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Old 09-19-2007, 08:39 AM
Doug Wegener Doug Wegener is offline
 
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Default Time adjustment

There are different methods for calculation time adjustments.

What method do you use? Why do you feel it is the best?
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Old 09-19-2007, 10:10 AM
Mike Garrett, RAA's Avatar
Mike Garrett, RAA Mike Garrett, RAA is offline
 
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I used both negative and positive time adjustments back in the 80s. My data still indicates most areas IN MY MARKET are flat rather than declining; however, it appears we well may be crossing the line soon. Here is how I would handle it...

First, be cautious of using general data such as that provided by MLS, title companies, and media as it pertains to an entire community. I base my adjustment on location, ie., subdivision or neighborhood and try to make it specific to price range.

Second, establish a trend by comparing several quarters to determine an adjustment. I try to avoid comparing just one period to another. Six quarters is what some ERC companies have been asking for and it fairly easy to do on our MLS.

Third, once I have compared the data and have a general indication of the trend, I come up with a monthly adjustment. As an example...

If the median price for the first quarter of 2007 was, say, $260,000 and for the second quarter was 250,000 then there was a $10,000 decline or 4%. I then compare third quarter to the second quarter. Lets say the median price was $255,000 (summer season, more sales). Now I have a positive number but the over-all is still down 2%. Now comes the fourth quarter (winter months, less sales) and have a median sales price of, say, $245,000. Once I have worked all of the data, I find that my over-all decline is, say, 4%...I divide that by 12 and come up with a monthly adjustment of 1/3rd of one percent per month.

The same would be for true for positive adjustments. Even when our market was appreciating at 8% per year I preferred to not do time adjustments but rather use very current sales dates as most underwriters hate to see "positive" time adjustments. If I do use a time adjustment, I prefer to include my MLS stat sheets for the comparisons as proof of my adjustment.

Many underwriters say..."show us a property that has sold twice in the last year as proof of a time adjustment". That is faulty logic. Any property that sells twice in year has something funny about it and is not usually a "typical" or "arms length" transaction, AT LEAST IN MY MARKET. The most common reasons are...loss of job or job transfer, divorce, or a flip. I am very reluctant to base my projections on a single sale. Typically, my data would include 50 to 100 properties over a one year period of time.

Just for the record, based on a comparison of the first 8 months of 2007 and the first 8 months of 2006 shows our market to still be appreciating...but now less than 2% annually. I call this flat or stable; however, the trend is worrisome with inventories expanding in nearly all price ranges. Days on the market are increasing and the number of sales declining. Building permits are off for 2007 and foreclosures have increased dramatically. Can you say...declining market? Just remember, when reporting your appraisal on a Fannie Mae form, the question asked is...."are property values declining?" So far, I can't prove that. I like to use the term..."cautious optimism" when describing how I feel about MY MARKET.
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Last edited by Mike Garrett, RAA : 09-19-2007 at 10:13 AM.
  #3  
Old 09-19-2007, 10:39 AM
Denis DeSaix Denis DeSaix is online now
 
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For what it is worth, I'm making two types of market adjustments to do with "time" right now:

What everyone would consider the typical market-time adjustments; either appreciation or depreciation trended over time.

I'm also making what I call a "market condition" adjustment due to the current volatility in the market and lack of readily available financing for many buyers (per my conversations with agents and loan brokers; many deals in my market are "falling out" because financing that was assumed to be in place is no longer there).

I consider this a distinction with a difference, although both types of adjustments can be considered to be based on "time" or can be considered to be based on "market conditions". My opinion is that the reader can understand an adjustment I make based on tracking sales trends (that's one analysis), and then can understand a market condition adjustment I make based on the immediate market environment (which has not had "time" to show up in a trend analysis of significance).
Without analyzing the two dynamics separately and explaining what my rationale is in my report, I'm either missing the boat on my value, or not providing adequate information to the reader to understand how I arrived at the value I did.

