Conditional/quality Adjustments

[BRCJR]

We are to mimic typical market participants the best we can, plain and simple.

Most typical residential market participants have never heard of regression analysis.

This house is bigger, this house is newer, this house is dated, this house is close to X. etc., etc. That is how most make a purchase decision.

Also, if you cannot explain regression analysis, if you indicate you used such, you may be in trouble if ever asked to explain the correlation to the adjustment(s) presented.

I like the premise of RA but, it has extremely limited use in the typical residential appraisal development.

 

[J Grant]

Buyers don't spend hundreds of thousands of dollars to buy a "data point".

My coverage area is diverse- I might do a waterfront high value luxury home, a starter FHA home and 5 acre equestrian home in one week. The price point and type of subject doesn't change how I approach an assignment because the appraisal principles are the same. The theory in SCA is a buyer would buy the most similar substitute for the subject and that is how we choose our comps. Ideally, we can find same/similar quality or condition comps but that is not always possible. Adjustments between differences are extracted from what the market and that thus provides credible support.

An appraisal recreates,what a typically motivated buyer and seller for subject property would do, ( and thus considers what typical buyers and sellers for similar properties did), The SOW filters their actions through the analysis of the appraiser and the definition of market value used.

 

[Artemis Fowl]

Probly make a AMC/lender's head explode but for different use with a prepared explanation ready IMO it holds water. Not sure I'd go in with that as my only methodology but would add credibility to more common ones. Depends on the client/use.

 

[Terrel L. Shields]

Buyers don't spend hundreds of thousands of dollars to buy a "data point".

No, but they are not random in their selection because sellers reflect pricing based on comparison with other sales...so they have a general idea of what the COST is to remodel a bathroom or kitchen, they have an idea of the relationship between rent and payments. The buyer probably has a very good relative feel for the core of what a house consists of and what features are important to them. Since these natural feedback loops exist and buyers are not making random offers, nor sellers pricing randomly, sales data will tend to fall along a consistent path and the same items over and over will produce consistent similar results. No, a regression isn't going to isolate a value for a gold-plated fireplace, but it likely will isolate a typical contribution for the number of bedrooms, size, age-condition, etc.

 

[RCA]

We are to mimic typical market participants the best we can, plain and simple.

That is exactly what regression does: mimic. Of course it does this superficially - at the surface; like an actor mimicking a character. And, actors can be very good.

It's a question of being smart and clever. Kind of like the story of how Eratosthenes measured, fairly accurately the circumference of the earth, told by Douglas Hubbard in his book "How to Measure Anything".

Eratosthenes measured the circumference of the earth to within 3% accuracy around 200 B.C., without even leaving the library in Alexandria, - 1700 hundred years before Columbus made his estimate that was 25% short. In fact, nobody came close until the late eighteenth century.

"How an Ancient Greek Measured the Size of Earth "

"Our first mentor of measurement did something that was probably thought by many in his day to be impossible. An ancient Greek named Eratosthenes (ca. 276-194 B.C.) made the first recorded measurement of the circumference of Earth. If he sounds familiar, it might be because he is mentioned in many high school trigonometry and geometry textbooks. Eratosthenes didn’t use accurate survey equipment, and he certainly didn’t have lasers and satellites. He didn’t even embark on a risky and probably lifelong attempt at circumnavigating Earth. Instead, while in the Library of Alexandria, he read that a certain deep well in Syene, a city in southern Egypt, would have its bottom entirely lit by the noon sun one day a year. This meant the sun must be directly overhead at that point in time. But he also observed that at the same time, vertical objects in Alexandria (almost straight north of Syene) cast a shadow. This meant Alexandria received sunlight at a slightly different angle at the same time. Eratosthenes recognized that he could use this information to assess the curvature of Earth. He observed that the shadows in Alexandria at noon at that time of year made an angle that was equal to an arc of one-fiftieth of a circle. Therefore, if the distance between Syene and Alexandria was one-fiftieth of an arc, the circumference of Earth must be 50 times that distance. Modern attempts to replicate Eratosthenes’s calculations vary by exactly how much the angles were, conversions from ancient units of measure, and the exact distances between the ancient cities, but typical results put his answer within 3% of the actual value.1 Eratosthenes’s calculation was a huge improvement over previous knowledge, and his error was less than the error modern scientists had just a few decades ago for the size and age of the universe. Even 1,700 years later, Columbus was apparently unaware of or ignored Eratosthenes’s result; his estimate was fully 25% short. (This is one of the reasons Columbus thought he might be in India, not another large, intervening landmass where I reside.) In fact, a more accurate measurement than Eratosthenes’s would not be available for another 300 years after Columbus. By then, two Frenchmen, armed with the finest survey equipment available in late-eighteenth-century France, numerous staff, and a significant grant, finally were able to do better than Eratosthenes.2 Here is the lesson for business: Eratosthenes made what might seem an impossible measurement by making a clever calculation on some simple observations. When I ask participants in my measurement and risk analysis seminars how they would make this estimate without modern tools, they usually identify one of the “hard ways” to do it (e.g., circumnavigation). But Eratosthenes, in fact, may not have even left the vicinity of the library to make this calculation. One set of observations that would have answered this question would have been very difficult to make, but his measurement was based on other, simpler observations. He wrung more information out of the few facts he could confirm instead of assuming the hard way was the only way.

