Developing and Supporting GRM Factors, and other Thoughts

When I started appraisal with a savings and loan association, I was given a List of Adjustments to use. We did the Market Data and Cost Approach on every house, plugged in a rental amount and used a GRM which we were given.

This List was used everywhere, from Los Angeles, to San Diego, to San Francisco regions. From Watts to Beverly Hills the adjustment factors were the same, as was the GRM.

Upon being handed the List, I questioned it. It was used in every price range, every quality range and every location. To me this was counter intuitive.

Example, the market was going up double digit, varying from 2%+ in the best areas, to 1% in marginal areas. I questioned the .% adjustment being used and told my boss that the regional average was 1.5%/month. He asked if I could prove it, which I went back to my desk and did. Then, he looked me straight in the eye and said “OK, we will use .%”. That flabbergasted me, but seemed to satisfy him. I then asked how we were going to hit the sales prices, fudge the other adjustments? My upward mobility was quashed and I had not done one appraisal yet.

I was one of five trainees that started that month in that office, but the only one with any real estate education or experience. No one else questioned the List or the GRM.

Within weeks they had me doing 5+unit buildings that were portfolio loans. In the city my office was in, Glendale, CA, when Zoning was put in place in the 1930’s* era; a large sector of the central core was zoned R-3 and R-4, multi family. Later in the 1970’s with the adoption of a General Plan, the new Planning Director who was from New York, implemented an R-5 Zone, which allowed mixed use/high-rise development. This new change was to have the effect of causing a change to the central downtown district over the nest 4-decades.

* Village of Euclid, Ohio v. Ambler Realty Co., 272 U.S. 365 (1926), more commonly Euclid v. Ambler, was a United States Supreme Court landmark case[1] argued in 1926. It was the first significant case regarding the relatively new practice of zoning, and served to

substantially bolster zoning ordinances in towns nationwide in the United States and in other countries of the world including Canada.

Many of the R-3 and R-4 properties around the central core, had homes built on them from the 1880’s onward. Many of these had 4-units built in their back yards from the 1950’s onward. The vacant lots were mostly built on later, first with apartments in the ‘50’s and 60’s, then with condominiums in the’70’s. The point being the first to be developed into multi family were the ones with the homes on them. There were many lots with a SFR plus a 4-unit apartment in the rear.

When the apartments started being built on the vacant lots in the 1950-1970 era, often they would build more than 5 units. I managed a 20 unit on a single city lot in this area in the 1970’s.

Where 5-units were built on a single vacant lot, often the builder had gone to the owner and made a deal to build the building with an Owners Unit that they could occupy. Sometimes they tore down the 1880-1930 house and built even more apartments, with an Owners Unit.

Typical apartment sizes were like 500 for a Studio, 770 for a 1-bedroom, 950 for a 2-bedroom. Except for Owners Units, there were few 3-bedrooms built. Owners Units might be 1,500-2,000 SF with a fireplace, family room, etc. Sometimes they were the original homes, where the owner still lived.

I could almost never find rentals on Owners Units. So, I used SFR and Townhouse rental. Actual Rent 900 $ Units 4 Total Monthly 3,600 $ Actual GRM 167 Indicated Value: 601,200 $ Econimic Rent 1,100 $ Units 4 Total Monthly 4,400 $ Actual GRM 167 Indicated Value: 734,800 $ Econimic Rent 1,100 $ Units 4 Total Monthly 4,400 $ Economic GRM 136 Indicated Value: 598,400$

Door knocking was part and parcel of daily activity to get market rents. Rents at the time of sale were one thing; rents after they had been raised, post sale, were sometimes different. Which should be used?

This area became my Farm Area for Rents and GRM’s. I was working in it every week. It was on Thomas Map Page 25 in Los Angeles County.

I was able to reuse rents and GRM’s over and over again after I had developed enough of them.

