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Understanding comp adjustments

Discussion in 'Ask an Appraiser' started by NateVaREAgent, Feb 1, 2011.

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  1. NateVaREAgent

    NateVaREAgent New Member

    0
    Feb 1, 2011
    Professional Status:
    Real Estate Agent or Broker
    State:
    Virginia
    Hi,

    My Name is Nate Pickles I am a Real Estate agent in Va.

    I have a question for an educated, humble, passionate appraiser or someone with knowledge of the appraisal process.

    Please forgive me if I am asking a question that's already been answered on this form. I searched the site the best I could and couldn't find this topic or any good explanation.

    First and for most I am very aware that appraisals are very complex and that there is no truly accurate "list" of adjustments. However I am certain that appraisers have to have some sort of foundation or base to go off of. Again I am aware that comps are effected from area to area and by many other deciding factors. However I am asking for a "generalization" where it's not possible in some appraisers eyes.

    Please forgive my disclaimer I am simply trying to avoid the arrogant people who respond with WAY to general of information never answering the question simply making it more difficult to understand without ever even coming close to answer the questions.

    OK so here goes the question.

    When an appraiser is making adjustments to comps what are some baseline numbers or percentages that they use for making adjustments?

    EXAMPLES of what I am looking for
    Bedroom Adjustments
    Bathroom Adjustments
    Garage Adjustments
    Pool Adjustments
    Fireplace Adjustments
    Fence Adjustments
    Yard size adjustments
    Year build adjustments
    Etc, Etc, Etc

    Again I am aware that there really is no list according to others responses from other forms. But I figure you have to have some sort of base your working from. Or a software that is updated yearly that you simply plug the data into and it does the math for you. I could just buy the course and become a certified appraiser as easy as I became an agent but I would rather leave that profession to the professional appraisers.

    Thank you to anyone who takes the time to read this and answer my specific question. If you cannot answer the question can you point me in the direction of the educational site or material you used to learn how to make adjustments for comps?

    Thanks again,

    P.S.

    When you say you make your judgement off of market data where are you getting this market data from?

    -N
     
    Last edited: Feb 1, 2011
  2. Thomas Fiehler

    Thomas Fiehler Senior Member

    2
    Jun 2, 2003
    Professional Status:
    Certified General Appraiser
    State:
    Ohio
    OK-somebody send him/her our private list! Now, the questions you ask are probably what differentiates appraisers from Realtors. The "adjustments" are based on the market that the subject property is in. How much is a 4th bedroom worth over a 3 bedroom house? That depends on the market area but then don't forget about sq. footage. I seldom adjust for differences in bedrooms but usually adjust for differences in size. Some think to do both would be "double dipping". To answer your question, look for similar properties with only 1 different item (if possible). Say you want to know the value of a inground pool. Look for sales that have a pool and compare them to similar houses without a pool. You will find there is no correct answer, only a range. The value that is used should be in that range. I have neighborhoods where the pool is worth nothing to others where the pool is worth 50-75% of their cost. If you want further examples, try to find a basic appraisal book and look under "Matched Paired Sales Analysis".
     
  3. CANative

    CANative Elite Member

    62
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    How do you do it when you set a list price or advise your prospective buyer?
     
  4. leelansford

    leelansford Elite Member

    24
    Mar 29, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois

    For the competent and experienced appraiser, the support for adjustments comes via analysis of the various data available to the appraiser and from the market (current and past, as best available).

    I would have to guess that some (not so "competent and experienced") pluck numbers out of the air. :(

    This all stated, the market is not perfect and neither is the interpretation of the data. The efforts and results are made better when there is a sufficient amount of data available for interpretation.
     
  5. TennMan

    TennMan Junior Member

    0
    Apr 8, 2009
    Professional Status:
    Certified Residential Appraiser
    State:
    Virginia
  6. BRCJR

    BRCJR Senior Member

    8
    Sep 20, 2005
    Professional Status:
    Licensed Appraiser
    State:
    Virginia
    Some markets "matched pairs" may exist and data may be extracted from these sales.

    Many markets this is not possible and the appraisers' judgment becomes critical.

