Must appraisal GLA be based on city records GLA?

[KD247]

... The answer is (should be, if the appraisal were done correctly) no. You would start with comps of similar size (~2,150 sq-ft), and make adjustments from there. ...

Gavin, Is GLA really the most important value determinant in your area? Are there really so many sales in your area that the appraiser had several listings and sales that were exactly the same as your property in every way except for GLA diferences? I'd suspect not.

Remember, your house is worth what someone would pay for it, so we should be concentrating on how buyers think, not some statistically derived price per floor tile.
Just a wild-*** guess but I'd figure that you live in the type of neighborhood where buyers view properties as a complete package with significant consideration for intangibles like aesthetics and "feel". Standard appraisal methodology teaches us to think in terms of 1.5 oak trees with swings exactly equal 2.4 wooden porches, but (I'm obviously generalizing because I don't know your neighborhood) buyers don't think like that.

Buyers in a neighborhood like yours don't expect to find the exact house that they are looking for. They are prepared to compromise in their purchase and then make alterations after the sale closes. They're prepared to be dismayed by funky room additions or be delighted by an unexpected view but they're not going to be thinking in terms of component-based pricing. They're going to be thinking of the house as a package deal comprised of trade-offs and benefits.

So, the comparable sales and competing listings you should be examining most closely would include those that the typical buyer in your area would consider to be of generally similar desirability to your home, not just the ones of similar size. All GLA is not created equal and the GLA can often be altered. The best comparables will have similar "feeling" living area, not just similar total GLA. Your basement area is likely to be far less desirable than a large living room with picture windows overlooking a garden. But it is also likely to be far more desirable than a partially finished attic.

If I were reviewing your appraisal, the first thing I'd do (after getting a good feel for your property) would be to go house hunting. My goal would be to find the least expensive, currently available house that I would like just as much as your house. (Of course, this isn't through my eyes. It's done through the eyes of a typical buyer.) The asking price of that house (or the adjusted asking prices of several listings) is going to give me a rough idea of your home's upper limit of value. Next, I'd find the most recent and proximate sale(s) of a home(s) that was just slightly inferior to yours in every respect. That price gives me a rough idea of my lower limit of value for your property as well as a general idea of what sort of range we're dealing with.

Then it's off to the races, considering tens (if not hundreds) of other sales and listings, refining my ideas and testing my assumptions. Along the way I'd consider the permit status of your basement both in light of it's effect on market reaction to your property and in light of the lender's (my client's) requirements and best interests. I might conclude that the lack of permits is an insignificant factor in your market or I might conclude that the lack of permits makes your house almost impossible to sell but I'm not going to come to that conclusion by sitting behind a computer while looking at a table of numbers.

Only after I analyzed the most pertinent data and decided on the most reasonable and well-supported opinion of value, only then would I start worrying about expressing my findings in a report that includes the requisites of at least three recent closed sales with the most similar physical attributes. Only then would I begin to note the differences in GLA and how to derive consistent adjustments for the sales I used. Some appraisers are in the habit of letting the form dictate their methodology and it often results in a poor job of analyzing the market as well as presenting (to non-appraisers) a misleading picture of the nature of market value.

The only "rules" are general appraisal standards and laws, FNMA's guidelines, and specific client instructions that are a part of the appraisal services agreement.

 

[gavin]

... If the data has been adequately explained within the summary report or emphasized post fact through an addendum then that is all he can do and it is up to the client to determine if the issue needs to continue to be addressed and if not, up to the borrower if they want to press forward on the basis that this aspect of the analysis is not credible...

