypothesis leads to a conclusion.

From the appraiser’s point of view:

• Observation leads the appraiser to believe one neighborhood is superior to another.

• The appraiser tests the hypothesis by the use a methodcalled a matched-pair analysis to determine if, and by how much, one neighborhood is superior to another.

• The method’s output is the adjustment in the appraisal.


Rule #1 - No Single Method

• There are at least 30 different methods for determining adjustments.

• Because markets vary and have different levels of information, no single method works every time or every place.

• Not every appraiser will understand some of the more complex methods.

• This class will demonstrate several different ways to attack the problem.

• Sometimes you’ll have to attempt or test different methods until something makes sense.– Visually, yellow colored slides will break up the different

methods.


Rule – Not By Price• No matter which method or process you use, try not to

search by sales price.

• Searching by sales price indicates a bias toward a certain value conclusion.– Only searching for sales between $200,000 and $250,000

indicates you didn’t consider sales below $200,000 or over $250,000.

• If price restricted, you will likely miss similar homes.

– What if they were physically the most similar to the sub?

– Looks really bad to state auditors.

– The CU doesn’t search by price,

– neither should you.


• Can not use information from the newspaper, or what someone else said, as an adjustment, unless the foundation for the article is studied and included.– Where did they get the data?– What was their search criteria?– What was excluded? Included?– Was their data reliable or a column filler?

Rule - Do Not Rely Upon….


• Appraisers can not use someone else’s appraisal for support an adjustment. – Did they use the right methods?– What if they made a mistake? – Using their report would multiply the problem by

using it again.– If there’s an issue with your report, are you going to

blame the other appraiser???

Rule - Can Not Use


Rule - Best Support

• Best if data is based upon CLOSED sales.– Proof of the market’s actions.

Second best indicators of the market’s actions:A. Listings

– Indicates future possibility/actions– Competing alternatives

B. Expired– Great at showing what something is not worth.



Rule - More Than Just Comment

Examples of appraisal failures:“An adjustment for location has been made to comparable #1.”“Adjustments were made for sites superior and inferior to the subject.”

Fannie Mae’s Selling Guide:• The appraiser must provide appropriate comment(s) reflecting

the logic and reasoning for the adjustments provided,…

• A statement only recognizing that an adjustment has been made is not acceptable.

• Selling Guide: B4-1.3-09, Adjustments to Comparable Sales


Rules - Facts Not Opinion

• Support for your adjustments must be in…:a) the report,b) the workfile,c) another location referenced in the workfile or,d) all three of the above. (best option)

• Review appraisers, or government agencies, looking at your appraisal and/or workfile, must be able to replicate data conclusions.– Ask yourself: If someone reads your file (State or lawsuit) is it in there?


• Adjustments must be based on facts, not the appraiser’s opinion.– Facts are everything.

• No facts….no data = no support.

• No data, support, proof….. then no adjustmentshould be made on the appraisal.

A Guess / Experience Is Not Good Enough

• If there’s no support, what would your adjustment be based upon?

• Experience is insufficient.• Opinion is not an objective fact.


No Adjustment!?

• What do you mean if there is no support we should not make an adjustment??

• Stop and lets talk!

• How do you define the word “support?”If you have an opinion,

Email your definition to the instructor:

[email protected]


Charges Against An Appraiser

• No support,• Inaccurate adjustments,

• When charges are filed, what will the government say about your files?

AF - Found guilty.


Statement of Charges



Next 5 Rules

Common Sense Rules:

1. You don’t have to make adjustments for every component that’s different.

2. Only adjust the components that the market is adjusting.

3. Adjustments can not be based upon the actions of a single person.

4. Adjustments must be based upon the actions taken by a majority of the market segment.

• Hence the term: “Market Adjustments”

5. Adjustments must be for items that you can support with market evidence.


RuleNo Matter Which Method - Keep Notes

• I have a page filled with calculations;

• Every major adjustment is on my note page;

– Location,

– Site,

– Square footage,

– Bed/Bath,

– Etc..


Rule - Practice

• Practice one or two methods at a time.– Practice on an easy property with numerous sales.

– Practice until you understand and become comfortable with a method.

– Increase your skills by adding several more methods to your “tool kit.”

– You will become a better appraiser by understanding more methods.

• More complex assignments

• Higher fees.


Mistakes And Communication

Fannie Mae’s System


Who Has Heard…?

• Fannie Mae does not allow single line adjustments to be more than 15-20%

Or

• Total adjustments to a comparable must be less than X%


A Fannie Mae Myth

• Fannie Mae and Freddie Mac do not have limits regarding how big, or small adjustments can be.

• They do not have limits regarding the total number of adjustments.

Who ever told you there was a limit, was wrong. It was a guideline that required a comment, nothing more.



Gospel According To FNMA

• The appraiser’s adjustments must reflect the market’s reaction (that is, market based adjustments) to the difference in the properties. – For example, it would be inappropriate for an appraiser

to provide a $20 per square foot adjustment for the difference in the gross living area based on a rule-of-thumb when market analysis indicates the adjustment should be $100 per square foot.

• B4-1.3-09, Adjustments to Comparable Sales


Same SF Adjustment Regardless Of State??How Can That Be?

• At a minimum, the SF adjustments should increase when the value of the improvements increase.

• If they don’t, something must be wrong.


Failure To Properly Adjust SF

• Adjustments should increase somewhat along the lines of increasing property value.

• If not, why not?


Statement From FNMA - July 2014

• “Based on the examination of the Uniform Appraisal Dataset (UAD) data, Fannie Mae's focus for the next 12 months will be on adjustments.”

• “The data indicates that many appraisers are not using proper methodology to make their adjustments.”

• Some appraisers are still using the old standard $20-$40 per square foot adjustment on properties that are easily valued at $500-$650 per square foot."


• "Fannie Mae is planning to re-evaluate appraisers based on their adjustments and the GSE will expect appraisers to comment on all adjustments if necessary.”

• “Fannie has seen a lot of under adjusting.”

• “To be safe, appraisers should document their logic and reasoning for making any specific adjustments.”

• Appraisal Port / Appraisal Today


AQM Level 1 ProblemIssue With An Individual Appraisal

1. The AQM / CU system analyzes an appraisal;

2. Discovers issues;

3. Trouble code(s) and explanation(s) will be delivered to the bank;

4. Bank, or AMC, will ask the appraiser for additional information, clarification or support for adjustments.

• Hopefully, the appraiser can supply the requested information, clarification or support.

• Life is good and the loan/appraisal proceeds.



Recent “Lender” Request

From: Bank

RE: Loan File #

Address: SE Ridge Road

1. Please provide details as to why the following comps were not utilized:

– 880 Fran Street SE

– 755 Valleywood Dr. SE

– 677 Wipwood Dr. SE

2. Please provide detailed market support for all adjustments made in the report.


Recent – Request From Lender To The Appraiser

[Appraiser] ,

In reference to your appraisal of

Please explain the following:

• No adjustment has been made for condition and age to any of the comparables provided. Please provide support as to why adjustments for differences in age and condition are not warranted. – Example: If paired sales analysis was utilized, please provide the

data, analysis and reconciliation of the rates of adjustment; If regression analysis was utilized, please provide the data, analysis and reconciliation of the rates of adjustment.

Wow! Not just proof of the adjustment but why an adjustment wasn’t made.


Fannie Mae’s RequirementsObjective and Unbiased Appraisals

A lender must ensure that the appraiser:• considered all factors that have an effect on value; and• was objective and unbiased in the development of the

opinion of market value in the appraisal report.

Prohibited practices include:• use of unsupported, descriptive comments or drawing

unsupported conclusions from subjective observations. • use of unsupported assumptions, interjections of

personal opinion, or perceptions about factors in the valuation process.

Fannie Mae Selling Guide;Part B, Subpart 4, Underwriting PropertyChapter 1, General Appraisal Requirements

Often appraisers use personal opinions to determine an adjustment.



Cost Approach


Three Approaches to Value:

1. Cost Approach Value of land + cost to rebuild improvements.

2. Sales Comparison Approach A Comparison between the subject and other

similar properties in the market area.

3. Income Approach Based on the income that the property is capable

of producing.


Cost Approach - Adjustments

Even the cost approach has/requires adjustments:

– Depreciation.


#1 Cost Approach

The appraisal steps:

Step 1: Determine Land Value;Step 2: Determine the cost of constructing all

improvements to the land, such as a house, garage, barn, driveway, landscaping;

Step 3: Subtract for depreciation; (wear & tear and other factors)

Step 4: Total.

Depreciation is an adjustment.


#1 Cost Approach – cont.

Land Value $200,000

+ Cost to Construct Home

(2,500sf home x $110.00)

+ $275,000

= Total Cost as if new = $475,000

- Depreciation (loss of value) - $ 50,000

Today’s value of property

Total = $425,000


Depreciation

• Loss of value due to any cause.• Difference between value new and today’s value.

Three major categories:1. Physical -

• Things wear out

2. Functional –• Problems with the floor plan, needs change

3. External –• Adverse conditions from beyond site boundary



Depreciation - Physical

Wear and tear, use, elements.


State of California – InvestigationsCommon Appraisal Deficiencies

The Top 20 List


State of California – Investigations#11 on the hit parade of deficiencies…


Who Has Heard The Statement..

“My house has gone up in value.”

Question: What has gone up in value?

• The house……. or the land?


If Only It Were That Simple

• If land values were stable, then calculating depreciation would be simple.

Problem –

• The value of land and structures are impacted differently by different forces (social and physical).

• Land and structures change at different rates, at different times, and…. often in different directions.


Assuming Stable Site Value –Home Value Declines

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Stable Price Market

Land Value Improvement Value

Assuming land value remains constant, the value of the improvements (building) declines over time.

It “wears” out.



