Editor’s Note: Enjoy this “how to” on proving appraisal adjustments. This is Part One, Part Two will be published April 28th.
Proving Appraisal Adjustments
By Beverly A Bayer, SRA – Mvappraiser@yahoo.com
When I began appraising, I asked my mentor what adjustments to use- he said, “Figure it out for yourself.” So I did. Here’s what I learned.
When my mentor left the office, I studied his appraisals and began using his adjustments. Many years later, I wonder how many appraisers are using hand-me-down adjustments, a list picked up from somewhere or another, or those suggested by a client?
Let’s be honest:
(1) How many appraisers have a set of adjustments that seem to work - that they might have used for years but have never tested?
(2) How often do we guess at an adjustment either because we do not know how to determine the adjustment or just don’t want (or have the time) to do the research and analysis?
(3) How often do appraisers, challenged on an adjustment and unable to defend it, bend to unreasonable requests?
It is possible to do an appraisal without adjusting but we have found by adjusting we can narrow the range of indicated values from the comparables. However, if our adjustments are wrong, we might find we are not narrowing the range but actually making it wider. I find that lot size and/or age adjustments might not be helpful because the market does not always account for those numeric differences.
Using Your Comparables to Determine Adjustments
SUBJECT Comp 1 Comp 2 Comp 3
Sales Price $160,000 $171,000 $189,000
Year Built 1985 1984 1986 1985
Square Footage 1,600 1,600 1,800 1,800
Pool YES No No YES
Looking at the data we would expect the subject to have more value than comp 1 but less than comp 3. You can subtract the sales price of comp 1 from comp 2 to determine a square footage adjustment. You can subtract the sales price of comp 2 from comp 3 to determine a contributory value for a pool.
The more variables you have, the more comparables you may need to account for each difference but what do you do with a difference you cannot find in any of your comparables (such as a view)?
Using Paired Sales to Determine Adjustments
Subject is a 1,600 square foot house with a view but there are no sales in the past year of similar size homes with comparable views. However, there are four sales of the same plan without views in the past 120 days – ranging in sales price from $200,000 to $225,000. So first we would expect the subject property to have a value in excess of $200,000.
There is a 1,000 square foot house with a comparable view – that sold for $165,000 and a model match without a view that sold for $140,000 – for a difference of: $25,000. Now it looks like the contributory value of a comparable view might be $25,000 but that is for a smaller house.
There are two sales of a 2,000 square foot plan with views for $250,000 and $260,000 and model matches without the view for $220,000 and $230,000. So the range here is: $20,000 to $40,000 (average at: $30,000).
Using History and Percentages to Determine Adjustments
As a second test you find the subject property sold two years ago for $184,000 and model matches without the view were selling for $160,000 – now that difference is $24,000 (15 percent). So determining 15 percent of the two current model match sales at $200,000 and $225,000 will result in a possible view value range of $30,000 to $33,750.
Conclusion for the View Adjustment Determination
Smaller homes with and without the view indicated a $25,000 premium for the view. Larger homes (on average) pull up to $40,000 more for the view (average at $30,000). Prior sales of subject with the view and comparables without the view found the view added 15 percent to value – which applied to the non-view current comparables equals a value for the view from about $30,000 to $34,000. View value adjustment of $32,000 is chosen.
Using Sale/Re-sale of the Same Property to Determine Adjustments
Subject sold for $100,000 on January 1, 2000 as an REO in fair condition.
Re-sold for $140,000 on April 1, 2000 after a $20,000 rehab (in a stable market).
From that information we can conclude a condition adjustment of $40,000 – for nothing else has changed.
Subject sold for $100,000 on January 1, 2000.
Sold again on January 1, 2002 for $140,000, which equals $40,000 in 24 months or +$1,666 per month.
Now you can take that $1,666 per month to current comparables to account for appreciation. Many appraisers are doing time adjustments wrong – by using the close of escrow date. Here is a quote from Fannie Mae: “Time adjustments must be representative of the market and supported by comparable sales or other market evidence. The adjustment must reflect the time that elapsed between the contract dates (the date of the meetings of the minds) for the comparable sales and the effective date of the appraisal for the subject property.”
Using Published Data to Determine Adjustments
Data shows the median home prices in the county were going down between January and April but started moving up in May. The city home prices hit bottom in March and began moving up in April but are still below the median from January. The monthly increase from June to July for the County is $6,000 and $5,000 for the city. The appraiser could choose a time adjustment of $140 per day applied to the contract (meeting of the minds) dates of the comparable sales.
Part Two will be published next issue: Using Mass Data to Determine Trends.