There is absolutely no data or discussion in the appraisal of the valuation of $30 for umpermitted living area.
KD247 describes the approach a buyer might use, looking at recent similar sales and currently for sale homes.
Using Trulia (it's all I've got), 94107, sold, >1,000 sq-ft, 9 months back (exclude 24th st, 25th st - diff neighborhood) there are only 16 sales. I used 9 months instead of 6 to include the data that was relevant when this appraisal was done in July 2012.
I think KD247's approach would make a buyer think they are going to pay a lot (my house is 3/2, 2,150; info below is sale price & sq-ft, listed low to high):
$715k, 1,030; $715k, 1,215; $730k, 1,045; $860k, 1,150;
$870k, 1,265; $890k, 1,726; $890k, 1,025; $915k, 1,302;
$1,100k, 1,212; $1,275k, 1,330; $1,500k, 2,350; $1,555k, 2,130;
$1,730k, 1,440; $1,865k, 1,962; $1,900k, 2,720; $2,700k, 2,940;

Now, that the buyer has that research done, they look at homes for sale (again Trulia, 94107, SFH, no foreclosure), and there are only 12 (sorted low to high):
$859k, 1,250; $899k, 1,334; $1,150k, 1,488; $1,195k, 1,872;
$1,199k, 1,934; $1,495k, unk; $1,749k, unk; $1,928k, unk;
$2,100k, 3,192; $3,450k, unk

KD247 asked "is GLA really the most important value determinant?" I'm not sure "most," but the data indicates a strong correlation between size & price in my neighborhood. And it's a good starting point for comparison.

I understand this is simplistic, but the data does tell a story. Does anyone think a 3/2 2,150 of good quality would command only $758k? Again, the appraisal does not state any negatives about the property ("fixer," etc.) in determining valuation.

If Dan is going to make a valuation of the property that is so out of line with everything else, it must be substantiated with something more compelling than "no permits."

I strongly believe his appraiser did a very poor job, he didn't know how to address the permit issue, so he basically ignored the area. Then he selected as his main comperable a house of 1,045 sq-ft, crediting $49,000 for the difference in size between the properties. Another serious deficiency.

And now Dan speaks of multiple data analysis w/ R2 > 95% etc., etc., to imply his valuation is sound. That data just doesn't exist.

I repeat my previous question: if the work were permitted, would the "most probable price" still be $758,000?
The most probable price for this property > $1,200,000.

 

[CANative]

Many out of area appraisers do not understand SF and how valuable land is and how small lot sizes area. If someone can wedge an extra couple of square feet into livable area it's more valuable than gold. $30/sf for finished area is just nonsense.

 

[KD247]

Many out of area appraisers do not understand SF and how valuable land is and how small lot sizes area. If someone can wedge an extra couple of square feet into livable area it's more valuable than gold. ...

Not always true. I live in a beach-oriented neighborhood with very small lots and strict size limits. The "smartest" builders always maximize the size of the house because if something's limited, it must be valuable, right? Oftentimes they're wrong and the "even smarter" builder who builds what the market wants (homes that are properly planned with noteworthy character) is the one who's going to have shorter marketing times and higher net profits.

It's complicated. And for many hours, it takes hours and hours with buyers and agents before an appraiser can begin to understand what really affects market reaction to a property. That's why we see so many out-of-town appraisers spending all their time trying to solve problems that don't matter.

Gavin, take your listings and rank them. What's the least expensive currently available property that would represent a reasonable alternative for your home? Don't be afraid to look in other neighborhoods that a buyer might consider. And try to catch yourself when you find that you're thinking, "I just love my kitchen, it's the only one like it in the world."

 

[Dan Tosh]