Land Values Increase, Value of Improvements Decrease

If land values increase, and the value of the improvements (house) decline typically, the overall value still can increase.

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Time/Years

Increasing Prices

Land Value House Value


3 MethodsFor Determining Depreciation


Three Methods For DeterminingDepreciation Adjustments

1. Your best guess based on experience; – Very poor choice.

2. Marshal and Swift Tables;– Reasonable but less than perfect. Nationwide data.

3. Market Data;– Difference between new and old homes, in the same

neighborhood.


MethodEffective Age

The appraiser’s best guess


Effective AgeThe Appraiser’s Guess

• The actual age of the improvements impacted by updates, remodeling, style, and buyer’s taste.

• An estimate of the age based upon the appraiser’s opinion.

• Based upon the appraisers experience and comparisons.

• Poor choice.


Depreciation – Effective Age

• Effective age of a building is reduced when there are improvements or maintenance.

• Effective age of a building increases when there are no improvements or maintenance.

– Excessive wear and tear.

• Less maintenance or more wear and tear, the more likely that Effective Age and Actual Age will be similar.

Graph on next page



Depreciation

Higher Effective Age

Lower Effective Age

No Maintenance

Extensive Maintenance

25 yrs

15 yrs

5 yrs

To a pointStyle and needs change


Life Expectancy Chart

Quality “Q” Site BuiltFrame / Masonry

Manufactured Home

Log Homes

Excellent 1 60 – 65 Years 40 / 45

Very Good 2 55 – 60 Years 35 / 40

Good 3 55 – 60 Years 30 / 35

Average 4 55 – 60 Years 25 / 30

Fair 5 50 – 50 Years 20 / 25

Low 6 45 – 50 Years 20 / 25


Depreciation –Physical Straight Line Depreciation

0

20,000

40,000

60,000

80,000

100,000

120,000

Yea

r1

Year 65

$0 value

Value of the improvements


Depreciation –Physical With Improvements

0

20,000

40,000

60,000

80,000

100,000

120,000Y

ear1

Year 65

$0 value

Year 100

Yea

r 7

Yea

r 20


Depreciation

• Improvements to a building reduces the building’s effective age.

– Actual building age is 20 years old;

– However, due to improvements the “Effective Age” is estimated at 5 years.

• Both ages can be placed on the Report:

– Actual age = 20 years

– Effective age = 5 years


Calculating Total Physical Depreciation (Adjustment)

• Average construction is expected to last 65 years.• Assume a property has an Effective Age of 5 years:

Effective age ÷ Anticipated age = Amount of Depreciation

5 ÷ 65 = 7.6% (1.52% yr.)

7.6% of the total construction cost must be subtracted due to depreciation.

7.6% is the adjustment for depreciation.



$68,717 is very likely the same adjustment that would used on the sales comparison section under the “age” or “condition,” between the subject and a comparable that is a new.

7.6%


Steps to Determine the Effective Age

1. Typical Life Expectancy: Determine the residence's Typical Life, based on its construction type and quality.

2. Remaining Useful Life: Estimate the building's remaining useful life, based on an evaluation its condition, construction quality, actual age and any renovations or repairs that have been made.

3. Effective Age: Subtract the remaining useful life from the Typical Life to obtain the Effective Age.


Effective Age - Document

• If you use this method document how you arrived at your opinion of the effective age.a) What components were remodeled, updated, replaced.

b) What components were not remodeled, updated.

c) What is the condition of various components.

d) List the differences between the subject and comparables.

e) Explain how you calculated the amounts, etc.

• Good files, good explanations are a must.– In no uncertain terms, do not use this for a legal case.


Summary - Effective AgeThe Appraiser’s Guess

• An estimate of the age based upon the appraiser’s opinion.

• Based upon experience and comparisons.

• Poor choice.Why?

– Non-Defendable.

– Lack of data…support…evidence.

– Inability to be duplicated by others.

– Lacks objectivity.

– Involves subjectivity.


Depreciation Tables

Let someone else do the hard work


Depreciation Tables“Marshall & Swift” or Equivalent

• Samples properties in the U.S. to establish averages.

• Creates general tables that you can apply to your property.

• Good for beginners and in areas of similar homes.



Depreciation for components AND the whole house.

Explanations contained within the cost and depreciation guides.


180 Years

0 Years

Total Life Expectancy

Actual

Age

Old New

Marshall and Swift Cost Guide


180 Years

0 Years

Total Life Expectancy

Actual

Age

Old New

Actual Age = 64

Due to various updates, over the years, the structure suffers 36% depreciation.

36% is the depreciation amount in your cost approach and used to determine the “condition” adjustment.


180 Years

0 Years

After Remodeling

Actual

Age

Old New

Major fix-upRemodeled, kitchen, bath and upgraded electrical and plumbing.

Actual Age = 64

Due to various updates, over the years, the structure suffers 36% depreciation.

After the major remodel nowthe structure suffers only 9% depreciation.

What was 36% is now 9% due to remodeling.


Depreciation Tables• You have evidence of the adjustment.

• Recognized method.

• Taught in appraisal classes.

• Described in text books.

• Repeatable by others (review appraisers).

• Several companies supply the tables, including the IRS.

• Outdated or inaccurate for:– Areas experiencing high appreciation or depreciation rates,

– Upper end value,

– High land value ratios (waterfront),

– Remote areas.



Method – Market Data


Inside Tip……and Your Job

• Every appraisal –

Find new construction in the area.

This will provide you critical information


Look At New Construction In The Neighborhood

New construction can help you:a) Measure depreciation;b) Cost of construction;c) Land value.

Examples on the following pages


145xx Fremont N


Market Data/New ConstructionTwo Vital Components

Sales Price: $500,000

- Land Purchased: $100,000

= Total Improvement Costs: $400,000

- Site Improvements: $ 10,000

- Garage Cost: $ 20,000

= Improvement Cost: $370,000

$370,000 ÷ 2,260sf = $164.00 per foot

Price per foot includes hard construction costs, soft costs, commissions, etc.


Market Support

By analyzing new construction in a neighborhood or market area, the appraiser has facts that support:

a) Lot value,

b) Construction costs on a per square foot basis and,

c) The ability to derive the adjustment for depreciation.

• Market derived data .. support .. proof .. evidence.



Determining The AdjustmentFor Depreciation

Now with data from new construction, determining the adjustment for depreciation is simple.


Same Data Two UsesExample

• The subject is a 5 year old home.

• What’s the amount of depreciation stated in the cost approach?– Where did you obtain that adjustment?

• What is the adjustment between homes of different ages/condition?– Where did you obtain that evidence?

• New construction can help.


Difference Between New And OldPerfect World Example

• Think of this as a matched-pair analysis. What is the difference between new and old houses?

• Home = 2-story; 2,260sf; 7-3-2

• Same subdivision, same builder, same floor plan, same landscaping, etc.

New Construction = $500,000

5 year old home = $450,000

Depreciation Amount = $ 50,000 (10%)

Or = $10,000 per year.


$50,000 is also the likely adjustment that’s used on the sales comparison section under the “age” or “condition” adjustments.


Depreciation in Cost Approach = Depreciation in Sales Comparison Approach

• Adjustments $50,000 or $10,000 per year.– Assuming no SF adjustment.

• If cost and sales comparison approaches don’t equal.. …..you have a lot of explaining to do!!


No New ConstructionLike The Subject

Now What?



Nothing Like The Subject

Remember the goal:

1. Determining the depreciation rate for the subject.

and/or

2. Determining how the market is depreciating older homes.

• While #1 would be perfect, #2 would also do in a pinch.

• The depreciation rate for older homes in the neighborhood, can be applied to the subject.


New Construction


- Land Purchased: $ 83,500




$240,000 ÷ 2,300sf = $104.00 per foot (r)

While this new home is different from the subject, it does allow a point of comparison between new and older homes. The information can be applied to the subject.


Neighborhood 5 Year Old Home


- Land Value est.: $ 83,500




$216,000 ÷ 2,300sf = $ 94 per foot (r)

• This 5 year old home is selling for approximately $24,000 less than a similar new construction home.

• Yes it’s different from the subject, but it is a sale and allows for a comparison between it and a new home.


Now Compare New To Old

New Construction

• Tri-level home $104

• 2-Story $109

• Rambler $130

5 Year Old Home

• Tri-level home $ 94

• 2-Story $ 96

• Rambler $122

$104 - $ 94 = $10 or 9.6%$109 - $ 99 = $10 or 9.1%$130 - $120 = $10 or 7.6%

The depreciation adjustment is 9% or 1.8% per year.These homes can be different from the subject. The goal is to determine how the market adjusts for older homes.


Market Approach

Market data is the best method.

• You have evidence of the adjustment.


• Utilizes a recognized method.

• Method has been taught to others and is described in appraisal text books.

• If someone questions your adjustment conclusion, you can shove …. the...ah... data at them.



Market ExtractionDepreciated Value

2nd Use of Market Data

Cost Approach in reverse


Another Way To Measure Depreciation

Market Extraction

• More Effort.

• Requires additional understanding and research.

• A different way to measure the market.

• If you use this technique - questions by lenders and AMCs will fade away.


Spreadsheet The Comparables

1. On a spreadsheet place:I. All of your comparables and/or

II. Very similar age homes in the subject’s market.

2. Calculate:i. Cost of construction (new);

ii. Total depreciation;

iii. Depreciation per year.


Input:• Sales price;• Subtract land value;• Subtract the value of site improvements;• The remainder is the Depreciated Value of the Improvements.

• The market indicates that the improvements of Comp #1 are worth $249,500.

Step 1:Calculate the depreciated value.


• Sales price – concessions -- land – site improvements = Depreciated value of all improvements.• For more accuracy you could also individually subtract garage costs.

• The appraiser now knows the depreciated value of the improvements for every comparable used in the report.