Hubbard, Douglas W.. How to Measure Anything: Finding the Value of Intangibles in Business (pp. 10-11). Wiley. Kindle Edition. "

 

[RCA]

Has anybody noticed the pronounced effect of style on sales price. I know areas where the lowest priced homes, these are the ones that have the most negative residuals, are there because and only because their style is totally nonconforming to the neighborhood. You know the barn style in the midst of modern contemporary designs; or that old Cape COD, that ONLY Cape COD. Renovations don't help much. Not even ocean view. In fact STYLE overwhelms C and Q in adjustments. Yea. C/Q are worthless .... in some areas.

 

[residentialguy]

Has anybody noticed the pronounced effect of style on sales price. I know areas where the lowest priced homes, these are the ones that have the most negative residuals, are there because and only because their style is totally nonconforming to the neighborhood. You know the barn style in the midst of modern contemporary designs; or that old Cape COD, that ONLY Cape COD. Renovations don't help much. Not even ocean view. In fact STYLE overwhelms C and Q in adjustments. Yea. C/Q are worthless .... in some areas.

Not sure what you're talking about. The 1004 has a "DESIGN/STYLE" adjustment line.

 

[RCA]

Not sure what you're talking about. The 1004 has a "DESIGN/STYLE" adjustment line.

You are absolutely right. Next question, why don't they just make it Quality and Condition (without forcing a strictly defined Qn/Cn response)? If it works for Style, why not for Condition and Quality? It works for view as well. These are all intangibles, or partial intangibles. The problems have been well documented on this forum, I'm not to go into them any further.

Actually, let me reverse myself there. Whoever came up with Q1 must be a nutcase. I couldn't say enough bad about it:

"Q1: Dwellings with this quality rating are usually unique structures that are individually designed by an architect for a specified user. Such residences typically are constructed from detailed architectural plans and specifications and feature an exceptionally high level of workmanship and exceptionally high-grade materials throughout the interior and exterior of the structure. The design features exceptionally high-quality exterior refinements and ornamentation, and exceptionally high-quality interior refinements. The workmanship, materials, and finishes throughout the dwelling are of exceptionally high quality."

Does it take any brains for any appraiser to see what is wrong with this? Yea, it really works with a Trump mansion. But then we drop ALLLLL the way down to Q2, which could work just about anywhere. Q1 is de facto useless. I mean. For example, we get $7M homes with vinyl counter tops in Pebble Beach. Yea, it's kind of shocking. I will repeat, whoever came up this is a nut case.

Yes, Cn/Qn works for some appraisers, maybe most, especially those who work with tract homes and homogenous subdivisions. But it's ridiculous to force this on all residential appraisers. Anyway, be sure I don't really care about your opinion on this. I am stating my position for the record, - in agreement with some others. It's a statement of position and there is plenty of evidence to support it.

But I couldn't actually show my problems with it without going into my methods in detail. - Which I don't, at this time, have any interest in doing. I mean, IF I had to do a URAR, I would have a problem.

Just take it as a statement of position: The Fannie Mae Quality-Condition ratings are CRAP for market areas made of of highly heterogeneous custom homes with highly varying degrees of upgrades, ages and styles.

 

[J Grant]

No, but they are not random in their selection because sellers reflect pricing based on comparison with other sales...so they have a general idea of what the COST is to remodel a bathroom or kitchen, they have an idea of the relationship between rent and payments. The buyer probably has a very good relative feel for the core of what a house consists of and what features are important to them. Since these natural feedback loops exist and buyers are not making random offers, nor sellers pricing randomly, sales data will tend to fall along a consistent path and the same items over and over will produce consistent similar results. No, a regression isn't going to isolate a value for a gold-plated fireplace, but it likely will isolate a typical contribution for the number of bedrooms, size, age-condition, etc.

What you describe (buyers, sellers having an idea of costs/relationship of rent and payments etc ) is what is known as a well informed buyer and seller. Patterns of buying and selling may not always form consistent results, but they form enough consistency to derive analysis from them.

Simply put, buyers pay more for positive features and pay less when a property has negative features. That is true of 100k properties and million dollar properties. Only the scale is different.

I would think regression is more useful where large sets of data is needed such as year over year time adjustments.

 

[Terrel L. Shields]

patterns of buying and selling may not form consistent results, they do form over a period of time a pattern

Which is why regression works.

regression is more useful where large sets of data is needed such as year over year time adjustments.

Time could be but multiple factors are basic to most reports. Size matters, bedrooms matter, condition (effective age) matters, garages matter, and quality matters. Those half dozen factors can be used with only a few sales perhaps as few as 11 to 15. And it is most useful when you get a consistent set then insert dummy variables to test if the market is identifying other factors. You can put that fireplace in as as Y or N (0 and 1) and find out if there is a pattern or not. Probably not.

So say you have a sensitivity set that isn't working out, can the MLR see a pattern? Will paired sales do the trick? No use being a one trick pony because we all know that "paired sales" rarely can find a "pair" let alone several that doesn't need tweeking. Not many identical houses selling with one with a fireplace, one without, or one with 3 car garage and one with only 2...and a single "pair" isn't well supported. Several pairs gives you a range of value...