I did not answer your specific question because it depends on your specific market. You can do trend analyses, paired sales analyses, or market-participant survey. I always include a trend analysis in my reports, and I am also finding more paired sales of a relatively short time (less than six-months) to use. And, in this market environment, I make contact with at least two agents to see what is happening in the active market.

Good luck.
  #4  
Old 09-19-2007, 10:43 AM
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Mike Garrett, RAA Mike Garrett, RAA is offline
 
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It helps to be both an appraiser and a real estate broker...LOL.
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  #5  
Old 09-19-2007, 11:34 AM
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Scott Lanz Scott Lanz is offline
 
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Quote:
Originally Posted by Denis DeSaix View Post
I consider this a distinction with a difference, although both types of adjustments can be considered to be based on "time" or can be considered to be based on "market conditions".
Market condition adjustments are just that. Time is not the cause of the adjustment, just the measurement of the adjustment. Market conditions that shift over time require an adjustment, not time itself.

I understand our vernacular has adopted "time" adjustments to be synonymous with "market condition" adjustments. I think using them interchangeably causes confusion.

I noticed you put those terms in quotes

How are you measuring this second adjustment for market conditions?

Doug,

The methods Dennis put forward are the same I would recommend.

Scott J. Lanz
  #6  
Old 09-19-2007, 12:03 PM
Denis DeSaix Denis DeSaix is online now
 
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Quote:
Originally Posted by Scott Lanz View Post
How are you measuring this second adjustment for market conditions?
By speaking to the market participants; the agents.
In my market, inventories are headed up as are DOM. Median $/SF is going down as are most of the median sale price trends themselves. The "arrow" of momentum is pointing down.

There has been a significant gap in regard to sales volume in closed sales from July to present. When I speak to the agents, I get similar feedback:
Buyers who tried to make an offer close to the listing price lost their financing; when they came back with a lower offer, the seller refused, holding out for more from the next guy. Unfortunately, the next guy offered lower. Those with secure financing (usually a 20% downpayment and good credit score) know they are sitting in the driver's seat and are making firm, but low offers. The offers we are getting now are 3-5% below the list.

IMO, this is powerful evidence of the current state of affairs.
The interesting question (in my mind) is one I do not have the technical prowess to analyze: At what point does this dynamic affect the market such that a generalized conclusion (adjustment) can be extracted that is reliable?

I've read some on the forum say they exclude short-sales and foreclosures from consideration because those sales are not examples of typical seller motivation. I wonder at what point does this argument lose its persuasion? All sellers (presumably) want to sell, and all sellers (presumably) want to sell for as much as they can get, be they private-party or institutions. Yes, an institution has a different set of circumstances that may induce it to quick-sell the property. But I've seen foreclosures on the market longer than non-foreclosure properties that are priced similar, so it doesn't appear that all REO pricing strategies match what one would assume (unload quick).

How many low listings/sales does it take to lead the market down? 5%? 10%? When there are few buyers participating, it probably doesn't take that many. Someone out there is probably smart enough to study this and come up with an answer; it is beyond my ability.

So, that's how I measure the current market condition adjustment. In my opinion, there is enough consistency in experiences among the market participants to point to the same thing that makes this a credible conclusion.

Lastly, I've heard some argue that if sellers aren't selling any lower, then that establishes the floor-price. I don't understand this logic? A particular seller may hold out for a particular price; but the market value of the house (as we define it) is independent of that particular seller's motivations. If the buyers are willing to purchase it for 5% less than what it is listed for, then that represents the most a "typical seller" could receive for the house (all other things being equal); ergo, market value is established.

My 2-cents for the day!

Last edited by Denis DeSaix : 09-19-2007 at 12:07 PM. Reason: grammar & clarity
  #7  
Old 09-19-2007, 12:13 PM
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Scott Lanz Scott Lanz is offline
 
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Interesting,

Thanks Denis,

Scott J. Lanz
  #8  
Old 09-19-2007, 02:04 PM
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Vegan702 Vegan702 is offline
 
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Quote:
Originally Posted by Scott Lanz View Post
Market condition adjustments are just that. Time is not the cause of the adjustment, just the measurement of the adjustment. Market conditions that shift over time require an adjustment, not time itself.