Step 2:Do the same for all of the comparables.


• On a separate tab/page, calculate the improvements cost new for each comparable.

Step 3:Calculate cost new for each comparable.



• From cost new, subtract the depreciated value, the remainder is the Total Market Derived Depreciation• Line 11 minus line 12 = line 13

• The appraiser has market proof of the loss of value due to all causes.

Step 4:Subtract depreciation from new.


• Total Depreciation 38%, divided by the age of the house 35 years = loss per year 1.09% or $4,000 ish.

Step 5:Calculate the loss per year.


• The goal is to use market data to determine the approximate depreciation rate that is applicable to the subject.

• If similar homes are losing 1% per year of age, and they are similar to the subject, likely the same rate can be applied to the subject in the cost approach.

• Market derived depreciation.

Step 6:Apply the calculations to the subject.


1. The data has been used to determine the approximate depreciation rate for the subject.

2. The same data can be used again to calculate the adjustments used in the sales comparison approach.

Bonus Use

Same effort and information, two uses.


• Comp 1: $249,500• Comp 2: $217,500• Adjust: $ 32,000

Bonus Use

Same effort and information, two uses.

On the adjustment grid, Comp 1 should have a total adjustment for the improvements, that is different from Comp 2, by $32,000.


Addendum Example

12

Depreciation in the cost approach and the adjustments in the sales comparison approach were derived by extracting data from market sales. Data extraction is detailed in the grid below.



Use Excel, and set up templates. Then all you have to do is plug in data.

If you do this for your appraisals, you will become bullet proof. Likely, no AMC or lender will question you and you can perform more appraisals for a higher fee.


SummaryMarket Approach - Depreciation

Market data is the best method.

• You have evidence of the adjustment.


• Utilizes a recognized method.

• Method has been taught to others and is described in appraisal text books.

• If someone questions your adjustment conclusion, you can bury them in data and proof.


Depreciation Expensive Homes

Life is different here…


Most Would Believe…

• Most would believe that higher quality homes built with extreme upper end products, have a longer life.

• However, there is a difference between physical life and economic life.

• While an upper-end home can physically last 100-200 years, economically the market value is different from the physical life.


Depreciation – Average Quality Home

0

20,000

40,000

60,000

80,000

100,000

120,000

Yea

r1

Year 65

$0 value

Value of the improvementsdecline over time.


Depreciation – High Value Homes/Land

0

20,000

40,000

60,000

80,000

100,000

120,000

Yea

r1 Year 65$0 value

For the upper-end homes, economic life is less than 65 years, likely 15-20

Yearly depreciation is massive



Nice House - Long Physical Life

• Dodge Mansion / Grosse Pointe (Detroit);• Rose Terrace;• Considered to be one of the grandest most

expensive homes built in America;• Built in 1910;• $4 million;• 100+ years of physical life.


Rose Terrace I


Long Physical - Short Economic Life

• Dodge Mansion / Grosse Pointe (Detroit);• Rose Terrace;• Considered to be one of the grandest most

expensive homes built in America;• $4 million;• 100+ years of physical life;• Built in 1910;• Torn down 1931;

• 21 years of economic life.Then…



Short Economic Life

• Rose Terrace II

• Built in 1931/34;

• $7.5 million / $186 per foot;

• One of the grandest most expensive homes built in America, again;

• 40,313sf (tax records)

• Torn down 1976 (42 yrs. old);

• Cost today $5,000 per sf.

Car cost:

1915 $ 800

2005 $25,000

3125% increase

----------------------------------

$7 mill x 3125% = $224 million


Groat Point – Bellevue WA



Groat Point

Features:

• 2 acres;

• Built 1986;

• 15,160+ sf.;

• Massive multi-million dollar remodel 1996/97;

• Added SF in 2000;

• + Attached garage;

• + Room over the garage;

• 26 years old.

Sales History

• 1995 $ 8,500,000 +

• 2011 $15,250,000

• 2012 Torn down


My Point

• Don’t allow my expensive home example throw you.

• Different price range…

• Different areas…

• Different rates of depreciation and condition adjustments.

• And appraisers have to measure the difference no matter what the value.


• 40 years old;

• New roof, new paint, average (C4) condition;

• So was it purchased as a “home” or land?

• It was purchased and torn down.

• If you appraised it, what depreciation figure would you have used?

• If you used it as a house comp….the house had no value.– It’s a land sale.


Reviewing Adjustments

How you can spot bad adjustments

and failed appraisals.


In Our Reviews

1. First we look at is the amount of depreciation noted in the cost approach.

2. Second, we look at the condition adjustments in the sales comparison approach, if they are different….

3. Then we look for explanations in the narrative section.

• If the figures are different and there is no explanation, we burrow in and rip the appraisal apart.

Computer programs can do the same thing.


How To Spot A Bad Appraisal

• Components of the Cost Approach are directly related to the Sales Comparison Approach.

• Failure to cross check the two leads to failed appraisals, upset review appraisers, bad loans, and a bad economy.



Depreciation Relates

• Even though it is a separate approach…

…the depreciation stated in the Cost Approach, relates to adjustments in the Sales Comparison Approach.

• Depreciation figures are directly related to the Market’s perception of value.

• If you adjust for depreciation in the Cost Section, make sure you adjust accordingly in the Market Comparison Section.


Cost / Depreciation Indicates

• Review;

• 11 year old home;

• 7% depreciation or

• $71,671 loss of value indicated in the Cost Approach.

Depreciation indicates the loss of value between a new home and the subject’s 11 year old home.

For this example, lets assume … the appraiser analyzed the market and accurately determined the depreciation.


Cost / Depreciation Indicates

• Review;

• 11 year old home;

• 7% depreciation or

• $71,671 loss of value indicated in the Cost Approach.

Problem• Only $36,000 adjustment

between a new home and the subject’s 11 year old home.

• Contradictory information.


Catching Inconsistencies In A ReportHere’s How

• If your Cost Approach indicates a reduction in value of 1.52% per year.

• 1.52% per year would also be your condition or age adjustment on the Sales Comparison Approach.

• If the adjustments are not the same, or at least similar, then there is a chance something in your appraisal is wrong.– Not an absolute

• If they are different, then the appraiser needs to explain why?


10 years New 5 years

50,000

- 50,000 - 25,000- 0 -

If the subject’s depreciation is $50,000 due to it’s 10 years of age, then your adjustment on the grid would be the same between the subject and new construction.


10 years New 5 years

50,000

- 50,000 - 25,000- 0 -

If the subject’s depreciation is $50,000 due to it’s 10 years of age, then your adjustment on the grid would be the same between the subject and new construction.C or age adj.

C4 C4 C1 C3

The UAD Way



How do you know whendepreciation is accurate?

The Cost Approach has only 3 major variables:1. Land Value;2. Cost per square foot ;3. Depreciation;4. (some times extra Entrepreneurial Profit).

If the final value is similar to the values derived in the sales comparison and income approaches, then the value in the cost approach is reasonable.

If land value is rock solid and construction costs are reasonable.... then the only remaining variable is depreciation.


Depreciation / Condition / Age

Depreciation, age and/or condition adjustments are:

• Different In every area;

• Different rates under different market conditions;– declining vs. increasing

• Different price ranges in the same general area;

• Different quality homes;

• Different for various styles or floor plans;

• Different for waterfront vs non-waterfront properties;

• It is a changing thing that the appraiser is required to understand and measure for every appraisal.



Sales Comparison Approach


Market Analysis / Comparison

Market Value

High Value Properties

Unusual Properties

Low Value Properties

The Cloud of Market Value

The point of the Market analysis is to reduce the cloud down to a narrow value range.

Narrower, the better.


Market Analysis / Comparison

Market Value

High Value Properties

Unusual Properties

Low Value Properties

Narrow Value Range

Subject’s Value


The Order of Adjustments

• Not only is it critical to make accurate adjustments, but there is also a certain order that must be followed when making them.

• Making adjustments in the correct order is a method for making the important, and maybe the only required, adjustments first.


Adjustments –The Required Order of the Universe

1. Terms; (cash equivalent)

2. Time; (time, changes in market conditions)

3. Ownership; (fee simple, condominium, leased)

4. Location;

5. Site Components;

6. Physical Characteristics.

• The order of adjustments impacts accuracy of adjustments lower down on the form.

• Common for commercial appraisals;

• Failure on the part of residential appraisals.


Adjustments –The Required Order of the Universe

1. Terms; (cash equivalent)

2. Time; (time, changes in market conditions)

3. Ownership;

4. Location;

5. Site Components;

6. Physical Characteristics.

• Adjust time to equal today’s value.• Things were different yesterday.• Time impacts value.

• Concessions mask a comparable’s true sales price.

• Sales price must be reduced to the cash equivalent price before making other adjustments.

• Get time and concession out of the way before moving on.



Terms

Time

Ownership

Location

Other stuff

The order is already there.


Why Does The Order Count?

• The most important adjustments must be made first.

• Adjust for what is critical and skip the small stuff.

For example:

• After making adjustments for concessions, time or location, maybe no other adjustments are necessary.

• Maybe the market does not consider the number of bedrooms or garage, important.– Often appraisers make adjustments based on habit

instead of analyzing the market segment.

– Example of Tier 2 work.


How do you do the Voodoo that you do?


How To Determine And Adjust

• Step #1: Identify individual components;(priority based on the type of property being appraised)

• Step #2: Rate the components (qualitative);

• Step #3: Determine if the Market is adjusting;

• Step #4: Apply a quantitative analysis to determine the amount of the adjustment.

