Conditional/quality Adjustments

[sebridges]

It seems that about half the time we use a adjustments on properties with similar conditional/quality ratings that we get kick-back from the AMCs. The claim will be that they simply aren't allowed. I can understand if they wanted further explanation/justification for the adjustment and it would be easy enough to further comment on certain features amongst the properties and the varying economic ages or levels of quality.

How common is it for these types of adjustments or is this an over-analysis that should be avoided?

 

[Terrel L. Shields]

I do a two step sensitivity analysis where I calculate the age/condition adjustment. It is usually in the $1 plus minus $1 range, per year difference per SF. Then I do a SF adjustment sensitivity with the net GLA.

You can use Donald Epley's market extraction method on your comps, to get effective ages and just graph it too. The SF adjustment requires you to parse the property into the GLA, other improvements (garage, pool, site, etc.) and, of course the land value.

I rarely make more adjustments except land and those other items. I do not adjust for fireplaces, tile, granite countertops, etc.

PM me if you need a copy of Epley.

 

[Deleted member 128537]

I do it all the time. If a home is a low Q3 and I have mid range Q3 or high Q3 I will explain the adjustment. For example I am doing a ranch home that is a low Q3. It has many aspects of a Q3, but the roof lines etc are fairly simple (a Q4 look). On the other hand I have a comparable Q3 that is really a high Q3 due to higher vaulted ceilings and more varied roof lines. I will explain it and then make an adjustment. The basis for the adjustment may be market sensitivity, but I may also use a cost analysis and instead of saying “good” I will give it a rating of “good/very good” on the cost book. Then I’ll see the cost difference and adjust accordingly. I live in a rural area so I have to make these kinds of adjustments. Not all Q3’s are created equal.

This is also true for condition adjustments. And FAnnie Mae and Freddie Mac know this. And this is the problem with the rating system. In days past I would state in the grid “good” or “good+”. Can’t do that today. We can’t say Q3.5 vs. Q3.

In more homogenous markets or where one has an abundance of similar sales this may not be necessary. But in rural markets where comparables are limited you MUST be willing to make quality and condition adjustments even though they are rated the same Q or C.

This is my biggest gripe with ratings that are so hard and fast. It’s also why I really like not doing UAD appraisals when I have more freedom to grid comparable sales with more creativity.

I struggle daily with the ratings, because I know I have to live with the rating for a long time. I have often regretted the rating I’ve given it. This is especially true where homes are hard to classify. I call them the in-betweeners. Do I rate a home high Q3 or low Q2? Sometimes not so easy to know.

 

[Dublin ohio]

IMHO. The best way to avoid kickback is to make a separate line item entry (superior updates, inferior updates, superior upgrades, inferior upgrades) with sufficient commentary included. Have never been questioned. Too many AMC "reviewers" cannot understand that although the ratings are supposed to be absolute. There are levels of upgrades and updates in most markets that fall somewhere in between the "absolutes".

 

[Michigan CG]

It seems that about half the time we use a adjustments on properties with similar conditional/quality ratings that we get kick-back from the AMCs. The claim will be that they simply aren't allowed...............

How common is it for these types of adjustments or is this an over-analysis that should be avoided?

You have one of two problems or both.

Either you are working for idiots or you are not explaining enough.

It is perfectly acceptable to make condition adjustments for a C3 property vs a C3 property which is clearly spelled out. If you have clients (AMCs) that are telling you it is unacceptable then they are idiots. If you are not supporting and explaining the adjustments clearly then you need to improve your reporting.

I have NEVER been questioned on this, EVER. I comment on or explain all adjustments.

 

[sebridges]

I do it all the time. If a home is a low Q3 and I have mid range Q3 or high Q3 I will explain the adjustment. For example I am doing a ranch home that is a low Q3. It has many aspects of a Q3, but the roof lines etc are fairly simple (a Q4 look). On the other hand I have a comparable Q3 that is really a high Q3 due to higher vaulted ceilings and more varied roof lines. I will explain it and then make an adjustment. The basis for the adjustment may be market sensitivity, but I may also use a cost analysis and instead of saying “good” I will give it a rating of “good/very good” on the cost book. Then I’ll see the cost difference and adjust accordingly. I live in a rural area so I have to make these kinds of adjustments. Not all Q3’s are created equal.

