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Appraising a Changing Market

Updated: Sep 6, 2019

OFTEN, AS MARKETS COOL AND SALES START SLOWING DOWN, THE LACK OF

CURRENT CLOSED SALES SENDS APPRAISERS OFF IN A RADIUS LOOKING FOR

COMPARABLES. IN ANTICIPATION OF THE PROBLEMS THAT MIGHT BE ENCOUNTERED

BY THE FIELD APPRAISER IF THE CURRENT REAL ESTATE MARKET CYCLE

CONTINUES TO COOL, RATES CONTINUE TO RISE AND SALES VOLUMES DECLINE

WHILE LISTINGS INCREASE, A MULTI-TIERED MARKET DATA ANALYSIS MAY HELP

MAKE MORE LOCAL DATA AVAILABLE FOR USE AS A COMPARABLE.


It is founded on a concept described in The Appraisal of Real Estate that has been in place since the market approach was introduced in the 1950's as a check against the cost approach.


Market data is defined as a sale, listing or offer to purchase that, if properly adjusted, provides a meaningful indicator of value. When you think about it, even in the worst markets there is lots

of market data; however, it might just be listings, offers to purchase or, in extreme cases, expired listings rather than closed sales.


Multi-tiered approach In order to satisfy lenders in any price range, appraisers can use a multiple tier approach that encompasses all of the following:

1. Closed sales, less than six months old.

2. Pending sales that competed under current market conditions. These should be highly similar, requiring few adjustments and model matches if possible.

3. Current competitive listings (highly similar) discounted by a market derived list/sale ratio, or interviews with listing agent (e.g., Have you had any offers? Where do you think it will sell?)

4. Historic sales, older than six months.

5. Offers to purchase from a ready, willing and able buyer. Sometimes the listings have received valid offers that were rejected, or countered but not accepted. Verify the highest offer and its terms. What if you had a perfect comparable with an offer last month, Would that be an indicator of value?

6. Expired listings, double discounted and adjusted normally.


Location, location, location. Certainly at the residential level, finding three closed sales in the last six months within a mile radius is the goal of many loan production reports. It keeps the callbacks from coming and makes the reviewers and underwriters happy. But does it violate the “Location, Location,

Location” rule?


Neighborhoods are rarely a radius of a mile except in large specific plans; often their boundaries are jagged or gerrymandered. Sometimes their boundaries are invisible, more political or social than physical. Sometimes there are physical boundaries within the radius that separate neighborhoods. Sometimes, a neighborhood is made up of one project, development or building. Thus, appraisers who use market data from outside the subject neighborhood by going to a better area or project for data have to make sure they understand the magnitude of the

location adjustment.


The last thing you want to do is violate the location rule. It is not necessarily distance. It could be a physical or political delineation such as a school district, city limits, a country club or project boundary that makes the important locational factor.


Over half of all buyers buy the location first, and then the property. For example, country club sales managers state that their buyers first buy the club, and then may take one to two years to find their property. The socialization factor in a country club is such that only sales from inside the same club are going to make sense. A home in one club might be worth a million more than an identical home in another.


Knowing the rankings and locational differences is important. All too often subjects in an inferior country club are being compared with sales from superior ones with no location adjustment. On

the other end of the value range, when a subject is not located in a country club, choosing comps from inside one also violates the location rule, unless you make the necessary adjustment,

which can be up to –35 percent.


Bare in mind, that while you must always include three comparables, sometimes you are adjusting six, nine, even 12 comparables, if not more.


Now as the market turns we need to consider negative time adjustments in many markets. In addition, defaults rise as markets decline; in turn, lawsuits against appraisers increase as defaults increase. Notices of default have increased more than 50 percent over a year ago, which means we will likely see a spike in professional liability suits against appraisers within the next

year. So, the answer is that there are always lots of comps, it’s just a matter of how you use them, put them together, verify, analyze and document them. The writing of the appraisal analysis will carry weight and allow readers to understand the logic and reasoning used. Omit the logic and reasoning and you could get a rejection.


Tips for a compelling report

Once you have compiled the multitude of comps, their presentation is paramount. How they are presented should reflect the context in which they are being included: as a direct comp or to

show variance for location or time. For example, you can create a table of sales as an exhibit in your forms program to show the breadth of the market. You can do it in Excel, calculate the mean and standard deviation, demonstrate the most probable range, and set up the client to understand your selection criteria used for your primary comparables. We usually include a minimum of 25 comps, sometimes more, depending on the depth of date in the given market.


Graphing what the market is doing is also a powerful tool. Appraisers can put graphs of their data set into the exhibit pages. Showing the trend line on a graph helps back up the time

adjustment, even if you have published data on your zip code or pairings. The visual presentation is powerful. For example, I turned in a report for a class project. It was an appraisal with a feasibility study in a remote desert city. The front cover had a graph, as did the back. Inside there were an additional half dozen graphs and numerous color maps and exhibits. The visual content aided me in getting an A on the report. Additionally, I have testified in court without a report, with

just a graph and had judges say that I provided compelling testimony.


The Appraisal Institute course, Advanced Sales Comparison and Cost Approach, created by Nelson Bowes, covers trend analysis and graphing the data. For the first report I wrote after

taking that class, I put 48 sales on a graph in the highest and best use section of a report, and demonstrated a –2 percent per-month time adjustment over a 24-month period for lots in

Hesperia at that time. The only comment from the reviewer was, “Loved the graph, but why did you put it in portrait style instead of landscape?” The answer was simple, it increased the steepness of the slope and made the point all that more powerful.


Appraising in a down market is a learned skill

that most appraisers who have been licensed less

than 15 years have not necessarily been through.


Now, for later Appraising in a down market is a learned skill that most appraisers who have been licensed less than 15 years have not necessarily been through. Residential price trends have been studied by California Polytechnic State University since 1947. In the last four decades, there have been recessions during which prices declined. We are on the cusp of that situation now. The difference is that the Housing Affordability Index numbers are woefully low compared to last time. In 1990 about 75 percent of Californians could afford the average house. Now the number is under 20 percent. Once hyper-inflated markets stop going up, they will be coming

down. The only remaining questions are the rate and timing of the descent along with the readth of the valley.


As markets cool down and turn down, writing with power that includes good primary research and valuation analysis of the market (supply/demand /trends), as well as the data used as primary comparables, goes a long way in separating the professional from the average licensee. As sales volumes decline, those appraisers with the better work product will become the preferred appraiser of the investors.


There is a new Appraisal Institute seminar, What Clients Would Like Their Appraisers to Know, and an article in the second quarter 2006 issue of Valuation Insights & Perspectives titled “Communicating with Clients: What Appraisers Need to Know.” By embracing the concept that our reports are a form of written and visual communication and that there are no boundaries

on what we can write or how much data we can put into them, we can provide reports that really serve the needs of clients in the dynamics of the current market. Practicing now by writing about what is happening in the market is a good thing. Even if prices aren’t declining in your area, certainly supply is building up and sales are slowing.


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