What I found out, and was later to find out when I did my SRA Demonstration report was that because a house was rented at time of sale, did not necessarily make it a GRM comparable. If the buyer was going to owner occupy, then it did not matter what the rent was, there was no GRM from that sale.

If it was rented at time of sale, what did the new buyer anticipate their first year rents would be? Did they Think they could raise the rents, if so, to what level? These questions needed to be answered before a sale could be turned into a GRM comparable or a rent comparable for that matter.

Example, say a building sold and the rents were $900 a month average and the monthly GRM calculation came out to 167 {11.8 if calculated annually}. But the buyer anticipated they could get $1,100 per month average. What is the difference in the calculated GRM’s?

Which should be used and why? If you use the actual rent, the multiplier is much higher. And, it gives a false read on what the buyers’ anticipation was. Using a multiplier calculated from actual rents, when economic rents are higher, gives a false read.

When applied to a 4-unit property, the calculated difference using Economic Rent and Actual is a 136 GRM verses 167. When applied to all four units the indicated value using the wrong multiplier is 23% higher.

This issue was brought to my supervisor but caused dissonance, he was conflicted because he had been there five years as the supervisor but had never had anyone bring this up. Nor did he have the education to know which was right. Everything he knew, he had learned on the job.

I began writing form apartment reports with two columns, one for Actual Rents, and Economic Rents, and two GRM’s, then using the Economic Rent and GRM, and not the Actual. To me, this made it clear to any reader what I had done, and why.

Fast forward to doing research for the SRA Demonstration Narrative Report; I picked a property in a town where there were lots of rentals in the MLS and sales that were rented {Hint, wink}. I first worked on finding out if the reported rents were the Actual or Economic/Anticipated rents. Then began doing the GRM calculations using the Economic rents, explaining to the reviewer; that they and only they reflected the Principal of Anticipation.

I discovered that many of the houses that had sold rented; were purchased for owner occupancy, so that they were not a GRM sale to begin with.

The Actual rents were wildly different even for the same size and room count home. This was in part due to the fact that some tenants were long term and had below market rents. The GRM indicators using Actual Rents were much higher than the Economic Rents showed.

When I calculated everything from the Economic or Anticipated Rents, what had been a wide range, began to narrow.

At different times in my career, I have picked a specialty area to concentrate on. This has been a key for me. Becoming knowledgeable in a particular locale or product type is one of the things I learned in the Society of Real Estate Appraiser’s, Office Management seminar. I took it in 1980. At that time, I picked the Luxury Home, and picked 5-Zip Codes to concentrate on much like a broker works a Farm* area. I picked Beverly Hills, Bel Air, Brentwood, Pacific Palisades and Malibu as my Farm. Later I would go on to pick Apartments to specialize in, and then Market Studies. I found that concentrating on each helped change me as an appraiser. I began to Know stuff about the market, the product type. This was all pre USPAP, but what I was doing was developing product and geographic competencies. To the point, I could not be fooled by artificially inflated values.

* How to Farm an Area or Market in Real Estate

BY JAMES KIMMONS Updated November 26, 2018

There's one thing that almost all successful real estate agents have done to develop their business in a specific area or market demographic. They "farm" the area for business.

The term farm implies growing something. That's what you do when you farm a local subdivision. You plant the seeds of future business, nurture them with marketing and then hopefully reap the rewards in commissions. Farming can involve any or all of direct mail, door knocking, postcards, newsletters, email or any other form of advertising. The key to farming an area is to do it with regularity and keep on your message.

I could not be misled by transactions where the intention was to commit mortgage fraud by stripping equity out of a property. A favorite loan is the FHA loan, which allowed up to $650,000 on a 4-unit property wth 3% down.