This is also true for condition adjustments. And FAnnie Mae and Freddie Mac know this. And this is the problem with the rating system. In days past I would state in the grid “good” or “good+”. Can’t do that today. We can’t say Q3.5 vs. Q3.

In more homogenous markets or where one has an abundance of similar sales this may not be necessary. But in rural markets where comparables are limited you MUST be willing to make quality and condition adjustments even though they are rated the same Q or C.

This is my biggest gripe with ratings that are so hard and fast. It’s also why I really like not doing UAD appraisals when I have more freedom to grid comparable sales with more creativity.

I struggle daily with the ratings, because I know I have to live with the rating for a long time. I have often regretted the rating I’ve given it. This is especially true where homes are hard to classify. I call them the in-betweeners. Do I rate a home high Q3 or low Q2? Sometimes not so easy to know.

Yes, so far with rural market appraisals, I've learned bracketing a key feature like $50-$100k in outbuildings a lot of times results in significant adjustments to the home improvement.

 

[J Grant]

Yes, so far with rural market appraisals, I've learned bracketing a key feature like $50-$100k in outbuildings a lot of times results in significant adjustments to the home improvement.

An out building should have its own separate line item adjustment . It is not part of the home itself, though it is part of the property ( and normally contributes value to the whole) .

 

[sebridges]

An out building should have its own separate line item adjustment . It is not part of the home itself, though it is part of the property ( and normally contributes value to the whole) .

Right, but in bracketing the outbuildings that has its own line, you are left reconciling the values of the homes on each property that are often very dissimilar.

 

[J Grant]

Right, but in bracketing the outbuildings that has its own line, you are left reconciling the values of the homes on each property that are often very dissimilar.

Each has to be handled for what it is...outbuildings are one adjustment, then any dis similarities between homes ( condition or quality ) adjusted for . After appraiser applies the series of adjustments, ideally, the adjusted range is tighter than the original price range. .

I like to make an upgrade or remodeling adjustment as a separate line item for homes with same condition but a difference in upgrades. Two homes can be overall C3, but one has higher quality upgrades or more extensive upgrades, so I make a separate line item adjustment for the upgrades.

Q ratings, a home is or is not a certain quality- it is intrinsic to the architecture not sure why that would be adjusted ...there is another line for design/( style ) where you can adjust between homes of equivalent quality...if you see one style is commanding more value than another in the market ( reflected in prices, confirmed by interview with agents etc)

 

[Deleted member 128537]

I don't make separate line adjustments for condition and quality. Some do, but I find an explanation (which you have to do anyway) is sufficient. Also I often need the grid space. I do lots of shoreline homes and most of my clients want a separate line for the shoreline frontage. Then by the time I get other amenities in there like ADU's, pools, fireplaces, outbuilding, etc. it gets a bit full. The advantage of a separate line adjustment is that when you save the comparable it's saved in the grid. So it's a personal decision based upon your market. I know I have a friend that makes effective age adjustments on a separate line. Again, no one right way to do it. I see pros and cons either way.

But I never include the outbuilding in the condition of the property or the quality of the property. That's a separate item. Then one has to decide how a higher quality outbuilding is going to affect the value compared to a lessor quality outbuilding. I always say, "Good luck with that!" It's very difficult to discern that because there isn't enough data. And I find that most of the time one is tempted to make too large of adjustment for outbuildings. For example I am putting up a 18x36 outbuilding for my RV. I already have a 3 car garage. I know I'm not going to get the cost back in resale. I might get 50% at best. But I knew that going into it. But I want the convenience and the protection for my Airstream which is expensive. The fact is not many buyers will want my house, with my floor plan, on my lot, with an RV garage. So I'd be very careful in adjusting outbuildings. I just did a house with a 6600sf outbuilding. It was incredible. But I made no adjustment from that building to a 50x60. Who the heck needs a 6600sf outbuilding?

I seldom make design adjustments unless it's pretty clear. For example I know that log homes (of a certain quality) tend to bring more money in my market due to it being a recreational second home market. And it's really evident when one starts to grid them. On other's it's not so clear. At that point I deal with it in the reconciliation.