12th Edition; Page 429+ Expanded on next slide


Common Methods for Determining Adjustments

1. Data Analysis;• Data Analysis (big data),• Matched paired analysis,• Allocation.

2. Statistical Analysis;• Regression Analysis

3. Cost;• Cost to cure,• Depreciated cost,• Cost + market adjustment,

4. Hagar’s “Percentage of Use Calculations”;5. Capitalized via Change in Rent Income;

– GRM,6. Interviews;


1. Data Analysis

• Grouped Analysis (Big Data);– Taking large groups of data and making comparisons

• Paired Analysis;

– Matched paired analysis or comparison

– Side by side comparison



Grouped (Big Data) Analysis

• Comparing large groups of comparables and looking for trends.

– Median price for homes with 2 bedrooms verses;– Median price for homes with 3 bedrooms;

– Median price for homes with 1 car garage verses;– Median price for homes with 2 car garage;

– Not the entire city in every price range;– A slice of the market.


North Seattle; 1,000 – 1,500sf

3 Bedroom Median = $410,000

2 Bedroom Median = $384,000

Difference/Adjustment = $ 26,000

Similar number of sales, min/max sales prices, days on market.


Difference between 3 and 4 bedroom homes.

Sales of homes with 4 BedroomsSales of homes with 3 Bedrooms

$657,500- $650,000=$ 7,500 = Market value of

one bedroom.

4th bedroom is less valuable than the 3rd bedroom.


Location Adjustment

Bellevue vs. Seattle

Bellevue $760,000Seattle $490,000Difference $270,000 Location Adjustment


MLS Data – Location Adjustment

Search 1 = SeattleSearch 2 = Bellevue


Location Adjustment

Bellevue vs. Seattle

• This search was for homes in one area vs another.• If you have numerous sales, obtain better results by refining the search.• Maybe:

• Homes built between 1950-1960, like your subject or,• Only rambler or 2-story or,• Homes that have not been remodeled or, or, or…• Etc.



Style• What’s the difference in value (the adjustment) between a

rambler/ranch and a 2-story of the same size?

• 1,500 – 1,800sf;

• Rambler vs 2-story;

• Same age;

2-story = $578,5001-story = $524,700Difference = $ 53,800 or 10% adjustment for “style”


Method 2 - Average Price - Garage• Use County and/or MLS data to locate sales.

• All of the sales in the neighborhood…– Or similar to the subject, your choice.

• Segregated by the number of covered spaces.

• Calculate the average sales price of the group.

Covered Parking Spaces 0 Garage 1 Car Garage 2 Car Garage

Home’s Average Sales Price $190,100 $199,600 $207,833

Difference / Adjustment -0- $9,500 $8,233


MLS Data Download

• Mapped an area;

• Downloaded the MLS data into Excel;


Sort By Garage Spaces

• Use Excel to sort the sales by the number of garage parking spaces and sales price.



Warning

When sorting, make sure to mark the:

“Expand the selection” button

It will keep all of the data lines together and prevent mixing up the sales prices.

If you don’t understand this step, please take a class, or watch a video on using the Excel program.



One group at a time, copy:

a) 1 Car garage sales

b) 2 Car garage sales

c) 3 Car garage sales

• Copy each into a separate tab and it’s own column;

• Excel can then total and determine the average or median.



Group, Sum, Median or Average

• Excel, or any spreadsheet program, can figure the total and average or median price, based upon the number of garage spaces.


Average Price - Garage

• All of the sales in the neighborhood…or…

• Segregated by the number of covered spaces.

• Calculate the average sales price of the group.

• The first covered space is worth $9,500 more.

• The second covered space adds another $8,233.

• Adjustment between -0- and a 2 car garage = $17,500(r)

• You can use average or median.

Covered Parking Spaces 0 Garage 1 Car Garage 2 Car Garage

Average Sales Price $190,100 $199,600 $207,833

Difference / Adjustment -0- $9,500 $8,233


Grouped Analysis - Many Uses

• Waterfront vs. Non-waterfront.

• View vs. non-view.

• Swimming pool vs. no swimming pool.

• Neighborhood “A” vs. Neighborhood “B.”

• Census Tract “A” vs. Census Tract “B”– Great for location adjustments.


Summary of Big Data

• Taught in books;

• Acceptable method, often used by commercial appraisers;

• Can be duplicated by review or government appraisers.

• Depends on having access to data.

• Quick and easy to explain in the report.

• Not perfect, but far better than guessing.



Data AnalysisPaired Sales Analysis

Small data set


Paired AnalysisPerfect World:

• Compare two properties that are identical.. ..exceptfor one single point.

• Home with a:

– 2 car garage vs. 1 car garage;

– View vs. no view;

– 3 bedrooms vs. 4 bedrooms.

• Whatever the difference is between sales prices, is the market adjustment.– Assuming all other things being equal



3 bedrooms


4 bedrooms

Difference = $20,000

Market Adjustment on the appraisal, based on Matched Paired Analysis

$20,000


MaybeYou May Have What You Need

Proper analysis of the comparables may yield gold.

The perfect matched pair for determining the “C”

4


Look Deeper

• Past sales can be a treasure trove of information.

• Comparables usually have prior sales. By analyzing their histories the appraiser might discover previous sales…:– as a fixer-upper – now fixed;

– with smaller square footage – now larger;

– with an unfinished basement – now finished;

– Larger lot that was divided and sold off;

– Etc..

• Prior sales price may provide a perfect match pair.– Yesterday vs today


History Provides the Adjustment

C3 = $585,000C5 = $474,500

$110,500

- $110,500

A comparable sold twice in six months.In the past sale it was a fixer.The current sale it’s C3.By comparing the sales prices you have the condition adjustment.

Include both sales in your sales comparison approach.


Copyright © 2007- 2015 Kinja LLC / Hagar Institute Copyright © 2007- 2015 Kinja LLC / Hagar Institute

• What’s the adjustment due to condition?

• Matched-pair, the same house as #7 & #8.

• C5 or C6 vs. C2 or C3

Same House –- Two Prices

Fixer

8


Analyze

• At a minimum, appraisers should analyze every sale of the subject and comparables that have occurred in the past 3 years. (longer is better)

• Not just look and comment but REALLY analyze and describe what was found.

You might get lucky!!

• The prior sale may yield a perfect matched pair analysis that will help you with today’s adjustment problem.


Adjustment For The “Q”

• Matched pair can be used to determine the adjustment for differences in Quality.

Next page:

• Same builder;

• Same subdivision;

• Similar floor plan;

• Similar age;

• Similar size;

• Selling within days of each other.

How much more perfect can you get!!


$180,000 $300,000

$440,000 $540,000

Ceiling heightQuality of surfaces


$180,000 Q5 $300,000 Q4

$440,000 Q3 $540,000 Q3



$180,000 Q5 $300,000 Q4

$120,000Difference between Q5 and Q4

based upon a matched pair.

13


$300,000 Q4

$540,000 Q3 14

$240,000Difference between Q3 and Q4

based upon a matched pair.


Matched Pairs

• Utilizing a matched-pair analysis method combined with market data, indicated the adjustment between homes of different “Q.”

• It does not matter what you think, believe, or feel theadjustment should be…. the facts indicate there is a $240,000 difference.

• The appraiser MUST make the supportable adjustment….. or get out of the business.

• Your choice.


Attached vs. Detached

Richard,

• My subject is an attached townhouse.

• There are very few attached houses in my area.

• I’ve got a couple of attached houses and loads of detached SFRs that I can use as comparables.

• How do I determine the adjustment between attached and detached houses?


Problem – What’s The Adjustment

• The subject property is attached to the next door neighbor. ( -0- Lot line)

• The majority of the most similar homes are detached.

• Does the market care?

• Is there an adjustment?

• What is the adjustment?

• How would you determine the adjustment?

17


Attached But Separate• Some zoning allows homes to be attached on one side.

– Different zoning, different areas, different requirements.

– Check zoning and land use codes.



Other than attachment:• Similar site size;• Same general design;• Same materials;• Same interior look, feel, materials, Q rating;• Similar selling date;• What is the adjustment between attached & detached?

Comparable #1Detached

SubjectAttached

Two side by side unitsEach on their own SFR site


One Way – Matched Pair – Land Value

• Check the purchase price of the land, no matter how far back in time (assuming both sites sold at about the same time).

• What is the difference between the two?

• Site for the detached home = $375,000• Site for the attached townhouse = $315,000 (per site)

Difference = $ 60,000 (20%)

• The adjustment on the appraisal between an attached and detached house is $60,000 or 20%.

• $2,000,000 price range

20

Ignore the house. Look at the lowest common dominator….the land.


What If Land Sales Are Not Available?

• What if the land sales were at different times and one was part of a subdivision and the other an individual site sale?

• Tough to make a direct comparison.

Now what? Well….

• Look for matched pair home sales in the same area.

• But what if there are no attached homes in town or, there are no recent sales of attached homes.

Again, now what?

• Look for a matched pair somewhere else.

• Different subdivision, neighborhood, market area, town, price range, age…. Something, somewhere but don’t guess.

• We got lucky. In a different town, in a different price range, we found a matched pair.


Detached vs. Attached

Matched pair analysis

• Same builder (different LLC);• Same plat;• Similar floor plan;• Same SF;• Similar selling date;

• $489,950 vs. $519,950

= $ 30,000 Or 6% (r)

The appraiser searched for other homes built by the same builder as the subject, and found them in a different city.


Matched Pairs

• Comparing one property against another is A method for proving adjustments (not the only).

• It’s not perfect and can be influenced by the appraiser.

• Can be use to calculate almost any adjustment.

• It’s better than guessing and if performed correctly:– It is a standardized method;

– Taught in appraisal classes;

– Repeatable by others with the same data;

– You can use it to defend yourself.


Matched Pair

View Example



View AdjustmentWhat’s a view worth?

• Depends on what you are looking at.

• Different views have different values in different markets, different price range, and at different times.

• Are you looking up at the mountains or down on the valley? Each is different.