What this meant to me was that I began verifying sales with agents, before I had an assignment to use them on. I was later to learn that this is Step 2 of the Market Data Approach as taught by the SREA in their course 102, Residential Procedures. 6

At the time I began Farming for Comps, there were few residential sales over $3m. That became my threshold. Each week I would go to broker open houses on new listings at or above that price level, where I could have two way meaningful conversations with the agent, about the home they just listed, any subject I might be working on if they knew it or had shown it, had offer’s on it, as well as any Pending’s they might have, or other Listings that were pertinent.

By this time we were using 35mm cameras {as opposed to Polaroid’s}, and I had my assistant store the negatives from each house. Over time I had interior pictures of the comparables, their views, yard improvements, etc. Along with interview notes from the listing agents.

One of the wonderful things about working a product or area as a Farm; is that we begin to Know stuff, we can’t be fooled. An appraiser can more readily be misled when working wide geographic areas and product types. For the unaware, there are many nefarious reasons and ways that appraisers can become enablers to mortgage fraud transactions.

GRM factors are less volatile than the rents themselves. They tend to be more location specific than property specific. They can be stored and used over time, multiple times.

It is when an appraiser, does the hard work, they get to a place of Knowing {as Dr. Wayne Dyer used to say} something or things. Until then, we can be wildly off and never know it. We can be easily fooled by fraud data in the databases. Relying on Source Data alone and at face value can cause an appraiser to be off by a wide margin. Few if any appraisers would knowingly use a fraud transaction as a comparable. And, yet, tens of thousands have, and never knew it.

Imagine the value difference on 4-units if the multiplier from Actual Rents was used, and the rents were low. Verses, using verified Economic Rents and GRM’s.

The point being, using any sale for a GRM comparable or Rent Comparable at face value; can cause us to end up with a misleading indication of value. Who would knowingly want to be off by more than 20% because they did not know what they did not know?

Whether it is the Market Data Approach, or Income Approach, even the Cost Approach; a hard lesson to learn is that Verification of Market Data is the first Due Diligence step in the process and procedures of appraisal.

Not knowing this, is a Competency Issue. Many of us were never trained but told what to do and how to write a report that Looks Good for expediency sale.

We were not trained in processes and procedures. But told what to do, given a list of Adjustments, and in modern times, a Template to use.

The very first appraisal related text on Appraiser Liability that I was aware of appeared in the SREA magazine in 1984. The article was written by an appraiser in Tulsa, an oil patch area that had not come out of the Recession of 1979, he had gone to law school when the market did not recover, and wrote a research paper that was later to be published as an article, and then a seminar with the SREA. The article was Appraiser Liability; How Far Does It Reach3*. If one has never read anything on appraiser liability, I suggest that it be read. There are many sources Actual Rent 900 $ Units 4 Total Monthly 3,600 $ Actual GRM 167 Indicated Value: 601,200 $ Econimic Rent 1,100 $ Units 4 Total Monthly 4,400 $ Actual GRM 167 Indicated Value: 734,800$

*Whited, S. Wayne. The real estate appraiser & analyst ; [1986 [Summer] v. 52/2] (967); Chicago: Appraisal Institute (7836), 1986 Abstract: If the effects of an erroneous appraisal can be felt by third parties, can liability for a negligent appraisal reach beyond the client and force the appraiser to satisfy an injured third party? To answer this question, the author introduces six preliminary questions in need of answers and cites case examples.

Content notes: Introduction -- Is a real estate appraiser a professional? -- Is an appraisal a statement of opinion or a representation of fact? -- Is the third party reasonably justified in relying upon the appraisal report? -- Is there a class of persons who can claim against an appraiser without being in privity (a party) to the appraisal contract? -- What activities or omissions could constitute appraiser fraud, negligence, or misrepresentation? -- Doesn't the standard statement of contingent and limiting conditions protect the appraiser from liability? -- Conclusion. REA Vol.52 No.2 Summer 1986.

today on the internet to read about this topic*. There were none in 1984. It may seem irrelevant if one has never been sued. Appraiser liability is relevant to each of us, staff or fee. At least fee appraisers have E&O insurance.

