Manifesting Support for Adjustments

In the appraisal world of lender work, there is never enough time or fee to develop support for adjustments before the report is due. And, yet appraisers are increasingly being asked to document and support adjustments.

Many were trained and have gotten by using a List of Adjustments, from some unknown date and origin. Some appraisers are using the same List today, even though they have been appraising for years. The point is, the Lists being used may not be tied to the market, especially the current market as adjustments change with the market conditions.

Another important point is that Adjustments change over time due to market conditions. The same line item adjustment may be different in a rising market, or a declining one. Take the Time adjustment, at the peak in 2005, some of the worst neighborhoods in my immediate were reported by MLS data as having increased 57% in one year, only to go down 36% a year later, then down again for the following four years.

As the Price Per Square Foot increases, the $/SF adjustment typically decreases. Rising market conditions can cause this indicator to rise, so can Location or Quality. Knowing which and when to use what adjustment is a sign of a real appraiser. Not knowing and not being aware is simply not.

Location, Lot Size, Amenities all change in value with rising or falling market conditions. Adjustments derived during a rising market, will be too large as everything gets compressed in a declining market.

Some adjustments that can be developed during rising markets, all but dissappear during declining markets. Adjustments derived during rising markets are larger than when it is declining. Adjustments derived during declining markets may be too small for use in a rising market, resulting in under valuations.

Markets are seldom stable, and when they are, it is for a shorter period of time than when rising or falling. We each need to Know what the markets we serve are doing. Gaining a Knowing is an active process, not a passive one. Appraisers who actually Know things, can articulate them in a powerful way, and as such, their reports become more powerful, credible, believable. All of which are points toward USPAP compliance. Being unaware and doing nothing but using a List of

Adjustments will not allow for USPAP compliance which requires knowledge of the nuances of the market. This includes the nuances of market conditions, location, product type {large or small, quality or not}, amenities, etc.

This topic is about how to develop support for adjustments on a daily basis, effortlessly. It is offered as a helpful way for the practicing appraiser to be able to deliver more credible work products, help improve their reputation, and perhaps their client base and fees.

It is all about awareness. Example, how many saw a red car on the road today or this week? When I ask that question in class, few hands go up. And, when I ask students to watch for red

cars on their way home, the next day almost all saw red cars that afternoon. About 20% of cars on the road are some shade of red.

The same holds true for Pairings. If we are not looking for them, we do not see them. So, the first step is to raise our awareness level, and be watchful for them.

A key not understood my many is that the Pairings do not have to come from the Primary Data used for Direct Sales Comparison and adjustments. Pairings can be stored for later use. Some adjustments derived from Pairings may become flat dollar adjustments, some may be square foot adjustments and some may be percentage adjustments.

Another important fact not talked about is that Pairings will not provide absolute proof for any particular adjustment, but multiple Pairings will provide a supportable range. From which we must reconcile and conclude for each individual report we use them on. One can only get to a Knowing about this factor if and when they do Multiple Pairings for one line item. Then, and only then will they Know that no one pairing provides absolute proof.

When I am working on a detrimental conditions case, a large part of the fee is for the research and analysis time to find Pairings that would be helpful to support adjustments. Fees for this type of work run in the $X,000 range, not $X00, and timing is usually not an issue, weeks instead of days to do the work.

Still, with the GSE's and HUD guidelines asking for support for adjustments, and AMC Reviewers asking for them; it behooves each of us to be aware of and watch for Parings of any kind, and save them for later use.

The Society of Real Estate Appraisers had a seminar on Appraisal Office Management back in the 1980's. Two takeaways form the class for me was that you can maximize your income by two main ways, 1} on the backs of underlings working for you and 2} by reusing data already in your file and charging a full fee to the new client.

Some have been told to use Depreciated Costs for their Adjustments. A perfect way to do this, using the example of a pool, would be to have two model match homes of the same quality and condition with the only amenity difference being the pool. One home had a 1-year old pool, the other had a 10-year old pool, match them up and see if there is a difference. What a perfect world that would be. How would and appraiser Know the age of the subject or any comparable pool? Check the Building Permit file on both.

