Editor’s Note: Hang in there. The Financial Reform Bill, now in Senate Committee, could be a game changer for appraisers. If signed into law, the bill would regulate the use of broker price opinions and appraiser valuation products, set new rules for appraisal reviews, beef up appraiser independence and enforcement and mitigate the effects of HVCC.

Appraisal Game Changer on Horizon: HVCC Gone, BPOs, Reviews, AVMs Regulated, Greater Enforcement, Independence  

By David Brauner, Editor

There are 61 pages of appraisal provisions contained in the base text of the Financial Reform Bill now in House-Senate Conference Committee. If passed and signed into law, the legislation could be a game changer for appraisers.

Some highlights included in the base text are:

·       Sub prime mortgages to require written reports by state-licensed appraisers, including an interior inspection (no more drive-bys). Failure to obtain such an appraisal by a creditor will result in a $2,000 liability to the applicant or borrower.

·       Appraisers must be licensed in the state in which the property is located.

·       Strong appraiser independence language mirroring that of the Home Valuation Code of Conduct (HVCC), including a national complaint hotline.

·       Sweeping powers for the Appraisal Subcommittee to police state appraiser boards.   

·       Mandatory reporting requirements of appraiser malfeasance and/or discovery of Uniform Standards of Professional Practice (USPAP) violations to state appraiser boards.

·       All appraisal reviews to be in compliance with USPAP. From the base text: “Appraisal reviews by a lender, appraisal management company (AMC), or other third party organization, shall be performed by an appraiser who is duly licensed or certified by a state appraisal board.” 

·       AMCs to be regulated by state appraiser boards.

·       Quality control standards required for automated valuation products.  

·       Rules for broker price opinions (BPOs): “Broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property.”

·       Broker price opinions defined: “The term ‘broker price opinion’ means an estimate prepared by a real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model as defined in section 1125(c).”

Game Changer

According to Darwin Ernst, SRA, Montana Real Estate Appraiser Board Member and designated Residential Member of the Appraisal Institute, these changes have the potential of being significant. “The base text says appraisals and appraisal reviews need to be done by licensed appraisers,” Ernst said. “This could compel the GSEs (Government Sponsored Enterprises - Fannie and Freddie) to replace the use of AVMs and/or BPOs for quality control checks with appraisal reviews by qualified (licensed) appraisers. This could be a huge change. This legislation (if passed) will also lead to the removal of all unqualified personnel at appraisal management companies who are calling themselves appraisal reviewers. One goal of the legislation appears to be justly aimed at getting rid of people who are not qualified to complete appraisals or appraisal reviews. ‘Qualified’ now means a state licensed or certified real estate appraiser.”

Ernst recently returned from an Appraisal Institute-sponsored lobbying trip to Washington, D.C. where he met with staffers from various members of Congress to provide input on these issues from the perspective of appraisers (see Fighting for HVCC Reform: Mr. Ernst Goes to Washington, WorkingRE.com, Premium Content).

HVCC, Customary and Reasonable Fees

Conspicuously absent from the base text are the elimination of the Home Valuation Code of Conduct (HVCC), which is due to sunset in November 2010 unless renewed, and any mention of customary and reasonable fees for appraisers (see Demanding Customary and Reasonable Fees for Appraisers, WorkingRE.com, Premium Content). However, both issues are addressed in a proposed amendment.

The “Amendment to Title XIV” (see, WorkingRE.com, Sidebar) calls for the sunsetting of the HVCC. It also addresses customary and reasonable fees with more specificity than the FHA, which so far has failed to enforce its own mandate. The language in this amendment says: “Lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services in the market area of the property being appraised. Evidence of such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys. Fee studies shall exclude assignment orders by known appraisal management companies.” The last sentence seems to debunk the notion that the reduced fees offered by AMC should be considered “customary and reasonable.”

According to Ernst, whether or not the amendment is added, the base text of the legislation will have the De facto effect of superseding HVCC. “Most lenders will not make any changes to their current practices even when the HVCC is officially sunsetted, until they are forced by new regulations. The appraiser regulatory provisions in this financial reform legislation are such regulations. The GSEs’ policies for lenders will likely have to change in order to comply with the new law,” said Ernst.
 