I will make one more comment on this for the esteemed panel of experts and then I am finished arguing. The OP leaves out the fact that we did use sales with unpermitted GLA. He is focusing on the ones without. The contribution based upon market research and interviews, indicated a willingness to pay something for this area and it was considered in the analysis. The qualified buyer was most interested in the parking, schools, access and neighborhood composition and of course size. There is a simple solve, offered to the OP, get the code enforcement inspector out to let us know the area is completed without violations and that it meets health and safety standards. We will then re-analyze the subject property at no cost. I can even call one of my friends at the county, if the OP would like and have the inspector contact the OP for an appointment. Everything then becomes "moot" since we will being looking at larger homes. Unpermitted GLA is not the problem here (health and safety is) and the appraiser is not an expert in the code requirements. If there is faulty wiring, if plumbing is too close to the electrical outlets or anything else and a fire is caused by this unpermitted area, someone could lose their life. I am NOT going to be responsible for that. With regard to regression analysis (regression means to go back in time) you can have a linear regression (on a single line) or multiple regression (several differences) that cause an affect on the dependant variable. Everytime we do an appraiser we look to history, we certainly don't try to pull out our crystal ball. The "opinion" of value is sound and sales of similar size homes were implemented. There were sales that had reported unpermitted GLA and the realtors were interviewed. The motivating factors were important in determining an "opinion" of market value. Appraisers on this forum can't speak to value, since that would be considered a "Standard 3" review and they'd need a workfile. Appraisers never want to go out half-cocked and rush to judgement. Thank you all for your input.

 

[gavin]

Dan,
May I view the data you discovered about the unpermitted, high-quality GLA?
May I get the details about the multiple realtors you interviewed about unpermitted GLA?
The one realtor I interviewed thought there would be no reaction to the permit issue, estimated value $1,150,000 - $1,300,000 (the realtor of course has a conflict, but unlikely to a degree this significant).

Everyone else: is an appraiser responsible for any of the concerns Dan mentioned above (faulty wiring, substandard construction)? That strikes me as odd. Doesn't the phrase "Additions done without benefit of permit" put the onus on the one reading the appraisal to decide how to proceed? Couldn't a statement such as "Appraiser cannot attest to construction quality" remove any implied warranty offered by the appraisal?

I don't believe any research was done, I don't believe any interviews were done, and I don't think any analysis of unpermitted, high-quality additions was done.

I'm convinced your appraiser did a crappy job. I understand it would be difficult in a "public" forum such as this to see that. Reasons:
1: General consensus of the forum that living area is living area, regardless of city records.
2: Market reaction to the lack of permit and quality of construction is the critical detail to be considered.
3: Assigning $30/sq-ft to an entire finished floor of a house, in my market, cannot be substantiated (merely $29,000, where homes sell $700,000 - $1,500,000 in this general category).
4: Selecting a "Fire damaged, bring your contractor"-property for one of 3 "sold" comps is questionable, to say the least.
5: Selecting a property which is composed of small main house & guest cottage as another "sold" comp is questionable, as the applicability of that sale is questionable.
6: Selecting for the primary comp a house whose size is 50% of the subject property size, and correcting for this with $49,000 (7% of sale price of the small house).
7: Real Estate agent who had just sold a ~$1,700,000 property in the neighborhood estimates value at $1,150,000 - $1,300,000 (agreed, there can be some bias in the estimation).
8: Quick sanity check yields all sales $500 - > $750 / sq-ft (this valuation is $350, which hasn't been seen around here for a long time).
9: Quick sanity check of "for sale" homes yields average of $674/sq-ft; min, max of $620, $772. The $620 was for "large" house (1,934, indicating price does not precipitously drop with larger homes ); house of 3,192 sq-ft is listed at $658/sq-ft.

I ask the forum: if not evident in this particular case, what would a faulty appraisal actually look like?

I will let you all know if Dan provides the (alleged) data behind his valuation.

Thanks to everyone who contributed to this discussion. I feel quite confident that this appraisal is an outlier. I have already initiated another refinance, quite confident that the odds of getting another faulty appraisal are quite slim.
Gavin

 

[KD247]

Dan, It sounds like you (or your appraiser) did the job in a reasonable manner. I would differ only on a portion of the methodology. I'm not saying that your analysis is wrong, just that it might be approached differently.

Regression analysis requires the assumption that value is created by the additive contribution of a limited number of components. For complex properties, I don't agree with that assumption. I believe that value is determined mostly by the hypothetical buyer's willingness to decide to purchase the subject property instead of an alternative property. In a neighborhood with varying property types, the availability of alternative properties is usually the most important determinant of value.