    I, for example, in my local market could discredit the "paired sales analysis" fairly quickly.
    We do not have similar enough sales to extract single line items. "Matched pairs" is much more theoretical than many will admit, unless they have "cookie cutter" developments.

    "Matched pairs" are good in theroy, but do not truly exist in many/most arkets.

    Many may take exception to my take on this subject matter, that is fine, as I know they are not in my market and may see things differently.
     
  7. CANative

    CANative Elite Member

    62
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    http://www.boe.ca.gov/proptaxes/pdf/ah502.pdf

    Start on Page 46 (although it's best to read all of it first)

    ESTIMATING ADJUSTMENT AMOUNTS

    Several quantitative techniques can be used to estimate adjustment amounts. Recognized
    techniques discussed below include the following:46
    · Paired sales analysis · Capitalization of rent difference (gain or loss)
    · Statistical analysis · Discounting and time value of money concepts
    · Cost analysis
    PAIRED SALES ANALYSIS
    Paired sales analysis is perhaps the most common method for estimating adjustments. The
    technique requires sales properties that are identical in all characteristics except the
    characteristic, or element of comparison, that is being measured. Alternatively, and less reliably,
    if the sold properties differ in more than one characteristic, adjustments must already have been
    made for characteristics other than the one being measured. The adjustment is estimated by
    simply subtracting one sale price from the other. In theory, paired sale analysis can be used to
    estimate the adjustment for any element of comparison, provided sufficient data are available.
    Paired sales analysis is a popular technique for estimating the market conditions adjustment.
    Sales and resales of the same property or of highly similar properties are required. To make the
    adjustment, the appraiser should: (1) list the sales, (2) calculate the percentage change between
    the sale and resale prices, (3) divide this percentage change by the number of months between
    sales dates, and (4) apply this monthly estimate of the change in market conditions to comparable
    properties.
    Paired sales analysis is also used for estimating adjustments for differences in physical
    characteristics. The paired sales must have occurred at the same time or have been adjusted for
    market conditions. To estimate an adjustment for physical characteristics, the appraiser first
    selects a sale property with a given set of characteristics. This sale property is then paired with
    another sale property (or properties) identical in all characteristics, except the one whose value is
    being estimated. The sale price of the first property is subtracted from the sale price of the second
    property in order to obtain an estimate of the value of the isolated characteristic.
    In theory, paired sale analysis is a sound analytical technique. However, often there is an
    insufficient number of applicable paired sales—especially in the case of commercial properties.
    In addition, an estimated adjustment amount derived from only a single pair of sales may not be
    valid. However, when there are sufficient market data to apply the technique, paired sales
    analysis is practical and useful.
    46 In addition to quantitative techniques of adjustment, some appraisal texts discuss qualitative techniques.
    Qualitative techniques compare comparable properties with the subject property by ranking them as "superior" or
    "inferior" (or similar terms) to the subject; adjustments not explicitly stated as either lump-sum dollar amounts or
    percentages. The subject property is then placed within the qualitatively ranked array of comparable sales in order to
    estimate its value. Appraisers often refer to this as "bracketing" the subject property. While this may be a widely
    used and valid appraisal technique, it is not in accord with provisions of Rule 4. Also, see footnote 34.
    Chapter 3
    AH 502 47 December 1998
    STATISTICAL ANALYSIS
    Statistical techniques (e.g., linear and multiple regression) can be used in the measurement of
    adjustments. If an adequate database of sales data is available, multiple regression analysis is a
    valid technique for estimating the contributory value of selected elements of comparison that
    does not require the strict similarity between parcels required in most other methods of
    estimating adjustments. Using multiple regression analysis for this purpose involves the same
    methodology as valuation models based on multiple regression. A discussion of this technique is
    beyond the scope of this manual.47
    COST ANALYSIS
    An appraiser can use a cost analysis to estimate adjustment amounts, particularly for physical
    characteristics. Cost indicators such as an estimate of replacement or reproduction cost less
    estimated depreciation, an estimate of cost to cure, an estimate of deferred maintenance, etc., are
    used as the basis for adjustments in cost analysis. Although this method is widely used, its
    shortcoming is that the adjustment is not market derived—that is, estimated cost may or may not
    equal fair market value.
    CAPITALIZATION OF RENT DIFFERENCE
    Differences in rent (either a gain or loss) due to a specific property characteristic may be
    capitalized into an estimate of an adjustment amount. This technique is typically used to make
    adjustments for differences in physical characteristics, although it can be used for any difference