According to Ernst, it is possible that this legislation, if signed into law, may also curtail the use of BPOs for valuations. “BPOs are defined here as a ‘probable selling price,’ as distinct from an appraisal from a qualified appraiser that provides an opinion of market value.”

Day of Reckoning
The base text also calls upon the Comptroller General to conduct a study to determine the effects that the changes to the seller-guide appraisal requirements of Fannie Mae and Freddie Mac, contained in the HVCC, “have on small business, like mortgage brokers and independent appraisers, and consumers, including the effect on the quality and costs of appraisals; length of time for obtaining appraisals; impact on consumer protection, especially regarding maintaining appraisal independence, combating appraisal inflation, and mitigating acts of appraisal fraud; structure of the appraisal industry, especially regarding appraisal management companies, fee-for-service appraisers, and the regulation of appraisal management companies by the states; and impact on mortgage brokers and other small business professionals in the financial services industry.”

Find the Appraisal-Related Base Text of the Financial Reform Bill at WorkingRE.com, Sidebar.

For background information, please see July 4 - Independence Day or Doomsday for Appraisers? at WorkingRE.com, Premium Content.

About the Author

David Brauner is Editor of Working RE magazine and Senior Broker at OREP, a leading provider of E&O Insurance for appraisers, inspectors and other real estate professionals in 49 states (OREP.org). He has covered the appraisal profession for over 16 years. He can be contacted at dbrauner@orep.org or (888) 347-5273. Calif. Insurance Lic. #0C89873.

Editor’s note: However you feel about the wisdom or the right of your fellow appraisers to work for as much or as little as they choose, the lowest bidder is certainly not the intent of customary and reasonable. This issue is vital to taxpayers, Congress, FHA and appraisers and it’s time for the regulators charged with protecting the public interest to step up to defend a concept they claim to endorse. The following story, excerpted from the new summer issue of Working RE magazine, is a call to action on the issue. The print magazine is now in the mail to 80,000 real estate appraisers. To access the issue now, please click the cover image at left.

Demanding Customary and Reasonable Fees for Appraisers
By David Brauner, Editor

It’s time for FHA, Congress and others to step up to defend a concept they claim to endorse. Here’s why the issue of customary and reasonable fees are vital to taxpayers, Congress, FHA and you.
 

FHA wrote into recent regulations that appraisers should be paid fees that are conducive to quality work; customary and reasonable is the language they and others use. FHA did this, one surmises, in reaction to a barrage of feedback from appraisers that many AMCs shop for the lowest bidder when choosing appraisers and that this, along with pressure for unreasonably quick turn times, is hurting appraisal quality (see Appraisers Talk, FHA Listens, WorkingRE.com, Library, Issue 23).
 

The concept is widely accepted as important. There is similar customary and reasonable language regarding appraisal fees contained in federal legislation before Congress and in various state bills, enacted and proposed, designed to protect appraiser independence and/or to regulate AMCs.

Quality and Customary and Reasonable Fees

According to the new HVCC Appraiser Talkback Survey: One Year On, with over 2,100 appraisers responding in the first few weeks, 67 percent of appraisers believe that delivering a consistently reliable appraisal product is dependent on being compensated customary and reasonable fees. Yet, only six percent (6%) say that they are receiving customary and reasonable fees from AMCs for appraisal assignments always/often. Twenty-seven percent (27%) say they sometimes receive customary and reasonable fees and 56 percent say they receive them hardly ever/never. (Nine percent (9%) say they don’t accept AMC work, two percent (2%) were unsure.)

When asked specifically about FHA assignments, since the guidelines went into effect, only 16 percent of appraisers say they receive customary and reasonable fees always/often; 26 percent say sometimes; 38 percent say hardly ever/never.  (Eight percent (8%) say they’re unsure, 12 percent say they don’t do FHA assignments.)

Is the concept of customary and reasonable valid? The majority of appraisers completing the new survey say it is: 58 percent respond that in their market, most appraisers/lenders and other interested parties know (about) what a “customary and reasonable fee” is for a particular assignment.