25


Paired Analysis Will Help

View

Vacant Land with a view $300,000

Vacant Land without view - $200,000

Difference = $100,000

• View adjustment on the appraisal: $100,000 or 33%

• Lowest common denominator, the land.

• Using land only, eliminates variables caused by the house.

• While most of the various methods can be employed to determine adjustments, paired analysis works nice in this instance.


View - More Accuracy Please

• Matched-pair can provide you with the price between a view and non-view property.

However…..

• What if you need more accuracy?

• What if there is only a partial view?

• You need to know the value of a portion of a view that has been taken away?


What’s a portion of the view worth?

Example:• Nice view.

• What if you don’t have 100 degrees of view?

Or

• Property lower down on the hill, allows trees to take away a portion of the uphill property’s view.

• How much is a portion or blocked portion of the view worth?


How Many Degrees Are Blocked?


View Adjustment – Per Degree

• Total view is worth $100,000;

• How many degrees on the compass?

• Assume 100 degrees of view = $100,000;

• $100,000 100 degrees = $1,000 per degree;

• Adjustments - Determine how many degrees of view the subject has versus the comparable.– How? Look at the MLS photos or….



How Many Degrees Are Blocked?

• 30 degrees of view are blocked;

• $1,000 per degree;

• Blocked portion is worth $30,000


Matched Pairs

Concessions


Adjustments #1

Matched Paired AnalysisHow did concessions alter sales price

Sale 1 Sale 2 Sale 3

List Price $100,000 $100,000 $100,000

Concessions -0- $ 2,000 $ 50,000

Sales Price $100,000 $100,000 $150,000

Adjustment

Due to Concession

$50,000

At some point, concessions did impact the price.


In My Area It’s Difficult


“This Area Is Different”Richard, you don’t understand this area!

• My area is different….

• I don’t have ………..

• There are only 5 sales last year………

• We don’t have sufficient data to…..

• Our MLS doesn’t do …

Waaaa waaaaa!

• Despite what you think, your area isn’t that unique!

• Many appraisers have similar problems.

• I appraise in a city and in remote areas with no comparables for 30 miles. Only 2 waterfront sales in 18 months, etc..

• Part of your job is to figure out how to apply the various methods.


If Data Is SparseIf you have limited sales data, expand the search criteria.

Try:

• Expand until you have data.

• Greater distance;

• Different city;

• Farther back in time;

• Pending, expired, listed;

• Different sales price, quality, condition;

• A different methodology.



The Adjustment Not The Value

• You’re not trying to determine the value, you are trying to determine the adjustment.

• You are not restricted to properties just like yours and only in your neighborhood.

• Look for whatever, wherever necessary to find any data that helps.

• Even in different neighborhoods or market areas.

• The goal is proof of an adjustment.


Multiple Methods – One Appraisal

• There are 25+ different methods.

• Appraisers are not restricted to using only one method within the appraisal.

• Multiple methods are allowed and common.– Location: Big data comparison

– Site: Regression analysis

– Bedrooms: Matched-Pair analysis

– Square ft.: Capitalize the change in rent

• Which method the appraiser uses is dependent upon the data that’s available.

• The goal is anything that helps the appraisal become more accurate.


No Matched Pairs for X Adjustments

Richard, • I can’t find two homes that are almost alike. There’s no

way, in this market, that I can perform a reasonable matched-pair analysis. Now what?

• Lots of sales, but we also have a wide variety of homes.


Life’s Not PerfectWhat If Numerous Variables?

• What if you don’t have a perfect matched-pair?

• The appraisal becomes more complex.

• Tougher to calculate.

• Increased scope of work.

• Increase your fee.

• And ……


Multiple Differences

• EO due to a power station; what’s the adjustment?

• Matched Pair Analysis A comparison between any home next to a power station and a similar home distantfrom a station.

• They don’t have to be just like the subject.

• They do have to have the same issue.


After adjusting for what you can prove, square footage, there was still a gap.

After adjusting for everything possible, what remained is a location adjustment of $25,110

This process can be performed for any component.



Matched Pairs

• Comparing one property against another is A method for proving adjustments (not the only).

• It’s not perfect and can be influenced by the appraiser.

• Can be use to calculate almost any adjustment.

• It’s better than guessing and if performed correctly:– It is a standardized method;

– Taught in appraisal classes;

– Repeatable by others with the same data;

– You can use it to defend yourself.


Practice Homework

• Search the MLS, seeking a recently remodeled home in your area.

• Research to find one with a prior purchase, as a fixer.

• What is the difference between the two– Price

– Date

– Discover what was updated/remodeled.

– What was the old C rating?

– What is the new C rating? (2 or 3?)

• Practice one or two.



Data Analysis

Allocation


Determining The Total Value Of The:

a) Improvements,

And/Or

b) Land.

2


Data Analysis - Allocation The Easy Way

Allocate value to individual components:

• % toward land,

• % toward improvements.

• Not great at determining the adjustment for improvements but reasonable for determining site adjustments.– Insufficient for determining micro adjustments for

bedrooms, bathrooms, square feet

– May be reasonable for determining adjustments for quality, condition…..any thing a tax assessor would track.


4


Taxes and Ratios


Account Number

TaxYear

Appraised Land Value

Appraised Imp. Value

Total Assessed Value

123456-1234 2016 $300,000 $200,000 $500,000

60% + 40% = 100%

County Tax Information

• The county’s values are unimportant; forget about them.• What’s important are the ratios of land and improvement

values.• Land to value ratio. 60% for the subject.• Find the land value ratios for the subject and all of the

comparables.



Allocation Example - Tax Assessors Info

• Do not rely upon the assessors total value.

• Use Tax Assessors percentages.

• Apply percentages to the sales price.

Sales Price Improvements

Assessor

Land

Assessor

Indicated land value

Subject $200,000 40% 60% $120,000

Comp 1 $250,000 52% 48%

Comp 2 $190,000 40% 60%

7


Allocation - Tax Assessors Info

Use Tax Assessors percentages.

• Subject: $200,000 x 60% = $120,000

• Comparable #1: $250,000 x 48% = $120,000

• Comparable #2: $190,000 x 60% = $114,000


Assessor

Land

Assessors


Adjustment

Subject $200,000 40% 60% $120,000

Comp 1 $250,000 52% 48% $120,000 -0-

Comp 2 $190,000 40% 60% $114,000



Use Tax Assessors percentages.

• Subject: $200,000 x 60% = $120,000

• Comparable #1: $250,000 x 48% = $120,000

• Comparable #2: $190,000 x 60% = $114,000

• The difference in allocated land value, is the adjustment.


Assessor

Land

Assessors


Adjustment

Subject $200,000 40% 60% $120,000

Comp 1 $250,000 52% 48% $120,000 -0-

Comp 2 $190,000 40% 60% $114,000 $6,000



• Comparable #1 vs. the Subject - Look at the land values; they are the same. No adjustment.

• Look at their sales prices.

• Since their land values are the same, why is there still a $50,000 difference in sales price?

Sales Price Improvements Land Indicated land value

Adjustment

Subject $200,000 40% 60% $120,000

Comp 1 $250,000 52% 48% $120,000 -0-

Comp 2 $190,000 40% 60% $114,000 $6,000

10



• Comparable #1 vs. the Subject - Look at the land values; they are the same. No adjustment.

• Look at their sales prices.

• Since their land values are the same, why is there still a $50,000 difference in sales price?

• Data indicates that there’s a $50,000 adjustment for something else, maybe quality or condition, or….

Sales Price Improvements Land Indicated land value

Adjustment

Subject $200,000 40% 60% $120,000

Comp 1 $250,000 52% 48% $120,000 -0-

Comp 2 $190,000 40% 60% $114,000 $6,000

11


Addendum Text – Give A Reason

• Due to a lack of market data, for this neighborhood at this time, the site adjustments used in this appraisal were determined by the use of the allocation method.

• The county’s tax assessment allocates a percentage of value to land and improvements, for the subject and each of the comparables.

• The percentage allocated to “land value” was applied to each of the sales prices to estimate current land value.

• Any differences between the subject and a comparable’s indicated land value is the basis for site adjustments.

– Give a reason for using a particular method, then inform the reader of which method was employed in the appraisal process.



Allocation Based On Tax Assessed

1. Can be used to determine total land and improvement values.

2. Can be used to support adjustments.

It’s not perfect but it is a method:

• A method that can be used when data is scarce;

• Repeatable by a review appraiser;

• Taught in appraisal classes;

• Described in text books;

• Explainable.



AdjustmentsThey Are Not Always Linear


Matched Paired Analysis


Sales Price $100,000 $112,500 $125,000

Square foot 2,000sf 2,500sf 3,000sf

Price per foot $50.00 $45.00 $41.66

Adjustment for size =

Based on this info,

what is the SF adjustment?

$41.66, $45.00, $50.00,

or something else?


After Class – Something To Think About

• What I’m about to explain is going to take some time for most appraisers to absorb.

• I’ll explain, but you’re going to have to think about it for a while.– Read text books.

– Practice.

• You will have an Ah Ha! moment.


More of Something Does Not Always Increase Value

Sometimes more of something can:• decrease value; (more can become a burden)• reduce the incremental (per foot) value.


Not Always Higher RatesRahn or Laffers Curve

Incremental Taxes or Costs

More of somethingDecreasing value per SF


Price Per Foot Declines With Size

6



Adjustments Should Not Be Based on a Simple Price Per SF

Assume:

$100,000 ÷ 2,000sf (house) = $50.00 per square foot.

• Just because something has a total value of $50.00 per square foot, does not mean $50.00 is the adjustment.

Here’s why…


Adjustments Are Not Smooth

• Adjustments are not based on the total size

but the incremental change in size.

• Adjustments are rarely smooth or linear.