    between properties for which a permanent rent difference can be estimated. Obviously, an
    estimated capitalization rate is also required. For example, the subject property may have an
    elevator while a comparable property does not. Using market rental data, a rent differential for
    the two properties is estimated and capitalized—using direct capitalization—into an estimate of
    the adjustment. Both the rent difference and the capitalization rate should be market supported.
    DISCOUNTING AND TIME VALUE OF MONEY CONCEPTS
    An adjustment for above- or below-market leases (a property rights adjustment) can be estimated
    by discounting the difference between market and contract rent over the remaining term of the
    lease into a present value estimate. This technique requires an estimate of both the difference
    between market and contract rent and an appropriate discount rate. For example, assume that the
    sale price of a comparable property reflects a contract rent that is above market and that the lease
    has a remaining term of five years. A lump-sum adjustment is estimated by discounting the
    difference between contract and market rent at a market-derived discount rate over the five-year
    period.
    An adjustment for non-market financing (a cash equivalent adjustment) can be estimated using
    discounting and time value of money concepts. Essentially, this technique involves discounting
    the periodic payment of the non-market loan into a cash equivalent, present value amount. The
    47 See International Association of Assessing Officers, Property Appraisal and Assessment Administration,
    (Chicago: International Association of Assessing Officers, 1990), 159 and chapter 14.
    Chapter 3
    AH 502 48 December 1998
    payments are discounted at the market interest rate over either the remaining term of the loan or a
    shorter assumed holding period.48
    ADJUSTMENT PROCESSES AND METHODS
    As noted above, adjustments are made to the comparable sales prices to account for differences
    between the comparable properties and the subject property. The final result is a set of adjusted
    comparable sales prices representing estimates of what the comparable properties would have
    sold for had they possessed all of the important characteristics of the subject property. The
    adjusted sales prices thus become value indicators for the subject property. The process by which
    adjustments are made is sometimes referred to as "comparative analysis." This process involves
    several considerations, which include: (1) the direction and sign of adjustments; (2) the sequence
    of adjustments; (3) whether adjustments should be made in lump-sum dollar amounts or
    percentages; and, (4) whether adjustments should be made to the total property sale price or to a
    unit of comparison.
    Direction and Sign of Adjustments
    Adjustments to a comparable sale price are made toward, or relative to, the subject property.
    When a characteristic of a comparable property is inferior to that of the subject property, the
    adjustment to the comparable sale price is positive (i.e., the adjustment amount is added to the
    comparable sale price). When a characteristic of a comparable property is superior to that of the
    subject property, the adjustment to the comparable sale price is negative (i.e., the adjustment
    amount is deducted from the comparable sale price). This procedure applies to both lump-sum
    dollar adjustments and to percentage adjustments.
    Adjustment to Total Sale Price or Unit of Comparison
    Adjustments can be made to a total sale price, an appropriate unit of comparison, or both.
    Sometimes, adjustments are made to the total sale price for property rights conveyed, market
    conditions, cash equivalence, and non-real property items. This adjusted sale price is then
    converted into a unit of comparison (per square foot, per unit, per acre, etc.) that is further
    adjusted for the remaining elements of comparison (i.e., location, use, and physical and economic
    characteristics). Alternatively, all adjustments can be made to the entire property first, then this
    adjusted sale price can be divided by the relevant unit to derive a unit of comparison. The second
    method is more direct and preferable.
    Lump Sum or Percentage Adjustments
    Adjustments can be made as lump-sum dollar amounts or as percentage amounts. A general
    principle regarding adjustments is that they should be applied in the adjustment process based on
    the manner in which they were derived. Since most adjustments are derived in the form of dollar
    amounts (exceptions are the market conditions, i.e., time adjustment and perhaps the location
    adjustment), this leads to a general preference for dollar adjustments. Further, the particular
    48 See Assessors’ Handbook Section 503, Cash Equivalent Analysis.
    Chapter 3
    AH 502 49 December 1998
    sequence is not significant in the case of dollar adjustments, which is not always the case with
    percentage adjustments.
    If multiple percentage adjustments are used, they can sometimes be applied in either an additive
    or multiplicative manner, producing different net adjustment amounts. "Additive" simply means
    that the percentages are added to arrive at a net percentage adjustment. "Multiplicative" means
    that the percentages are multiplied to arrive at a net percentage adjustment. A multiplicative
    adjustment implies that the factors considered in the adjustment process are causally related and
    hence correlated with each other. Multiplicative percentage adjustments should not be used
    unless this correlation can be verified, which is not often the case.
     