Consumers, Appraisers, Tax Payers Big Losers
The Home Valuation Code of Conduct (HVCC) was intended to reduce pressure on appraisers in the pursuit of more independent, more accurate and reliable appraisals: according to the new survey, only 39 percent of appraisers “agree” that they are experiencing less pressure today to alter appraisal reports, for any reason, than before HVCC was implemented. 
 

With respect to quality, consider the following results from the new survey:

·    Over 99 percent of appraisers believe that accurate and professionally prepared appraisals are vital to the health of the real estate industry/U.S. economy/home buyers/tax payers. (Who knows better?)

·    62 percent say appraisal quality has worsened since HVCC.

·    48 percent answer that low fees are the main criteria for receiving appraisal assignments from AMCs always/often (20 percent say it is the main criteria sometimes).

According to the survey, 86 percent of appraisers say that their appraisal-related income has declined since HVCC and despite the spin from some regulators and others who assert that current appraiser woes are the result of a bad economy and not HVCC, 83 percent of survey takers attribute the decline in their income mostly to HVCC.

And it’s not only appraisers who are faring worse. While appraiser fees have declined, the cost to consumers has risen. Sixty-three percent (63%) of survey takers say they’ve seen the cost of appraisal services paid by consumers rise.  It’s no wonder that 81 percent of survey takers are in favor of terminating HVCC– hardly a ringing endorsement.
 

AMC Fees: Customary and Reasonable?
Most appraisers know what customary and reasonable fees are and it’s not the cut-rate fees paid by many AMCs. To back this up, a la mode did a year long fee survey for non-AMC appraisals (see current issue: HVCC: Taking Back Control of Your Fees). The national median fee according to the report is $350 for non-AMC orders. Fees for FHA and certain other appraisals are higher (see WorkingRE.com, Current Issue: HUD Responds: Customary and Reasonable Fees).  �

The AMC trade group TAVMA (Title/Appraisal Vendor Management Association) framed this debate almost immediately after the fee survey was made public in Working RE Online News Edition in February, arguing that AMC fees ought to be considered the new standard (i.e. customary and reasonable) because the majority of work is now flowing through these middle-men. As incredulous as this logic may leave you, it is their argument and so far FHA, to their discredit, does not disagree (see HUD Responds: Customary and Reasonable Fees, current issue).

Finally, what does customary and reasonable mean to appraisers? Anywhere from $150 to $250 per assignment. For many, this margin is the bleeding edge of survival as a professional appraiser. Most appraisers agree that a living wage is required to produce complete and well-documented reports.
 

However you feel about the wisdom or the right of your fellow appraisers to work for as much or as little as they choose, the lowest bidder is certainly not the intent of customary and reasonable. I urge you to lobby FHA, Congress and other regulators, who have called for fair pay for appraisers in the public interest, to step up to enforce the intent of the customary and reasonable, if they are serious that the public good requires valuations by trained and licensed professionals.

Appraisal Foundation News: The Appraisal Standards Board (ASB) has issued a second exposure draft with proposed revisions to the 2012-2013 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). Included are proposed revisions to the definitions of “report,” “scope of work” and “assignment results.” The ASB is accepting public comments until July 20th, 2010. To view the proposed revisions, please visit WorkingRE.com, Sidebar: Second Exposure Draft of Proposed Changes to 2012-2013 Edition of USPAP. Also, the Appraisal Foundation has appointed members to the Appraisal Practice Board (APB) to commence work on July 1st, 2010. For a list of members and to learn more about the APB, please visit WorkingRE.com, Sidebar: Appraisal Practice Board Members.

About the Author

David Brauner is Editor of Working RE magazine and Senior Broker at OREP, a leading provider of E&O Insurance for appraisers, inspectors and other real estate professionals in 49 states (OREP.org). He has covered the appraisal profession for over 16 years. He can be contacted at dbrauner@orep.org or (888) 347-5273. Calif. Insurance Lic. #0C89873.

Editor’s Note: It may be do or die time for appraiser independence as the Financial Reform Bill enters a House-Senate Conference Committee. Find a link below to contact your member(s) of Congress. Find additional background on these issues in the new print edition of Working RE, currently in the mail to 80,000 appraisers, including every member of OREP.org.
 

