by Bryan S. Reynolds, AQB Certified USPAP Instructor
Appraisers have had blinders on for way too long. It is time to open our eyes wide, keep our minds open and think outside the “check†box. When we do, we will see that the answer lies in distinguishing between the quantitative method, familiar to most appraisers, and qualitative appraising, which is more similar to the way homebuyers really behave. Appraising this way provides an opportunity to offer a service that your competitors probably do not.
Most of us learned this crazy business by filling out a form. For me, it was actually preparing forms on the good old typewriter, and since clients didn’t accept White-out, if you made one mistake you retyped the whole thing- in my case, usually right before completing the report. My education truly began when I began thinking, searching out meaningful education and going beyond form-filling.
It’s time for all of us to step back, re-evaluate and use a little common sense. Most preprinted forms utilize a quantitative appraisal method while a qualitative method is more in line with the way buyers really behave.
Quantitative Method
Paired Data Analysis: A quantitative technique is normally used to identify and measure adjustments to the sale prices or rents of comparable properties. To apply this technique, sales or rental data on nearly identical properties are analyzed to isolate a single characteristic’s effect on value or rent.[1]
Where do you get these so-called adjustments? I know - paired sales, right? Let me see them. Better yet, the next time you are in the hot seat be prepared to show your paired sales analysis to the court or to your state regulatory board. I do believe it is possible to have a proper paired sales analysis, and with regression analysis becoming more popular, there is oftentimes support for your adjustments. However, I would bet that most appraisers do not have the data in their offices to support their adjustments.
Think about it! How many home buyers have you ever seen pull out a legal pad or a 1004 form and make line item adjustments for every little difference. Wait! A bathroom is worth $2,000, a garage $5,000, a deck is $2,000, etc. By the way, why don’t these numbers ever change? Buyers don’t act this way. Has anyone ever seen a buyer operate in this manner? Then why do we? Don’t buyers really analyze differences in the aggregate and make a decision in a lump sum? For instance, buyers considering a ranch style residence for $100,000 would more than likely pay more for the same model with additional amenities, such as a fireplace, screened porch and fenced yard, but they tend to pay an amount that encompasses all of those amenities, say $110,000. They don’t break down the contribution of each item.Â
At the third annual Association of Texas Appraisers (ATA) conference in Austin, I asked a group of 72 appraisers how many buyers had they ever seen act this way. The answer was none. I have interviewed numerous appraisers/brokers nationwide, representing hundreds of years of experience in selling real estate and not one has seen a buyer act this way. If we are charged with analyzing the market, and market participants don’t act this way, why do we?Â
Qualitative Method
Relative Comparison Analysis is a qualitative technique for analyzing comparable sales, used to determine whether the characteristics of a comparable property are inferior, superior or equal to those of the subject property. Relative comparison analysis is similar to paired data analysis but quantitative adjustments are not derived.[2]
Most appraisers are probably already using a qualitative method to develop their opinion of site value. Most appraisers don’t grid land sales and make adjustments. You can do the same thing for improved sales. To demonstrate my point, below is an exercise in the Columbia Institute’s course Survey of the Cost Approach, which is an excellent course for those who like the Cost Approach for a land sales analysis utilizing a quantitative method. Compare the results using this same data set performing a qualitative vs. a quantitative method.
Quantitative Analysis
Item              Subject       Sale No. 1     Sale No. 2     Sale No. 3
Sale Price      $40,000     $43,400       $44,000         $40,000
Sale Date      Pending      2 Months      3 Months        6 Months
Adjustment    N/A        +/- $ -0-    +/- $ -0-       + $ 1,000
Location       Interior     Interior        Corner           Interior
Adjustment      N/A       +/- $ -0-       -   $ 600     +/- $ -0-
Utility       Ave Zone     Ave Zone      Ave Zone    Ave - Fair
FEMA        “C”                 “C”               “C”              “B & C”
Adjustment   N/A       +/- $  -0-        +/- $  -0-       + $ 3,400
Net $’s Adj.   N/A      +/- $ -0-        -$ 600           + $ 4,400
Value Adj.      N/A         $43,400        $43,400         $44,400
Amount of adjustments were provided in course material.
Qualitative Analysis
Item         Subject       Sale No. 1       Sale No. 2     Sale No. 3
Sale Price $40,000       $43,400         $44,000       $40,000
Sale Date  Pending        2 Months      3 Months     6 Months
Adjustment  N/A           Similar            Similar        Inferior
Location     Interior      Interior          Corner         Interior
Adjustment  N/A          Similar            Superior      Similar
Utility       Ave Zone    Ave Zone      Ave Zone      Ave - Fair
FEMA         “C”               “C”                 “C”          “B & C”
Adjustment N/A Similar Superior Inferior
Overall Comparability
Comparable    Sale Price     Comparability
Sale No. 2Â Â Â Â Â Â Â Â $44,000Â Â Â Â Â Â Â Â Superior
Sale No. 1Â Â Â Â Â Â Â Â $43,400Â Â Â Â Â Â Â Â Â Similar
Sale No. 3Â Â Â Â Â Â Â Â $40,000Â Â Â Â Â Â Â Inferior
Both methods provide support of $43,400 for the subject property. The qualitative/relative comparison analysis provides the same results without guessing for an amount of single line item adjustments.