• Example: Larger the site, lower the price per square foot (usually). The most valuable are the….– First 50 waterfront-feet,

– First 90 degrees of view,

– First bath, first bedroom, first garage, etc.

• Most value in beds 1-3. Least value in bedroom 10.

8


First Increment - Most Valuable• Assume building codes require 1,000sf.

• Homes with less than 1,000sf:– Maybe illegal to occupy;

– Unable to obtain financing;

– Can’t be rebuilt.

• Small homes have minimal value.– Minimal utility;

– Minimal number of buyers;

– Land has the value maybe not the house.

• However, once a house has 1,001+sf the value jumps.

• The first 1,001 - 6,000sf are the most valuable!

• More than 6,000 likely “excess” or “surplus.”9


3 Components of ValuePrimary, Secondary, and Surplus

$ 5,000 / $10 per sf

$ 20,000 / $40 per sf

$100,000 / $100 sf

$ -0- value

$125,000 Total

• Excess of market demand >

• Increment that increases utility/desire >

• Minimum necessary >

• Nobody cares >

500 sf

500 sf

1,000 sf

0 - 999sf


Bedroom Example - 3 Components of ValuePrimary, Secondary, and Surplus

$ -0- added value

$ 5,000 per

$10,000 per

$ -0- value

• Excess of market demand.

• Increment that increases utility/desire >

• Minimum necessary >

• Functionally obsolete >

6 +Beds

4-5Beds

1-3Bedrooms

0 bedroom


Matched Paired Analysis – What’s the adjustment?


Sales Price $100,000 $112,500 $125,000


Difference -0- $12,500 $25,000Price per foot $50.00 $45.00 $41.66


$ ??

Some might say that the adjustment is $41.66 per foot.That would be wrong.



3 Matched Pairs


Sales Price $100,000 $112,500 $125,000




$ ??


Analyzing The Changes


Sales Price $100,000 $112,500 $125,000




$ 25.00 per sf

How…?

3 slide explanation follows

Matched pair analysis is measuring how the change in size changes the sales price.


Matched Paired Analysis – Change Price/Size


Sales Price $100,000 $112,500 $125,000


Price per foot $50.00 $45.00 $41.66

Change in size -0- 500sf 1,000sf

Change in price -0- $12,500 $25,000

Price per incremental sf


15


Matched Paired Analysis – Change Size/Price


Sales Price $100,000 $112,500 $125,000


Price per foot $50.00 $45.00 $41.66

Change in size -0- 500sf 1,000sf

Change in price -0- $12,500 $25,000

Price per incremental sf

$12,500 / 500 = $25

$25,000 / 1,000 = $25


$ 25.00 per square foot

16


Site Value5,000 + sf are the most valuable

$3.00

$40.00

$6.66

$0.00$5.00

$10.00$15.00$20.00$25.00$30.00$35.00$40.00$45.00

Site Size

Less than 5,000sf 5,000sf site More than 5,000 sf

3,000 4,000 5,000 6,000 7,000 8,000 9,000

Unbuildable Zone

17

Excess land


Work Through A Problem

Sale 1 Sale 2 SubjectPrice / Value $200,000 $240,000 $ ??

Square foot 5,000sf 11,000sf 13,000sfDifference -0- $40,000 $ ??Price per foot $40.00 $21.81Adjustment for size =

$ ?

a) What is the subject’s 13,000sf lot worth?

b) What is the adjustment on a per SF basis ?

18



Matched Paired Analysis – Land Adjustment

Sale 1 Sale 2 Subject

Sales Price $200,000 $240,000 $ ?? $


Difference -0- $40,000 ?

Price per foot $40.00 $21.81

Adjustment for size = $ ?

Assume 5,000 sf is the minimum buildable site size.

If 5,000sf is worth $40.00 per square foot,

what’s the next 6,000 or 8,000 square feet worth?

$240,000 - $200,000 = $40,000 (gross adjustment between 1-2)

$40,000 ÷ 6,000sf = $6.66 (incremental sf)

Site adjustment $6.66 X 8,000 = $53,333


Matched Paired Analysis – Land Adjustment

Sale 1 Sale 2 Subject

Sales Price $200,000 $240,000 $253,333


Difference -0- $40,000 $53,333

Price per foot $40.00 $21.81

Adjustment for size = $ ?

Assume 5,000 sf is the minimum buildable site size.

If 5,000sf is worth $40.00 per square foot, what is the next 6,000 sf worth?

$240,000 - $200,000 = $40,000

$40,000 ÷ 6,000sf = $6.66 (incremental sf)

Subject’s site value:

$ 200,000 + ($6.66 X 8,000 sf = $53,333) = $253,333

Minimum buildable lot + Incremental value = total value

Also the adjustment 20


Summary – Price Per SF

• An adjustment is NOT calculated by dividing the sales price by the square footage.

• The first increment of something is the most valuable.

• The last increment of something is likely the least valuable.

• The goal is to determine how change alters the sales price, and by how much.



Statistical Analysis

• A grouped analysis with more math.

• More complex however, it provides greater accuracy…if completed properly.

a) Single Line or Linear Regression Analysis.

b) Multiple Regression Analysis.


Why Is Understanding Important?

• The regression analysis method is used by Fannie Mae’s Collateral Underwriter and all other AVMs.

• Regression is one of the components of the Collateral Underwriter (CU) system.

• If appraisers uses regression, their adjustments are likely to be similar to the CU.– Fewer conflicts

– Fewer hard stops

– Fewer black listings


Regression Analysis

• Mathematics and graphing can be used to indicate market adjustments.

• The graph displays the slope, or value per incremental foot.– Square foot of the building,

– Square foot of the site,

– Front foot of waterfront,

– Bedrooms,

– Bathrooms,

– Etc.


Single Line Regression Analysis

• Simplest case;

• Contains two variables:1. Independent variable

2. Dependent variable

• One variable predicts change in the other.


Single Line RegressionGraphing To Find The Adjustment

• As the size of a house gets bigger, its value usually increases.

• By Graphing we can determine incrementalchange in value.

• 4 sales, somewhat similar to the subject or in the subject’s neighborhood.

• More is always better. (suggest 20+)


Graphing The Value Of Incremental Square Footage

• In this case data indicates that the adjustment is $60.34 per square foot.

• R2 value indicates the accuracy of the data.



Walk Through ExcelDetermining The Value of a

Waterfront Lot

Simple Example

Students can download an Excel file (XLS) that contains the examples I’m about to go through.


Walk Through ExcelDetermining The SF Adjustment

Step #1 Input data

a) Input the square footage of the lot or house.

b) Input the sales price.

Step #2 Calculate

• Chart the improvement value and the square footage.


Based on what you see here, do you have any idea of what the adjustment should be for the number of front feet?

9


Input Data


Click on “Insert”

11


Click on “Scatter”



Right click on a data point.

13


Smaller boxes will appear

Click on “Add Trendline”


Select:

1. “Linear”

2. “Display Equation”3. “Display R-squared”

15


Starting at 164’ front feet,each additional front foot is worth $24,177.

95.9% confidence in the accuracy of the data.

The adjustment between comparables with different frontage on a lake is$24,177 per foot.

Same process for any water frontage (lake, stream, river).


Walk Through Another ExcelDetermining The SF Adjustment

Step #1 Input

• Column A - Input the square footage of the house;

• Column B - Input the sales price.

Step #2 Calculate

• Chart the improvement value and the square footage.

17


Sales Price



Sales Price

Make sure the size is in a column before the sales price.


1. Create a chart.

2. Scatter chart.

Sales Price

20


Data Points


> Right click on a data point> Select – “Add Trendline”

Sales Price

Change In Value


Linear

Display



Sales Price

Change In Value

Starting at $140,224 each additional SF increases the value by $110.46 OR Saying it a different way: The Square foot adjustment is $110.


Addendum Example

Close up on next slide

26


Example SF Adjustment - Condominium


Land Value


Site Size Sales Price10,800 $975,00019,863 $1,080,00010,870 $1,100,00020,007 $1,150,00018,118 $1,350,00017,210 $570,00010,812 $650,0009,502 $650,000

11,463 $650,0008,740 $900,000

10,629 $901,0009,260 $912,000

13,200 $925,0007,280 $925,0008,400 $950,000

16,534 $955,0008,050 $965,000

13,308 $985,00012,197 $1,000,00010,065 $1,050,0008,816 $1,050,000

13,500 $1,050,00010,320 $1,050,0008,570 $1,090,000

11,665 $1,101,00010,155 $1,111,80020,140 $1,125,00020,314 $1,150,00015,058 $1,200,0008,222 $1,200,000

21,544 $1,300,00042,347 $1,500,00020,953 $1,500,000

2007/2008All Land and Likely House Sales

y = 21.771x + 680995

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

0 10,000 20,000 30,000 40,000 50,000

Site Size

Sal

es P

rice

Price Per Square Foot Linear (Price Per Square Foot)

Vacant land sales

Area 520


Statistical Analysis

2007/2008All Land and Likely House Sales

y = 21.771x + 680995

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

0 10,000 20,000 30,000 40,000 50,000

Site Size

Sale

s P

rice

Price Per Square Foot Linear (Price Per Square Foot)

Starting at $680,995 and 7,500sf lot, each additional square foot of land adds an extra $21.77.



One Effort Two Uses

Richard,• I used a regression analysis to determine

my SF adjustment.• Is there a way for me to save time and

use the same data to prove a “C” or “Q” adjustment?


In this example, the first 5,000sf of the house is the most valuable. After that, the value goes up $872 per sf.


• What’s up with the outliners?• By analyzing outliers the appraiser may discover

adjustments for Q and C.


• Outliers (high and low) likely indicate quality adjustments. Which?

• The appraiser must review photographs and more information to determine if it’s a C or Q thing.

34


• The difference between the trendline and the sales price is an indicator of the market adjustment.