July 4 - Independence Day or Doomsday for Appraisers?
by David Brauner, Editor

This year, July 4 may or may not be Independence Day for appraisers, depending on which appraisal-related provisions (if any) make it into the final version of the Financial Reform Bill, now in a House-Senate Conference Committee.
 

Language supporting appraiser independence is included in a bill passed by the House (H.R. 4173), including provisions regulating appraiser management companies (AMCs), supporting “customary and reasonable” fees for appraisers, sun setting the Home Valuation Code of Conduct (HVCC) and providing needed funding to the Appraisal Subcommittee to help states regulate appraisers and AMCs.

If appraisers hit a home run in the House with H.R. 4173, they struck out in the Senate. The version that passed the Senate recently did not contain any appraisal provisions. The House and Senate now are in Conference Committee to reconcile the differences between Senate Bill 3217 and House Resolution 4173. 

What protections are afforded to real estate appraisers will ultimately depend on who sits on the Committee, according to Darwin Ernst, SRA. Ernst, recently returned from an Appraisal Institute-sponsored lobbying trip to Washington (read, Fighting for HVCC Reform: Mr. Ernst goes to Washington, at WorkingRE.com, Premium Content) said, “Some members of Congress care about these appraiser provisions and some don’t. What happens will depend on who is appointed to the Conference Committee and how influential they are in getting their concerns into the final version of the bill.” 

The Committee members were announced Tuesday afternoon. Find an article from The New York Times announcing the members at WorkingRE.com, Sidebar: Senate and House HVCC Conference Committee.

Once a single bill is agreed upon in Conference, it is sent back to the House and Senate for a final vote. If passed by both chambers, the bill is sent to the President to be signed into law. Financial Services Chairman Barney Frank (D-MA), who is riding shotgun on the legislation, said that he would like to get a reconciled bill to the President by July 4, 2010.

Appraiser Issues Raised
According to Ernst, who also sits on the Montana Real Estate Appraisal Board, the Senate staffers he met with were not aware of the issues from the perspective of appraisers, as expressed in the results of two OREP/Working RE Appraiser HVCC Talkback Surveys, including that pressure for low fees and fast turn times from AMCs result in lower quality appraisals; that while appraiser fees have been cut due to HVCC, the amount paid by consumers has increased and that pressure for an expected result is still a part of daily life for a majority of appraisers. According to the new survey, HVCC: One Year On, 74 percent of respondents disagree with the following statement: Your appraisal reports are more accurate, complete and free of outside influence today than before HVCC. To date, over 5,700 have completed the first HVCC Talkback Survey and over 1,900 the new HVCC: One Year On. (You can still take both surveys, find links to both below.) 

“We lobbied the Hill on May 5th and 6th and were successful in getting our views expressed to members of Congress but it may have been a little late in the process,” said Ernst. “We tried to get a key amendment (Senator Casey’s Appraisal Amendment) included in the Senate version of the bill prior to passage but could not. The amendment would have followed the provisions in the House version by requiring, among other things, that AMCs be registered with state appraiser boards.”

According to Ernst, the House version also requires that “all appraisal reviews, including appraisal reviews by a lender, appraisal management company, or third party organization, be performed by an appraiser who is duly licensed or certified by a state appraisal board.” Ernst said, “This language alone could cause the repeal of HVCC because the Code condones the use of broker price opinions (BPOs) and appraisal valuation models (AVMs) by GSEs (Fannie and Freddie) for quality control testing, which are in essence unregulated, rubber-stamp alternatives to an appraisal review completed by a qualified real estate appraiser.”

Ernst adds that BPOs, AMVs and AMCs will continue to threaten the integrity of the process if they remain unregulated. “Currently, there is no federal law that prohibits real estate agents from providing BPOs as a valuation product. Similarly, there is no federal law that allows state appraiser boards to regulate AMCs or the proprietors of appraisal valuation models. It is likely that BPOs, AMCs and AVMs will remain part of the lending picture. However, without proper regulation, unethical practices perpetuated by some in these groups will continue to plague the financial lending industry and damage the public’s trust in the process.”

Both chambers of Congress have called for the Comptroller General to review the effects of HVCC on the quality and costs of appraisals, length of time for obtaining appraisals, impact on consumer protection, etc. (See the appraisal provisions on pages 37-39 of Casey’s Appraisal Amendment at WorkingRE.com, Sidebar).