In the book Down to Earth, Sanders A. Kahn, Ph.D., SREA makes the following statement about Comparative Sales Grids: “…it became fashionable for some appraisers, with the encouragement of some public agencies, to rate the degree of variation between the subject property and comparative sales, of variation between the subject property and comparative sales, quantification of the variations, usually by the use of a plus or minus percentage (or dollar amount) from the comp to the subject, became the vogue. Actually this method is replete with danger. It looks so scientific but in realty it is only pseudo-scientific and converts subjective judgment into what pretends to be objective mathematical absoluteness.â€
Consider analyzing property the way the market does: in a qualitative manner.
1 The Dictionary of Real Estate Appraisal Fourth Edition  Appraisal Institute
2 The Dictionary of Real Estate Appraisal Fourth Edition  Appraisal Institute
About the Author
Bryan S. Reynolds is a Certified General Real Property Appraiser and an AQB Certified USPAP Instructor. Mr. Reynolds serves as an adjunct faculty member of The Columbia Institute and is an approved appraisal instructor in 30 states. Reynolds is the owner of Reynolds Appraisal Service in Owensboro, KY, providing various residential and commercial valuation services, consulting and litigation support services throughout the area. He can be contacted at (270) 929-3088 or by email at bryan@reynoldsappraisalservice.com.
10 responses so far ↓
1 Jerome Yuhas // Feb 4, 2009 at 7:17 am
I agree 100% with the article, but how do you do a qualitative analysis when all government agencies require the use of the 1004 form, and anything that doesn’t fit the “norm” is questioned and/or rejected?
2 Matt Ryan // Feb 4, 2009 at 8:23 am
I too agree with Bryan’s comments. Many years ago a fellow appraiser made the statement that the educators were attempting to make a hard science out of a soft science. I have often wondered why participation in an actual real estate transaction is not a prerequisite to obtaining appraiser certification. If a licensee has never “walked in a buyer’s shoes”, can they accurately measure the qualitiative variables in the market?
3 George K. Cox, MAI // Feb 4, 2009 at 9:30 am
Bryan,
It appears you are beginning to see the liht. Some good observations.
George
4 Terry S. // Feb 4, 2009 at 2:20 pm
I have never relied on paired sales analysis. When first presented with it in classes several years ago, it looked fairly good in theory. However, in practice, it is at best full of holes. Also, the less homogenous a particular market area is, the less reliable the results of any such “analysis” would be. There are far too many variables and vagueries in the market place as noted by Mr. Reynolds in his article which render the results of any such analysis as useless. There is, IMO, very little that any appraiser can reliably hang his or her hat on when it comes to supporting adjustments. Frankly, and again IMO, it should be enough for an appraiser to show that hundreds, perhaps thousands of appraisals have been submitted and accepted by lenders. If and when an underwriter has a problem with any particular adjustments in a given report, a discussion should ensue between him or her and the appraiser to come to an acceptable resolution.
Appraising is in no way a hard science. It is in the end the rendering an opinion of value. One should approach the job as systematically as possible, but that number on the bottom of page 2 is an OPINION.
5 Bryan S. Reynolds // Feb 6, 2009 at 11:53 am
Thanks George!
I continue to learn from a wise/great appraiser.
By the way, when is my next lesson?
Thanks for all you do.
Bryan
6 Bryan S. Reynolds // Feb 6, 2009 at 11:58 am
I understand your pain Jerome.
Unfortunately they do require their own forms so under many cases you won’t be able to do this. However you should also not make adjustments you do not have any support for.
In the Fannie Mae 2006 Selling Guide they did have an appraisal form for a qualitative analysis. I guess in never caught on so it is no longer in the guide. Most folks resist change.
B. Qualitative sales comparison analysis. The Desktop Underwriter Qualitative Analysis Appraisal Report (Form 2065) enables the appraiser to use a relative or qualitative sales comparison analysis (instead of providing actual dollar adjustments) to reflect the differences in features between each of the comparable sales and the subject property, by indicating the market’s reaction to any significant variations for each feature listed in the “sales comparison analysis” grid. The “paired” data analysis comparison logic, which is consistent with the way that buyers and sellers typically evaluate the differences between properties, is similar to the logic required by other appraisal forms. However, in this case, the appraiser does not have to quantify and report the market’s reaction by assigning a dollar value to each variation.