• In this case, it was due to higher quality.• The same method can be applied to $200,000

homes just as easily as $5 million dollar homes.

35

$20,000,000


It’s Not Just An Expensive House Thing

• Don’t let the expensive house example derail you.

• This sort of analysis can be used to determine many adjustments:– Small house to big house;

– Small lot to massive acreage;

– Waterfront to view;

– Adjustments for Inner city properties as well as distant farm land;



Same Data – Two Uses• While determining the SF adjustment, the Quality or

Condition adjustment became obvious.

High Q or C

Low Q or C

The difference between Q3 and Q4 is $75,000.

Q or C or view, or…?Look at the photos.


SF, Condition & View Adjustments

• All sales over the past 6 months.

• Graphing helped point out sales of similar size.

• Comparing the similar size sales (matched-pair) helped point out and measure differences (condition and view).

$80,000

$25,000

Adjustments• $281 SF• $25,000 condition• $80,000 view


About The “R”

• In a regression analysis, the value of the “R-Square” is an indicator of how closely data appears to tract reality.

• Closer to 1 better the value. Higher confidence level.

• 1.0 = perfect

• .98 = darn close

• .05 = other issues are in play.


What’s an R-Squared?

Greatly simplifying the math and explanation but…

R2 at .72 appears to indicate that 72% of the buying decision is base upon the SF.

Therefore, 28% of a buying decision is based uponsomething else. What? That’s what the appraiser must determine.

The appraiser should attempt to determine what else is impacting the price and adjust which sales are included, to increase the R-squared. Outliers can change the results.


How accurate is this data at indicating total value and price per foot? Talk to me…


Note the time period



If You Have Low R• The accuracy of adjustments and the R-Squared can be

influenced by:

a) Time,

• The market value of yesterday is different from today.

b) Concessions,

• Concessions inflate sales prices.

c) Location,

d) Anything higher up on the form than what is being adjusted.

• Discover what’s more important than what’s being adjusted and adjust for those things first.


Increase The “R”• There are at least 5 methods you can use to

increase the R factor:1. Adjusting in the correct order;

2. Filtering the data;

3. Use the adjusted sales price of the comparables after adjusting for time, concessions, location, etc;

4. Multiple Regression analysis;

5. All of the above.

• Discover what is more important than what you are adjusting.

• More on the “R” in later classes.


Introduction To Regression

• Purpose is to introduce you to regression analysis.

• For more information and a better understanding of the method, you should take specific classes on the topic.– Appraisal Institute

– Private schools

• If you need help understanding Excel, there are also numerous classes, live and on-line, where you can learn how to use the program.

• Start by using it for determining land value and SF and go from there.


Multiple Regression Analysis

3 or more variables.

Sales price and size and number of bedrooms and location.


Regression AnalysisIf you need more explanation please read the

following articles or take a special class:

• Sale Concessions and Market value:

Solving the Appraiser’s Dilemma.

• Paul Allen, James Shilling and C.F. Sirmans.

• The Appraisal Journal; April 1986.


Richard,We have absolutely nothing like the subject’s square footage.

Now what?



Few Sales

Richard,

• We have sales but some are larger, some are smaller, nothing….just right.

• All of the sales will require massive adjustments.

• I know the lender is going to call. How can we better support our value conclusion?


Graphing – Two Uses

1. Graphing can be used to determine adjustments.

2. Graphing can help indicate a likely value for the subject.

• Same information and method, two potential uses.


Solutions - Few Sales

• Lets assume you’ve done everything possible to accurately state the value, but there is still this nagging feeling that the lender is going to pounce.

Two out of many possible solutions:

1. Include at least two approaches to value, three if possible. (sales, cost, & income)

2. Graphing can help reinforce the value conclusions determined via the Sales, Cost, and/or Income approaches.


Single Line RegressionGraphing To Determine The Total Value of Improvements

• Assume your subject has a 1,500sf building.

• By Graphing the only sales available, you can estimate the value of the subject.

Data indicates that your subject has a market value of $120,000.

Hopefully this is similar to the value conclusion you’ve already reached in the sales comparison and cost approaches.

Value of the subject property


When Data Is Scarce

• People like visual aids.

• When data is scarce, you need all the help you can get.

• Using a graph, in your final reconciliation, can help support your value conclusion.

• Helps convince a reader that you are right.– Sales indicated $122,000

– Cost indicated $115,000

– Graph indicated $120,000


There are Lies, Damned Lies, and Statistics.

Mark Twain

Regression isn’t perfect, but it is an acceptable method that every appraiser should understand and use.Richard Hagar, SRA



Regression Isn’t

• Regression analysis isn’t the end all – be all, it’s simply “A” method that you can use.

Other methods including:

• Matched-Pair analysis,

• Income Approach,

• Big Data, etc.

• The more methods that you can master, the better your reports will become and higher the fees.



Determining Adjustments ViaA Cost Approach Method

1. Depreciated Value of the component;– Good for determining adjustments for common

quantifiable components like a garage. – Not good for determining adjustments for problems.

2. Cost To Cure; – OK for problems but is inaccurate

3. Cost To Cure + Market’s response to creating the cure;

– Best for determining adjustment for problems


1. Depreciated Value of the Improvement

In this method the appraiser estimates the current value of a component by following these steps:1. Calculate the current construction cost of a component.

2. Subtract depreciation from the cost.

– The remainder will be the current value of that component.

3. Compare the depreciated value of the subject’s component against that of a comparable.

– Any difference between the two, is the adjustment used in the report.

Lets start with a garage example.


Reusing Data From The Cost Approach

$40 per SF

15% Depreciation

In the cost approach, the appraiser has already determined that the cost of constructing the garage is $20,000 and the improvements are depreciated by 15%.


Garage Example

Subject Component Size Total

Step 1 2 Car Garage 500sf $40.00 $20,000

Step 2 Depreciation 15% $3,000 - $ 3,000

Subject’s Garage, Depreciated Value = $17,000

• Step 3: If a comparable has a different size garage, perform the same calculation on that comparable.• 3 car garage 750sf x $40 = $30,000 – 15% = $25,500

• Step 4: Any difference between the two, is the adjustment.


Compare Depreciated Values

Comparable #1: Depreciated value of the 3 car garage. $25,500

Subject: Depreciated value of the 2 car garage. $17,000

Difference between the two = Adjustment $ 8,500

• The subject has a 2 car garage• The comparable has a 3 car garage


Data From The Cost Approach

$40 per SF

15% Depreciation

$40.00 X 250 (sf of the one garage bay) = $10,000

$10,000 – 15% depreciation = $8,500

$8,500 is the adjustment on the Sales Comparison Grid



Depreciated Cost

• A valid method.

• Taught in books.

• Requires the appraiser to have factual figures on construction costs and accurately calculate depreciation– Guessing or backing into a figure will not due.

• Requires the appraiser to perform a similar calculation for a comparable.

• Good sources of cost data, math, and notes are very important.


2. Cost to Cure

• Determining the cost to repair a component that has curable physical or functional problems.

• Appraisers often, and incorrectly, use the Cost to Cure as the adjustment (condition or functional) in the sales comparison approach.

Problems:a) Applicable to deficiencies not differences (bedrooms).b) Difficulty in obtaining accurate repair costs.c) Cost rarely equals value or the adjustment.

– Costs have minimal relationship to the adjustment.– Swimming pool


Cost to Cure – Limits

• Only indicates the bottom end of a potential adjustment.

• Often, appraisers fail to account for all related costs.– Time, permits, holding costs, waiting for repairs, personal

time, management, etc.

• Fails to take into account the market’s response to spending time, making, and paying for the cure.


Cost to Cure – Limits

• Only applies to curable physical or functional issues.– Costs alone do not not solve for incurable issues.

• Not applicable to incurable, external, or stigma issues.– Incurable = Costs exceed increase in value

• Does not work for major problems:– Items would preclude normal bank financing;

– Potential for hidden problems;

– Mold, structural failures, landslide, fire, etc.

Do not use this method for external problems!


Cost To Cure?? External?• How could an appraiser apply a Cost to Cure for a landslide

that’s external to the site? You can’t!


Cost To Cure?? Major• Home never had building permits or a functioning septic tank

system.

• County will likely require the home to be torn down.

• How will the Cost to Cure indicate an adjustment?



Cost To Cure – Beginners and Minor

• Works for minor items:– Broken windows;

– Failed hot water tank;

– Minor maintenance issues;

– Items less than $1,000 ish.

– Issues that are so small, measuring their impact is impossible.


Cost to Cure - Fails

• Fails to take into account the market’s response to making and paying for the cure.

• Typically, buyer’s are adverse to buying a property, then paying an additional amount, in cash, to make repairs. Easier to buy a property already repaired.

• Banks rarely lend on properties with problems.• If no financing is available, the property is worth

much less. Was that adjusted in the appraisal?

• Cost to Cure is nice…. but almost worthless in trying to determine adjustments.

• We reject this approach since it does not factor in the market’s response.


3. Cost to Cure + The Market’s Response

Clearly a total market adjustment is comprised of two parts:

• The cost to cure a physical problem/issue +

• The market’s response to making or paying for the cure.

Cost of repairs

+ Costs associated with managing the repairs

+ Holding expenses

+ Alternative living expenses

+ Lost opportunity

+ Markets response

= Total market adjustment Yep… you have to know them all


Major Component Description Costs

Cost of Repairs a) The contractors cost for the repairs or,b) Marshall & Swift Repair Guide, or equal.c) Do not guess.

$50,000

Cost of Owning Costs associated with owning the property during repairs: Mortgage, taxes, insurance, utilities.X months during repairs.

$ 3,000

Living somewhere else

Living somewhere else during the repair. $ 5,000

Lost Opportunity How much would you earn from a bank? $ 1,000

Yuck Factor The market’s response because this is a problem. How many people want to buy something and then be forced to fix it?Toughest adjustment to determine.May take days or weeks to determine this single adjustment. Hope you charged correctly.