Ernst went to Washington, D.C. as part of the Appraisal Institute’s (AI) annual Leadership Development Advisory Council (LDAC). This group of AI members discussed legislation and lobbied Congress to help ensure that meaningful financial reform legislation is crafted.

“I shared the results of the OREP/Working RE HVCC Surveys with numerous other appraisers and with Senate staff members. I believe that our voice was heard in D.C. thanks to your company’s publication and the lobbing efforts of the Appraisal Institute. It was a very successful effort in providing members of Congress with more information to support effective financial reform to help restore the public’s trust,” Ernst said. 

IVPI Scrapped
In other news, the long anticipated Independent Valuation Protection Institute (IVPI) has been scrapped in favor of an online “complaint process.” The IVPI is the mechanism in HVCC designed to enforce appraiser independence.

The Federal Housing Finance Agency (FHFA) said the following in a press release dated May 20, 2010: “In light of the billions of dollars in taxpayer funds the enterprises (Fannie Mae and Freddie Mac) have drawn since entering conservatorships, I cannot, as conservator, justify the enterprises funding the institute,” said Acting Director Edward J. DeMarco, in a letter to New York Attorney General Andrew Cuomo. DeMarco continued, “Therefore, as conservator, I have determined that they will not proceed with that portion of the cooperation agreements.”

DeMarco said that FHFA views the newly announced complaint process as more practical than the institute in terms of policing appraisal-code violations.

The letter was addressed to AG Cuomo because, as you may recall, HVCC is a private agreement between the New York AG’s office and Fannie Mae and Freddie Mac. In return, Cuomo agreed to stop investigating the role of the agencies in a case involving lender pressure. (Find the press release and the DeMarco letter to Cuomo at WorkingRE.com, Sidebar: FHFA Press Release and DeMarco Letter). 

Contact your member(s) of Congress:
Senate: http://www.senate.gov/general/contact_information/senators_cfm.cfm

House of Representatives: https://writerep.house.gov/writerep/welcome.shtml

Make your voice heard by participating in both Working RE/OREP surveys here:
First Survey: HVCC Talkback Survey
New Survey: HVCC - One Year On 

About the Author

David Brauner is Editor of Working RE magazine and Senior Broker at OREP, a leading provider of E&O Insurance for appraisers, inspectors and other real estate professionals in 49 states (OREP.org). He has covered the appraisal profession for over 16 years. He can be contacted at dbrauner@orep.org or (888) 347-5273. Calif. Insurance Lic. #0C89873.

The Summer 2010 edition of Working RE is in the mail - yes the old fashioned print magazine - to 80,000 of you right now and should be in your mailboxes within the next couple of weeks - keep an eye out for it! Everyone can view it online right now for free - just click here!

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By Beverly A Bayer, SRA – Mvappraiser@yahoo.com

When we look for comparables to put into an appraisal report, we filter down to the properties that are the most similar, most recent and near-by. Sometimes the initial search is too narrow and only one or two comps are found, other times the search results in too many potential comparables and the appraiser will filter down to get to a reasonable number to produce a credible report. Some appraisers try not to use more than three comparables; other appraisers strive to always have more than three comparables. I believe if the appraiser is trying to manipulate a value it is easier to do it with only three comparables.
 

Here is a list of actual sales in a neighborhood – what can we learn from this information?

Average sales: $185,320
Median sales price: $180,000
Average house size: 2,010 sq. ft.
Average price per square foot: $94
Average year built 1989

Click for the Chart referred to here
 

From the chart we learn that house size is NOT the only variable to sales price.  There are 7 sets of model matches – what can be learned from them?