*The, Lum Library has 250 articles that contain information on Appraiser Liability, including numerous ones by Peter Christensen, defense attorney for insurance carriers.

This was the first article on appraiser liability that I became aware of, there have been many more. I even wrote two seminars and an article on point starting in the late 1990’s when I found rampant property flipping going on in my Region and after surveying two dozen local residential appraisers, realized that they were blind to it, blind to there being fraud sales in the databases.

Whether appraising a home, townhouse, or 2-4 units or larger, not knowing whether one is using actual rents from the data source or projected rents; can result in reports that are misleading, leading to liabilities.

After having worked on hundreds and hundreds of reviews in appraisal liability cases, I know that lawyers will use our textbooks and USPAP against us. Example, an associate with the AI who had taken appraisal principals, practice’s and USPAP; was asked in his deposition if they were good courses. He said Yes.

Then he was shown the text chapter on the Market Approach and asked to read the Steps. Then he was asked why he had not used the Steps of the process and procedures laid out in the textbooks. {Gulp, OMG, no one told me this could happen, Yikes, Jiggers, @#$%#^&#!!}.

Speed and price pressures from clients do not remove the responsibility of the appraiser to embrace and employ good valuation processes and procedures. We all Certify that we use them, every time we sign our USPAP Certifications.

Expediency dictates and controls the lives of most production appraisers. Fees for lender work are inadequate to actually embrace and employ all of the steps of using good processes and procedures.

This is a fact of life for many. Our industry has rationalized how and what they produce in their reports. No different than many other commoditized industries. This factor is one that is not talked about, and yet is real, controlling the lives of many licensees’.

Whether doing the Market Approach, Income or Cost Approach, there are steps to the processes and procedures. If we can take the time to re-read them, and think of ways we can make compliance work for us; that would be a good thing for each of us individually.

We may not be able to change the mindset of the lending world that see appraisal as a necessary evil, a dime a dozen function that should be paid cheap as if that is a good thing, preventing being able to do the meat and potatoes of the process and procedures.

We can individually change how we want to be in this business, one report at a time. When I was active in Candidate Guidance, I would admonish appraisers to do one good report per week. Verify market data with the agents to find out about motivations, terms, concessions, validate the sale, not use a fraud sale, and find out elements about the property that were not flushed out in the MLS, etc.

It has been my experience that only when I do the Verification of Market Data step, for any of the Approaches, do I ever actually learn anything about the market, and find out so much more about the comparable than is published, even find out sometimes about my subject too.

GRM’s are usable over a long period of time, Verify a few, and find out about the Actual or Economic rents, calculate indicators from both, and see for yourself how wide ranging they can be.

Whether it be GRM comparables, or Paired Sales data, they are all reusable. And, they do not need to be used as any of the primary data used for adjustment in the reports. They can be saved and used again on other reports. Wow! Amazing!

Also when Pairings are expressed as a percentage rather than a dollar factor, they have greater usefulness.

Example, I was told that pools are worth $5,000 or 50% of Costs. This was never true. What I discovered is that a pool value may vary by area or location, size, age, design. And, they may contribute a percentage to the overall value of a home, or not. In some areas and price ranges, they may contribute 5%, 10%, 15%. In other areas, a pool might be a negative factor.

The other thing I have found about adjustment factors, is, that they change with the market. During booming markets, amenities might be worth more. During a down or declining market, the value of amenities get compressed.

The same is true for the major factors of Time, Location, Site, Improvements. Their values change with the market and are different in different market segments and locations.

I hope that this article is helpful to at least one appraiser. If so, please let me know. One of the greatest feelings I get from my travels in this industry is when someone comes up and tells me that they read something I wrote and it helped them in their career.

Thanks for reading. Feel free to let me know if you got any value out of this article.

#appraisevalues #appraiserdecisions #banksview #lenders #owners #landvalues #marketsupanddown

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