$ ??

$50,000

TOTAL MARKET ADJUSTMENT $109,000


Still Issues

• Numerous items must be identified, analyzed and measured.– Beyond the scope of a typical bank appraisal.

• The Cost to Cure + The Market’s Response is still limited to issues/problems that are physically curable and located within property borders.

• Issues/problems where repair costs are less than the increase in the market value.

• This method likely not applicable when problems are external to the site and can’t be cured by the property owner. However…


Summary Cost Approach Method for Determining Adjustments

• Cost to Cure:– Weak and inaccurate;

– Often misused, leading to erroneous conclusions;

– Fine for minor problems that are “fixable” by the property owner.

• Depreciated Cost:– A mixture of weak and strong.

– Relies on the depreciation calculations being accurate.

• Cost to Cure + Market response:– Strong, accurate, and suitable for all types of properties with most

problems.

– Time consuming but results will stand up in court.

– High pay for appraisers who master this method.



Hagar’sPercentage of Use Calculations


Hagar’s Percentage of Use Calculation

1. Determine the cost new for a component;

2. What percentage of properties, in the neighborhood or area, have that component?

– The percentage of use

3. Apply the Percentage Of Use to the cost to determine the market value for a component.

Next slide for math.


Hagar’s Percentage of Use Calculations

Component Cost

New

Percentage that have the component

Market Value

Kitchen $20,000 100 % $20,000

Pool $40,000 5% $2,000

Barn or Shop $25,000 20% $5,000

• Best if used for unusual or unique components.• Best if used as the adjustment between properties with

and without the component.

Component Subject Comparable Adjustment

Pool Yes No $2,000

Barn or Shop No Yes $5,000


Summary Hagar’s Percentage of Use

4

• New methodology.

• Accuracy is still under review.

• Best if used along with a different method.

• Use as additional support, or as a cross-check, for difficult adjustments.

• Several lenders are allowing the use of this method.


Time Adjustment


Problem – No Recent Sales

• Very few sales in the past year.

• None of the sales are similar to the subject.

• Best comparable sale was 4 years ago.

• Same everything…

• Go back in time, find the sales data now adjust for time.

• You might have only 1 adjustment…… time.

• That is pretty strong indicator of value if only….

• You knew what the time adjustment should be.



MLS To The Rescue

• Obtain median sales price, in your neighborhood or market area, over the past 4+ years.

• Download the information into Excel.

• Calculate a trend line,

• display the equation and,

• display the graph.


We had to use a sale from 2011 for our 2014 appraisal. This data told us how much to adjust for time = $1,136 per month.


MLS


MLS Data


$31,704 per year


What If The MLS Is Behind The Times?

• If you don’t have an MLS that can supply the information…

• There are other sources of time and value changes.



Time Adjust – Matched Pair

• Look at the sales history of every comparable that was considered, included in your appraisal or not.

• Often sales have prior sales.

• What is the difference between the last sale date and the most recent?


www.fhfa.gov/datatools


15


Time Adjustments

Numerous methods:

1. Market data/MLS, (best)

2. Matched Pair, (best)

3. Single Line Regression, (second best)

4. Case Shiller,

5. Fannie Mae/Freddie Mac,

16



AdjustmentsCapitalized or Determined

viaChange in Rent Income


Adjustments Capitalized or Determined via Change in Rent Income

First we need to understand the Income Approach and apply the lessons to the Market Approach.

Capitalization Rates / Gross Rent Multiplier

Cap Rates GRM


Income Approach

• There is a direct correlation between improvements, components (assets) and rent income.

• Greater the improvement – greater the income.

• By measuring income, you can measure or determine value.


ResidentialGross Rent Multiplier (GRM)

• GRM is a relationship or ratio between value and income.

• The relationship is indicated by a numeric value; typically a two or three digit number.


Value (v) =

Market Value

Or Sales Price

Income (I) =

Gross Monthly Rent

GRM =Gross Rent Multiplier

Definitions for GRM:

Formula

Value ÷ Income = GRM Value ÷ GRM = Income GRM x Income = Value

Example:$100,000 (sales price ) ÷ $1,000 (mo rent) = 100 GRM

$1,000 (mo. rent) x 100 (GRM) = $100,000 Market Value


GRM - Work Examples (known GRM)

• Sales Price of Home = $234,000

• Rent income = $ 1,300

• The GRM = 180

• Rent for Similar Condo = $ 900

• Sales Price of Condo = $135,000

• The Gross Rent Multiplier = 150



GRM –Adjustments on the Market Grid,

Based on Rent Income

• GRM can be a tool for determining market value.– Garage 2 vs. 3,

– Fireplace,

– Bedroom 2 vs 3 vs. 4,

– Square footage.


Determine the Garage Adjustment

Component Rent Income

House 2 car garage $1,550

House 1 car garage $1,500

Difference $50.00

Difference in Rent x GRM = Adjustment/Value

$50.00 x 200 = $10,000

Houses in the same neighborhood

#1 Determine GRM for the house/area; (200)

#2 Determine difference in rent; ($50.00)

#3 Apply.


Determine the Square Foot Adjustment

Component Rent Income

House with 2,144sf $2,750

House with 2,000sf $2,714

Difference $36.00

GRM x Difference in Rent = Adjustment/Value

200 x $36.00 = $7,200

Houses in the same neighborhood

1 Determine GRM for the house/area;

2 Determine difference in rent;

3 Apply.


GRM - Work Examples

• Rent 2 Bedroom = $1,000

• Rent 1 Bedroom = $ 850

• Condo GRM = 200

• Value of 2 Bed = $200,000

• Value of 1 Bed = $170,000

Difference = $ 30,000 (adjustment)

• $ 30,000 is the total value for a second bedroom –which includes additional square footage.

• If, possible subtract the value of the square footage.


GRM – Bedroom Adjustment (cont)

• Difference in rent X GRM = Adjustment/Value for difference:

– Total Adjustment, includes adjustment for SF and bedroom,

– Need to isolate the two adjustments.

• Rent Difference x GRM = Total Value (or adjustment)

$150.00 x 200 = $30,000

Completing the same process you determine the SF is worth..

• $50 per square foot,

• 144 sf x $50.00 = $7,200,

• $30,000 – $7,200 = $22,800,

• Value for Bedroom based on GRM = $22,800.


Income Approach

• Good solid method of supporting adjustments.

• Works great in areas where:– there are rental properties

– rental information is available

• MLS or Craig’s List, etc.

• Repeatable by others.

• Standardized method.

• Taught in appraisal classes.



Market Studies

Blame it on someone else.


Numerous Studies Available

• Appraisal Institute,– Lum Library

• NAIFA,

• Fannie Mae,

• Fed Government,

• Etc.


County Assessor’s Reports

The Assessor may have what you are looking for:– DATA;

– Comparisons;

– Analysis;

– Adjustments;

– Allocation between land and improvements.

• They have access to every recorded sale within their tax district (city, county, state).

• Required, by law, to be accurate.


Real Property Assessors• Provides a base line value for a “typical” property then add

percentages for location, EO, view, waterfront, quality, condition, SF, etc. The adjustments

• Property assessors determine property value by using closed sales and applying various methodologies:• Mass appraisal techniques;• Multi-Regression Analysis;• Single-Line Regression Analysis;• Matched-Pair Analysis;• Income and Cost Approaches.

• Many produce reports are available to the public.• But you have to look for them.





www.kingcounty.gov/depts/assessor/Reports/area-reports.aspx


Interview Market Participants

The last gasp of desperation but….

it’s better than guessing.


Interview Market Participants

• Personal interviews can reveal the opinions of knowledgeable individuals participating in the subject’s market.

• Interviews are considered “secondary” indicators.

• It should only be used to help confirm data supplied by other methods, or as a last resort.

• If you use this method, you must note person, place, time, questions asked and the answers.

• Do not use general terms, ask specific questions and keep track.


Interviews

Common “market participants” that can help:

• Real estate agents,

• Buyers,

• Sellers,

• Property owners who own a portion of the market:– An owner/corporation owns a dozen buildings,

• Lenders.

• “When you thinking of buying this property, did you consider the price per square foot or units per site?”

• Etc.



Summary


Summary - Adjustments for Bed Room

• Method #1– Average Sales price 2 vs. 3 bed home = $23,000.

• Method #2– Matched Paired analysis bedroom = $20,000.

• Method #3– Depreciated value of bedroom space = $21,420.

• Method #4– Capitalized rent (GRM ) = $22,800.


Summary of methods for determining adjustments:

1. Data Analysis.

2. Statistical Analysis.

3. Cost.

4. Hagar’s “Percentage of Use Calculations.”

5. Capitalized via Change in Rent Income.

6. Personal interviews.


“Support, Evidence, Proof”

Support:

• the truth of;

• synonyms: verify, prove, validate, substantiate, back up, corroborate, confirm, attest to, authenticate.

Proof:

• evidence sufficient to establish a thing as true.

• the act of testing or making trial of anything.

– You can’t test “feelings” or “your experience”

– Don’t Guess – Support - Prove

Webster’s Dictionary


This Just In

• While I was preparing this class for CE/Webinar credit, the State of Washington’s Appraisal Board posted this:


I’m Trying To Keep You Safe

• This is a new appraisal world.

• State disciplinary actions and computer reviews are everywhere.

• Not everybody will survive.

– People providing poor appraisals will be eliminated.

• Understand what they will be looking for and make sure appraisals are completed properly.

• Stop complaining… do the job right and, increase your rates to compensate for your time.

• The appraisers that do the job right…

…will survive the purge and make money!



Richard Hagar SRA

Documents

Real Estate Appraiser, Determining Appraisal Adjustments