Set 1: Sale # 16 sold for $175,000; Sale # 28 sold for $189,000; a difference of:$14,000

Set 2: Sale #4 sold for $157,000; Sale #11 sold for $170,000; a difference of: $13,000

Set 3: Sale # 19 sold for $177,000; Sale # 26 sold for $185,000; a difference of: $8,000

Set 4: Sale #21 sold for $180,000; Sale #29 sold for $190,000; a difference of: $10,000

Set 5: Sale #20 sold for $169,800; Sale # 22 sold for $183,000; a difference of: $13,200

Set 6: Sale # 6 sold for $158,000; Sale #25 sold for $185,000; a difference of: $27,000

Set 7: Sale #24 sold for $185,000; Sale # 35 sold for $212,000; a difference of: $27,000

Things we might learn from the Mass Data sales

1.   We have information to fill out in the neighborhood section of the appraisal.

2.   We know more homes are selling above the list price than below it.

3.   We know larger houses on average are selling for less per square foot than smaller houses.

4.   We know most of the homes sold were distress sales (REOs and Short Sales).

5.   We know the REO properties typically sold in less than one month; standard sales often took slightly over one month and short sales often took over three months to sell.

6.   We know the standard sales often pull the highest prices.

7.   We know lot size does affect the sales price but might be overshadowed by such things as type of sale.

Things we might learn from the model match sales

Set 1: Condition and type of sale affects value: Sale # 28 was a Standard Sale (per MLS) with new interior paint, new carpet, new appliances, upgraded kitchen counters and a view; selling in a fast nine days; Sale # 16 was a short sale (sold vacant) with a sunroom addition, selling almost two months later for $14,000 less, taking 120 days longer.

Set 2: Sale #11 was an REO sold “as is” in December for $15,000 over the list price; Sale #4 sold for $7,000 over the list price but $13,000 less than the model match Sale #11, in November, as a short sale and per MLS it was “beautiful” but had a smaller lot. So the higher price went to the REO (over the short sale), with the larger lot, but in (possibly) inferior condition and the more recent sale (maybe some appreciation involved here). Interesting that both of these houses also sold in 2005 (July for #4 and October for #11). Number 11 with the larger lot sold for $356,000,  # 4 sold for $340,000, needing fresh paint and carpet – which is a $16,000 difference. What was the affect of condition, time (prices were moving up), and lot size with those two sales? In my opinion, lot size was not as big of a factor in home sales in 2005 versus now. 

Set 3: Sale # 19 was an REO that sold in only three days for cash at $7,100 above the list price in December; Sale # 26 was also an REO selling in 10 days, a month earlier, again over the list price – for only $8,000 more. This pairing might tell us about the furry of buyers, causing homes to sell fast and over the list price.

Set 4: Again two model match REO sales – both selling in December, both over the list price – for a difference of $10,000. Both had pools. Sale # 29 that sold for more had a slightly larger lot. Sale #21 had a prior sale three and a half years ago for $434,000, giving an indication of how much prices have dropped.

Set 5: Two REO model match homes, on equal size lots, selling in January, both for cash with a difference in price of $13,200. The one (#20) that sold for less “needs TLC” as per MLS.

Set 6: Here we have a big difference in sales prices: $27,000. Both were REOs. The lower sale closed in November, the higher sale in December, they were on the market similar number of days. MLS comments on the lower sale (Sale #6) “needs some repairs that may restrict FHA offers.” This property was previously listed for sale as a short sale for 197 days – ending at $160,000 per MLS, then selling for $169,000 as an REO. Sale # 6 also (see Sale #21) had a prior sale three years and seven months back for $435,000, highlighting how much prices have dropped.

Set 7: Another $27,000 difference, the low sale (#24) was an REO, going FHA in November. The higher sale (#35) was a standard sale, with new paint, carpet, flooring, granite kitchen counters, appliances and A/C, across the street from the club house. It had a prior cash sale as an REO three months before and per MLS at that time reported to need some cosmetic repairs for $160,000. Sale #35 sold for $160,000 and again after rehab, three months later, for $212,000 (an increase of $52,000). And the model match Sale #24 sold for $185,000: could these pairing be a reflection of the value for condition?

Determining Adjustments from Mass Data

We can gather indications of trends and adjustments from the neighborhood sales data.  “Paired sales” analysis is useful when dealing with one variable. Sale/re-sale of a specific property is very valuable find, which is an excellent way to determine value changes over time and/or the value of condition. It is also possible to change the perimeters of the mass data search to actually determine other dollar adjustments.

By restricting the neighborhood search to homes in a small square footage range, we will find good comparables for the report but possibly inadequate sales numbers to establish valuation differences or changes. If we expand the search in time, we will increase the number of sales but increasing or decreasing prices may distort the results but does provide sales data for the top of page two of the URAR.