Even if the appraiser assumes that they can isolate each of the components (characteristics) that influences value (a questionable assumption), the market reaction to the combination of components is more relevant to an opinion of value. Summing the quantified market reaction to individual components is likely to lead to unreasonable results. Isolating the permit status as a property characteristic may work in some neighborhoods but, in my experience, market reaction to permit status varies significantly from area to area and I've been in many different markets where permit status has absolutely no significant effect on market reaction.

I realize that the form requires us to present our analysis as if we were making the assumption that every property can be separated into individual components and that the adjustment for each component can be individually supported, but in many cases that's not a valid assumption. My technique in cases like this is to develop an opinion of value for the property "in toto" and then reverse engineer the analysis to comply with the form. In this type of case, the methodology built into the form becomes more of a test of reasonableness than a calculation of value.

The handling of a characteristic like permit status is made simpler if the appraisal job is divided into two distinct duties, first to form an opinion of market reaction to the property and second, to fulfill the client's reporting requirements. In my opinion, the most reasonable way to handle health/safety concerns is to report them clearly and accurately to the client, not to adjust the value opinion to a greater degree than a typical knowledgeable buyer would. In other words, if buyers don't consider a health/safety issue to be significant, the minimal market reaction should be reflected in the adjustments. The appraiser should control their liability by either declining the assignment or by copiously reporting the concern, not by making undue adjustments to market value.

(I'm writing this, not to second-guess your report but more as an exercise in examining my own methodology and hopefully helping less experienced appraisers see that the form shouldn't dictate practice. As you've rightfully pointed out, I know nothing about the subject property or the neighborhood and have only seen your report through the eyes of a dissatisfied homeowner. I appreciate and respect your staying involved in the conversation. Thank you.)

 

[Mike Kennedy]

The question of the prior sale of the subject is interesting. Despite a readily observable discrepancy between public records and what was on site, it seems that the last appraiser pressed forward without distinguishing permitted GLA vs non permitted area in the development of the opinion of value, and presumably indicated "legal" under zoning compliance. Perhaps that report, rather than the current one, is the report that resulted in a vast distortion in terms of value for the property in question. Losing a refi and a few hundred bucks is one thing. Overpaying hundreds of thousands of dollars or getting stuck with tens of thousands of dollars in repairs to obtain permits due to an appraisal that was done in ignorance or was done with the "wink, wink" suggested is the far greater burden to bear here.

Excellent observation.

 

[CANative]

Just out of curiosity, which neighborhood is this? Inner Richmond; Sunset?

If the additions look okay it's probably okay to assume their okay and at most condition the appraisal on obtaining permits or inspections. There are just too many ways to interpret "unpermitted" addition. Does it mean it's a legal, permitted use and someone didn't get the permits or does it mean the use in not a permitted use and therefore an illegal use.

I don't think it's proper to just decide on some lower value when the appraiser doesn't really know.

And SF can't be compared to other high dollar houses where a builder has an option to build big or small. There are almost no houses newer than 75 or 80 years in this area and almost all residential areas were fully built out for 100 years.

 

[KD247]

...Perhaps that report, rather than the current one, is the report that resulted in a vast distortion in terms of value for the property in question. ...

Very possible, but I really dislike the idea of buyers relying on the appraiser to confirm that their purchase price is reasonable. To maintain the integrity of the appraiser/client relationship and to keep appraisers from setting market value, it almost seems like it would be preferable to have a policy that kept the appraiser's conclusions confidential until after the close of escrow. Around here, the appraisal is becoming a vital part of negotiations, to the point that some buyers are only halfway committed to their offer, knowing that the appraiser will be the entity that actually sets the price.

Putting the appraiser into the role of property inspector, zoning compliance coordinator, and price approval officer just seems wrong to me. The appraiser's duty should be only towards the lender. Buyers and sellers should rely upon their own experts for their decisions.

In a perfect world, the prior sales price would be a valuable example of market reaction to the subject property. Unfortunately, in the real world, you're right. The previous sales price could have been influenced by the appraiser, either above or below market depending on the appraiser's opinion.