The point being that a pool amenity might have a different value for various reasons from date in time or market conditions, location, age/condition, to size/shape and elements. A salt water pool might be worth more than a regular pool. The same for one with a pebbletech finish, waterfall, slide, grotto, etc, etc, etc. These can all be Paired, it is just a matter of time, billable time.

Sometimes a particular amenity such as a pool, might actually suffer Functional depreciation. Example, I appraised a home with an almost new 25' X 48' {1200 sf} Diving pool that was 10'

deep. The owner spent $100,000 on the pool, spa and decking. This was in a $1,500,000 price range for the property. The average pool/spa being built at that time, cost less than $50,000 for a 450 sf pool. The average pool/spa package was worth about $70,000. In this instance, I used $30,000 as a Functional depreciation adjustment, because there was no market support for the oversize and depth pool.

So, be it a pool, or other adjustments, they may be different depending on the market condition, location, age/size, and quality of the amenity in question.

The Lists of Adjustments that have floated around our industry, may have had some connection to a particular market or market segment when created, or maybe not. The point being, using adjustments from some List of unknown origin or time period, is patently wrong. Using forms programs with automatic adjustments based on such Lists may look good, and be fast, but wrong.

For the lender appraiser, perhaps the best thing to do is offer a Menu of Services of what the client wants included in the preparation of the report.

This can include Verified or Unverified Market Data. Verified being when we interview someone involved in the sales to find out about motivations, terms, concessions, personal property, cash back, etc. And, to validate that it is in fact a bonafide, arm's-length sale. Adjustments for motivation alone can be larger than any GSE guideline, +-20-30%, etc.

Citing two Sources of information on the market data is not Verification, but Corroboration. It is sometimes amazing what one finds out when they talk to the agents involved in the sales, not only about the motivations of the parties but amenity factors as well, and about the market. I always as a closing question which is Could the Property be resold today for the same Price without sweeteners or concessions? If the market is hot, then not, if the market is cold and declining, then not. The answer to this one question can be very enlightening.

Talking to market participants is easiest done via the agents, but sometimes a principal can be enlightening too. Example I was field reviewing a home near the Beverly Hills Hotel, it was 4-years old. Upon inspection I found that the home was being torn apart and redone. I met the buyer at the property and asked him why. He said his wife did not like the finished. I aske then why did they buy this house, the answer was because it was in walking distance to the hotel. He said they did not like guest staying in their {12,000 sf} home, so put them up at the hotel, and called them when meals were being served.

Another example, while doing a field review of a home in Holmby Hills, I met the buyer and asked her why she bought the home and how she arrived at the price. Her response was I can change the home, but where can you get 3.5 acres in this neighborhood? I bough the lot.

While doing a field review in Sausalito, I drove up to the home and looked at the comparable map. It was up on a hill overlooking the city, the comparables were nearby but down in the flat lands. I drove up to the first Sale and noticed the owners had just come home from shopping. I was driving a white Crown Victoria with black out windows, wearing a dark suit and

sunglasses. The owner saw me, so I got out and walked to greet him with a friendly smile. I told him what I was doing and pointed to the house on the hill and said his home had been used as a comparable. He said, You Can't Do That, and then proceeded to march me through his garage to the back yard, where there was a 50' dock and gorgeous sloop. He said, I bough the Dock the home came with it.

When we do not talk to market participants we don't Know anything. All we have are indicators derived from published data. Before Pairing data, it is good to Verify the Motivations, Terms, Concessions, Personal Property and adjust them first. There is a reason why this is the first adjustment in the Order of Adjustments.

Then, adjust for Time if necessary. Or any other ancillary line items first, leaving the one item being Paired for last. The results can sometimes be confusing as we derive things that may be completely different than our List of Adjustments. Also, no one Pairing is proof of anything, while multiple Pairings provide only a Range which then needs to be reconciled for the date in time, location, etc.

It may seem hard at first, but once one has done this a couple dozen times, a realization will sweep over us, that everything we had been told was simply wrong when it comes to adjustments.

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