  8. 444nutman

    444nutman Senior Member

    4
    Jun 20, 2007
    Professional Status:
    Certified Residential Appraiser
    State:
    Florida
    It varies from property to property. The market dictates adjustments. I may have to do a view adjustment for a pond on one property, but a different property may not warrant an adjustment for the pond.
    There is not any list with a standard adjustment because every neighborhood is not the same as the next one.
     
  9. AnonApprsr

    AnonApprsr Elite Member

    0
    Jan 21, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    Massachusetts
    "Adjustments are based on the perceived market reaction." It's my perception of the market that they are paying for, afterall.
     
  10. Mile High Trout

    Mile High Trout Elite Member

    2
    Feb 13, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    Hi Nate

    I'll take a crack at that question.

    It's all about final net/gross figures, below the adjustment grid.

    As a senior appraiser once told me - "let the grid speak to you".

    The grid is a mathematical analysis which compares several homes together. The reason the grid has itemized lines for adjusting various aspects, is to appropriately separate the issues so adjustments can occur.

    Although the grid does not look like some longwinded math word problem, that's exactly what it is. Home A had X,X,X,X,X, materials. Home B had Y,Y,Y,Y,Y, materials. Home A sold for $Z, home B sold for $Z+m. Why did home B sell for m more? That's what the grid tries to convey.

    The grid breaks down the home into 20 so pieces of consideration, and draws them downward. The subject has the same application on the left side. Then the math starts and adjustments applied. The cumulative or weighted final indicators of sold pricing after adjustments is considered to lead to the value opinion by the appraiser. "The market tells me what a home is worth."

    Ultimately, it's all about matching comps correctly. The application of appraising considers the principal of substitution above most everything else. The readers indication of how appropriate the comparable sale matches were against the subject is indicated by the net/gross adjustment percentages. As it's exceedingly difficult and time consuming to backtrack the appraisers adjustment methodology or processes, the net/gross final adjustment indicators are there to assist the reader in identifying how close or far away the matches were from the subject, in a numerical form.

    If house Subject and house A,B,C, were all built by the same builder and had the same materials, same style, same size, same year built, the net/gross would be mostly uniform. Some material upgrades, condition, or view adjustments might be there which drove the differences in price premiums. But ultimately if the homes are the same, the net/gross is low.

    Regardless of what adjustments were used, the net/gross tells the reader if homes were appropriately similar or not. Should the appraiser be motivated to keep net/gross down regardless of the situation, the appraisal report is not so great. Should the appraiser be willing to honestly and transparently adjust on the grid to indicate appropriate differences, the net/gross reflects that.

    For similar homes, close net/gross is a sign of similarity and a good thing. For dissimilar homes against the subject, a low net/gross is potentially suspect. Offsetting adjustments can lead to a low net, but high gross, and that's acceptable.

    I looked at an appraisal for review last year. 5 comps ranging from X price to Y price. The funny thing was that X priced comp was on the high side compared to the subject, and Y priced comp was just like the subject. But the appraiser found a way to streamline net/gross across the board. That's suspect, because how could X priced comp sell for $30k or whatever more than Y priced comp which was just like the subject, yet X priced comp had the same net/gross indicators. How can that be? If X priced comp demanded that much more price, shouldn't it have had a higher net/gross adjustment to indicate the differences between it and the subject? To put it simply - X & Y comps in this scenario should not have matching net gross, when Y comp is clearly more similar to the subject. Y comp being similar should have narrow net/gross, but X comp should have higher net/gross because it needed that much more adjustment to bring it back to a similar state as the subject in the grid. That's a case of manufacturing value to make subject home appear more like X comp in value, when in the real world, it was clearly more like Y comp in value, and should have been priced more like Y comp.