If we expand the search in distance and compare the “median” sale prices, we actually can pull the true market reaction to such variables as value changes over time (time adjustment) and the differences in value per square foot. This expansion and refinement of the MC form into an adjustment matrix can also be used to determine market extracted adjustments for bedroom/bath count, distress versus standard sales, etc.

Appraiser Adjustment Matrix

Data used is median sales prices often for a full city, for both current to three months and four to six months by house size ranges. In the gray boxes is the difference between the two median prices from adjacent ranges. For example the median price of $132,000 for homes between 1,400-1,600 square feet is subtracted from the $151,000 median sales price of home between 1,600/1,800 square feet– resulting in a difference of $19,000.  When all the square footage differences are added, averaged and divided by 200 square feet – the result is the difference in actual prices per square foot for two different time periods. The last difference column will result in a market extracted time adjustment per day (average). 

First it is important to use a large data pull, a full city or a combo of cites and be very careful not to add other filters (such as age of homes or lot sizes). For I find the raw data tends to work best because we are working with median prices (never average prices), which by nature tends to defuse the outliners.   

Knowledge Obtained From New Home Sales

1.   You can compare the base prices of different models in a development to extract a square foot adjustment.

2.   By looking at the map of sales, you might be able to see what models have the most buyer appeal.

3.   You might be able to determine what they are getting for extra features, such as an additional garage space.

4.   You might note advertisements of “concessions” being offered, such as discounted interest rates, added upgrades at no extra cost or free things included with a purchase (big screen TV or a trip for example).

5.   If you track the base prices over time, you have a possible pattern of appreciation or depreciation.

6.   Signs of new construction or the stoppage of construction can be an early indication of changes in the marketplace.

7.   You can do a cost approach against the base prices to extract a land value.

8.   If you walk around the models, listen to what people are saying and you may learn other interesting stuff.
 

Knowledge from Real Estate Agents

The real advantage agents have over appraisers is that they deal with real people, while we work with data. And they are on the front lines of the market and can see trends we might not notice for months.
 

One great way to have some one-on-one conversation time with real estate agents is to visit open houses on the weekends or visit the new home sales offices during the week and talk to the agent on duty. I generally go to MLS meetings and have a good group of agents who will talk to me about what is going on in their areas. 

Agents can tell you about challenges they are having – such as no inventory or the difficulty getting REO or short sale offers accepted. You might hear of up bidding and multiple offers from agents. Sometimes they will express reasons why a particular home is not selling and it is not always about “price.”

Using Cost Analysis in Adjustment Determinations

For a Unique Feature with No Comparables

If you can find out the actual cost (or use a cost service) of a unique property feature, you have a starting point in determining a contributory value of that feature, improvement, etc. And you have information to put into the appraisal, which is always superior to throwing in an adjustment with no explanation, and far superior to ignoring something that might add value.
 

Certainly costs do not equal value but one can make a case that the added cost of a unique feature to a small segment of buyers might approach the actual amount they may be willing to pay extra for the property. But most times the value added will be less than the actual costs. Once the appraiser has decided a feature has buyer appeal, the appraiser can work with a number somewhere between 0 and the estimated costs. With energy efficient items I think energy savings – per year or month - could also be considered in the estimate of contributory value.
 

For When Comparables and the Subject are not of the Same Quality

If you calculate the new costs per square foot of the subject property against the cost per square foot new of the superior or inferior quality comparables (discounting if you need to) – you will have some basis for a hard to determine quality of construction adjustment. I have even used this technique when I had to use site built against manufactured homes in an appraisal.
 

For When the Subject Lacks Something Buyers Expect

Let’s say you are appraising a house without a kitchen; you could figure out the approximate cost to build an adequate kitchen in the appropriate location.  Now this is the opposite of a feature that might be nice but not needed; for here the adjustment would probably be more than the actual costs (instead of discounted costs).
 

In conclusion
Every now and then you need to think outside the box. Try to strive for techniques that seem reasonable, possibly a way a potential buyer might look at the issue. And be sure to explain what you did and why in the appraisal.