I understand our vernacular has adopted "time" adjustments to be synonymous with "market condition" adjustments. I think using them interchangeably causes confusion.

I noticed you put those terms in quotes

How are you measuring this second adjustment for market conditions?

Doug,

The methods Dennis put forward are the same I would recommend.

Scott J. Lanz
You are the first person (now Dennis also) on the forum that I have noticed to use the term market condition vs time adjustment. I use market condition as that is how I was taught. Not that anything on this forum surprises me anymore, but it's interesting to note the number of people who use the wrong wording, I believe we had this discussion last week regarding adjustments. What is even more surprising is when board members use the same time adjustment wording instead of the correct wording. It makes you think twice about who is getting elected to the state boards.
  #9  
Old 09-19-2007, 02:11 PM
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Quote:
Originally Posted by Doug Wegener View Post
There are different methods for calculation time adjustments.

What method do you use? Why do you feel it is the best?
Great question Doug! I was driving back from an appt. yesterday thinking the same thing. I seem to have a lot more time driving to and from appts. lately to ponder things regarding appraising, and this was one of them. I remember 2-3 years ago when Vegas was really hot with no supply and multiple bids on homes doing appraisals. I was only an intern at the time, but I don't remember ever doing a positive market condition adjustment. I always often wondered why. We were lucky in that we always had 1-2 sales that usually closed within the last 2 weeks, but there were still 2 weeks to account for since it closed and the 3rd sale that may have sold a month ago. This was in the time that homes were appreciating $10K+ every month, so there were definitely some adjustments left on the table for market conditions.
  #10  
Old 09-20-2007, 08:37 AM
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David Dietz David Dietz is offline
 
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Quote:
Originally Posted by Denis DeSaix View Post
I've read some on the forum say they exclude short-sales and foreclosures from consideration because those sales are not examples of typical seller motivation. I wonder at what point does this argument lose its persuasion? All sellers (presumably) want to sell, and all sellers (presumably) want to sell for as much as they can get, be they private-party or institutions. Yes, an institution has a different set of circumstances that may induce it to quick-sell the property. But I've seen foreclosures on the market longer than non-foreclosure properties that are priced similar, so it doesn't appear that all REO pricing strategies match what one would assume (unload quick).
I leave short sales and foreclosures in and feel they should be included in my market. The over whelming majority of foreclosures and short sales are newer homes and homes never lived in due to the over supply. These definitely have an impact on value. The typical buyer would definitely buy a foreclosure here.


Lastly, I've heard some argue that if sellers aren't selling any lower, then that establishes the floor-price. I don't understand this logic? A particular seller may hold out for a particular price; but the market value of the house (as we define it) is independent of that particular seller's motivations. If the buyers are willing to purchase it for 5% less than what it is listed for, then that represents the most a "typical seller" could receive for the house (all other things being equal); ergo, market value is established.
My 2-cents for the day![/quote]

The other part of this I believe if a seller holds out is he exceeding the typical marketing time. Most do not understand the opinion of value should reflect a sale price with a typical marketing time. Again in my market most homes are exposed to the market for a year or more but when they come into reality and lower the price 100k-200k the home sells within 3-6 months which is the marketing time not the 300-400 days prior. Now sales have dropped off completely in many market area around me which is especially difficult in supporting declining market adjustments. I find myself turning to the listings and the principle of substitution to assist in the formulation of a time adjustment. (I'm not to sure if formulation is a real word but I like it).

I think the most important part of time adjustments is to insure the appraiser researchers the market and finds support the the adjustment themselves. I do not believe using zillow, raw MLS reports, NAR reports and news paper reported declines is even close to property figuring and adjustment for a specific market or home.
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