    To further answer your question: Adjustments are "market derived adjustments". How does one derive appropriate adjustments? By breaking down the problem categorically (downward grid itemization), and then comparing and adjusting. Appraisers are not math geniuses for the most part, and there is no authoritative source for adjustment guidance. The reason adjustments are called market derived, is because the appraiser lets the grid speak to them. The comps are "the market", from which the adjustments are derived. If home A & B sold for the same price, are the same home, but one had a huge lot, and the other did not... The market indicates the additional lot size was not contributing to price. Therefore the adjustment is minimal. If home A & B sold for different prices, and were the same home, with different lots... The market indicates the lot size drove the price, and that lot adjustment is apparently necessary and an appropriate adjustment to apply.

    The reason the approach is so flexible and going this way or that, is because buyers call the shots by their acceptance of features vs price. Buyers are the market as well, and their acceptance of pricing is what spells out value for the subject. If buyers are not willing to pay for view in that area, view does not carry with higher price. But if buyers pay more for view, than that carries and an adjustment is necessary and appropriate. If appraisers apply the view adjustment regardless, they may not be appropriately considering buyer behavior and are a little to mechanical in their appraisal methods. That happens more than people care to admit when appraisers are pressured for time and value issues. Yet another reason to let the appraiser have adequate time to figure it out. It takes call backs, inquiries, analysis, sometimes extensive traditional and non-traditional data research, and leg work to figure that stuff out.

    It's never that easy with just one adjustment though, and appraisers are constantly challenged to decide "what drove the price." Whatever drives the price, can contribute to the subjects current valuation opinion, or detract from it. Depending on weather those features were matching, superior, or inferior to the subject. It takes a lot of time, and the adjustment factors are rarely clearly described. This is because appraisers don't want to be backed into a corner in a legal situation. Adjustments are taken from the market and applied back to the subject. Because markets are varied, oftentimes the market only yeilds a handful of acceptably similar sales to match against the subject. Ultimately this leads to an average of 3-6 comps which are like the subject, from which many derived market adjustments come from. This is in the net/gross. The most similar comp should have the narrowest net/gross. The most dissimilar comp should have a higher net/gross.

    Appraisers who do not take the time to analyze the individual market scenarios and just run with preset adjustments, are not doing it right. That happens though because lenders don't protect the appraisers. Lenders are forcing appraisers to work with amc's and such for steep discounts. This give the appraiser a perplexing and challenging position. To take the time, or just wing it to stay in business. Lenders will get more professional results from appraisers, when they choose to work with professional appraisers. Those are the appraisers who do not cut corners and apply pre typed narrative, but rather take the time to consider the market and the subjects intricately detailed relationship to the market. Time is money and if appraisers have to accept less money, they've got to trade off something, somewhere. It's shocking to see how misguided many appraisers and lenders are on these matters. Sadly, they don't get to work with me, or appraisers like me who know the real deal. The reason: Because I still charge $350 and won't make a concession on price to attain the work. There is no margin there to wiggle with. A professional appraisal analysis takes at least 8-16 hours for each order with a 1 man appraisal shop. Appraisers who churn out 2 or more a day have no choice but to apply preset adjustment and preset narrative. It's the choice between a discount and a non-discount appraiser.

    Have a good one, and please help appraisers in promoting ethical business practices. That means insisting by whatever channels or means necessary that you or your clients work with full fee appraisers, and not discount appraisers. Careful, patient and truly professional appraisers are a dying breed, as lenders seek to monopolize the business and take more control of the bottom line. Unlike other professions, an appraisers professionalism is less related to image, and more related to merits of appropriate data analysis and reporting disclosure. Truly unbiased appraisers are vital to the process because without them, the unbiased consumer protection would not be there.

    So Nate, look at the data. With this approach in mind, you should be able to put your finger on the pulse of the market so to speak. Compare the comps vs subject "from the shoes of a buyer", and judge the appraisal report content with that in mind.

    Have yourself a good one,

    Thanks for swinging by the Appraisers Forum.
     
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