• If a feature of a comparable sale is superior to, or more favorable than, the same feature for the subject property, the appraiser should report a negative (-) relationship.
• If a feature of a comparable sale is inferior to, or less favorable than, the same feature for the subject property, the appraiser should report a positive (+) relationship.
• If a feature of a comparable sale is equal to the same feature for the subject property, the appraiser should report an equal (=) relationship.
Our definition of market value requires the appraiser to make adjustments to the comparable sales for any special or creative financing sales concessions. The appraiser does not have to quantify the dollar amount of such concessions on Form 2065, but he or she must consider whether the sales price of a comparable sale was affected by the concessions and, if it was, report a negative (-) relationship.
In the overall comparison of the subject property and the comparable sales, the appraiser must take into consideration the value relationships for each of the features of the properties, and, for each comparable sale, the appraiser must indicate whether the property is superior, equal, or inferior to the subject property. In developing his or her opinion of the market value of the subject property, the appraiser should give the most weight to the comparable sales that are the most similar to the subject property based on the relative comparison analysis.
7 Roger Hughes, Cert Resid, Tn. // Mar 20, 2009 at 5:23 am
I agree most all. Do you ever feel like no body listens or cares except those people who fine ways to exploit us and our services. We are supposed to have a very strong voice in the App Inst. Altho they may be in bed with Wash government. I just don’t feel we have a voice. I am leaving the profession next july 2010,the date my license expires after 18 yrs. I use to dearly love Appraising. What a job, your the boss, your company and freedom from any big corporate company job, but because of incomputent people at all levels, we are most of the problem they say. Lets fix these Appraisers and regulate everything they do and hole them accountable for anything gone wrong. Not for me. IMHO, putting AMC’s incharge is one of the most stupid ideas I heard this year. But then I heard about the Appraisers Bond issue. I am a retired Army Officer from the 82nd Airborne Div. and I’ve seen stupidy. I’ve went from concern to worry. It’s not worth it to me. Lets start with stupid Loan Reviewers, FHA appraisal reviewers. Also same about Real estate agents with dumb attacks also wrong info on MLS every time. Also loan originaters who lie to borrowers. Change something on the contract or when contract changes, don’t send you a copy. Here’s good one: Buyer’s agent, But still swap info with seller agent to get the loan close. Reviewer: mr Appraiser you need 2 more comps that are within 1 mile of the rural subject. Appraiser: Not to worry I saved the 2 best comps just for this occasion. The new government is all about more power. I just feel we are in trouble yet to come. The AMC’s and lenders will in time throw us under the train. I should feel better but I don’t. I remember Qualitative analysis and it worked, but the banks and power people wanted hard numbers. When was the last time you did a narrative report? Good luck, CUL, Roger, Music city, Tn.
8 California Appraiser // Mar 22, 2009 at 1:06 pm
This is of course how the MA should be conducted - an adjustment applied via a bullet proof paired sale analysis backed by reasonable and adequate data is probably as common proportionately as left handed atheists who skydive, knit pillow covers, and drive buicks. Some properties might have 7 or 8 variables effecting value with time also in the equation - I had math professors in graduate school that could not solve these even if there was adequate data. But tell that to the folks who we send these quantitative forms to. Speaking of ending up in the hot seat because of the ridiculous position appraisers are put in due to these quantitative forms it was nice to hear about someone losing their license because they neglected to mention the ceiling fans in the living room and apply a quantitative adjustment because we all know every buyer clicks the calculator and adds in the dollar derived benefit of those ceilling fans, or patio area, or corian vanity in the powder room - heresay but hopefully my point is clear. We just need to keep doing our best and hope that someday clear thinking voices like yours come thru and another ludicrous aspect of this profession bites the dust.
9 Jake Boeger // Jul 21, 2009 at 11:53 pm
Awesome!
I would like to start using the qualitative analysis with my Estate/trust assignments.
It seems like appraisers who’s work is highly scrutinized (divorce, etc.) would benefit from this analysis vs. quantitative.
10 Alan // Aug 18, 2009 at 12:51 pm
Great article, I tried this long ago and it was flat rejected under my former employer. Now under my own hat and being reminded of it it’s time to give it a go. First one out and first one rejected today by the AMC. My goal then is to get it in writing that Qualitative is not allowed.
Then here you go judge, no can do. If AMC’s are telling the appraiser how to write and you don’t go along with their requirements your done. Who is the author the appraiser or the AMC underwriter.
Oh the joy of this profession, great article and nicely timed.
One thing many forget is in the quantitative method the problem is compounded by
-Time (turn time)
-Point value estimate vs Range estimate
-Fee’s (sorry but what’s the saying you get what you pay for, and what are AMC’s paying these days, not all but some)
The more you refine data the further you leave the reality of the market as an art form. That data is further skewed depending on the appraisers (opinions vary from person to person), the comps chosen etc.
Thoughts?
Leave a Comment