1004d Update - Define "declined"

[The Nightfly]

I've received an order for a 1004D Update from a report I did last October for a refinance. I rarely do Updates, and all others I have done didn't have this problem. At the original appraisal, I did not have good, recent comps from the subject's neighborhood (I had good neighborhood comps 6-10 months old). I did have recent comps but from a competing neighborhood that is mostly similar. I used a mixture of both dated/neighborhood sales and recent sales from a competing neighborhood. The OMV was $150,000. Values have been consistently increasing in this market for over three years (even through winter months)...but what I could not have known at the time was that values were about to level-off.

Fast forward 4.5 months. On both a macro and micro level, overall neighborhood and broader market area sales figures are level. The increasing trend has stopped, but its not in decline. Appraising the property today using a sales comparison grid, I have a few better comps and would opine a value slightly lower than before, right around $145,000. One pending sale that I had originally used (agent would not tell me closing price at the time) closed for much lower than anticipated, and a couple other sales happened since which do not support my original value (by a small amount).

So, what is FNMA looking for asking if the property has "declined" in value? (BTW, I stand by my original value given the information available at the time). From a neighborhood statistical standpoint, values are not in decline - in fact, very stable. But, using the 3 best comps available now, my opinion of value is slightly lower than before.

I realize that the appraisal update is an appraisal, no matter what box I check. How would you handle a situation like this? Use neighborhood data, summarize, check "no" and move on? Or, provide a grid (or reference a grid) and state that the best comps TODAY indicate a slightly lower value than before. If the latter, would you provide the specific number?

Many thanks for any input.

 

[Mike Kennedy]

Are the "the 3 best comps available now" located in the subject's immediate neighborhood? They apparently indicate a CURRENT decline in MV.

Define "slightly lower than before."

 

[J Grant]

"Values have been consistently increasing in this market for over three years (even thr"

Why would you base a value trend on 3 years, the direction is the MC form which is limited to a year is what the trend of increasing or decreasing on page one is supposed to base on. It can be of interest as back story to go back in time a few years and analyze it, but relying on it for trend can result in reporting a rate of depreciation or appreciation that is not really there in today's and past year market. You said you had no idea that prices were going to level off but look in your file and at prior report what did the pending and listing activity show?

At any rate, your research shows that based on most recent sales this current eff date OMV is 145k vs prior opinion of 150k, so technically yes the anwer is it has "declined in value" (imo the question is asked wrong but we have to answer it as asked) What do the listings and pendings show...5k is a marginal "decline", but if listings and pending sales indicate flat or lower it confirms. But if listings and pendings trending upward then it might not be a true decline in value just a small difference than prior value opinion. You have to clarify a bit more .

 

[Peter LeQuire]

"Values have been consistently increasing in this market for over three years (even thr"

Why would you base a value trend on 3 years, the direction is the MC form which is limited to a year is what the trend of increasing or decreasing on page one is supposed to base on. It can be of interest as back story to go back in time a few years and analyze it, but relying on it for trend can result in reporting a rate of depreciation or appreciation that is not really there in today's and past year market. You said you had no idea that prices were going to level off but look in your file and at prior report what did the pending and listing activity show?.

While Fannie mandates that the single family trends reflect the 1004MC addendum, this may (and in my experience often has) produced short term trend information that may be misleading. For example: there are several market areas/jurisdictions in this region that have shown significant increases in prices as well as increased number of sales for the past two or three years. At this time of year, the most recent 3 month period may and often does show a markedly lower number of sales, sometimes accompanied by level or slightly lower prices (generally because of seasonal or weather-related issues). To characterize the market as declining or stable is probably - in the context of the longer periods - misleading.

 

[J Grant]

Imo it's the other way around...a far back in time search of 3 years can give misleading picture of today's market and most recent trend, because it does not focus on listings or pending or most recent sales comps used.

An appraiser imo should analyze both and comment on both if needed, however when a past three year trend contradicts the most present trend, the most present trend is that which is meaningful because that is the period of time the comps come from as well as indicates continuation of a trend...the question is, are prices/values increasing or decreasing not have they increased or decreased (past tense only))

 

[hastalavista]

So, what is FNMA looking for asking if the property has "declined" in value?
Many thanks for any input.

This is a simple process.
An update is an appraisal (as you acknowledge). The only differences in the development process of the new appraisal assignment are:
A. You can incorporate parts of a prior report that you concluded are credible. Since the prior report was completed by you, the credibility issue isn't a problem for you. This incorporation requires an EA. I suggest you include the mandatory USPAP reporting-disclosure that using extraordinary assumptions can affect assignment results.
B. Rather than expressing the value as a "point", you can express the value in reference to a benchmark. The benchmark in this case is the value of the report you are updating.


You see? For much of the analysis (H&BU, physical characteristics, etc.), that doesn't have to be done again. You can incorporate that if you are reasonably sure that there hasn't been any changes.
But the value is a "start from scratch" and the benchmark is the the value concluded in the prior report.
If your current valuation is at or higher than the benchmark, then conclude the value has not declined.
If your current valuation is lower then the benchmark, then conclude the value has declined.
Since you are completing an appraisal either way, and since this isn't a restricted appraisal, you must summarize your analysis so that the client/intended user can understand and evaluate your results and test it for credibility. This means that either way ( regardless of the market changing or not) you must provide sales data and analysis in the 1004D update (the only exception to this rule I can think of is if there is absolutely no change in the data. The relevant sales were the ones already used in the prior report, there is no indication that anything has changed in the market, and therefore the original analysis is also incorporated into your new appraisal.

I would also suggest, even if there is no change in the value or market, you do a new market analysis (if you only do the 1004MC, then do a new one) to support that conclusion.
This is a new appraisal. It requires a USPAP complaint certification. The pre-printed form's pseudo-certification is not USPAP complaint. Include a new one and make sure you sign it.

One last thing (and this is my opinion): How detailed does the new sales comparison analysis need to be? I'd say that depends. If this is a simple assignment, and you have very good and relevant sales, I wouldn't say you have to put the data in a sales grid (although it wouldn't hurt) but you'd certainly have to identify the sales data and at least narratively walk the client through the process of how you concluded an indicated value using that particular sale, and then sum it up in a new reconciliation evaluating the quality/quantity, strengths/weaknesses of the approach.
However, if you are updating a complex assignment and you had to do a lot of "stuff" in the original report to support your value/analysis, then common sense tells me that a similar level of "stuff/analysis" needs to be in this new report as well. And, that may mean a regular grid.

Does this answer your question?

Good luck!

 

[glenn walker]

$145,000 - $150,000 looks stable to me : )

 

[The Nightfly]

Thanks everyone for the input. My internal debate stems from the fact that I don't believe market values have declined, but my opinion of market value for an individual property has declined from a prior benchmark. My original adjusted range was 147k-155k using 6 sales (3 of which were dated, other 3 from competing neighborhood), reconciled to 150k. Today, my completed sales grid is 143k - 152k using 5 newer sales, 4 located in the neighborhood and 1 located in a competing neighborhood. My 3 best sales today adjust to 143k, 145k, 148k, with the other two (which aren't as good as the first 3, but still decent comps) at 150k and 152k. I would use all 5 comps today if I had never seen the property before.

Denis - I understand your point (and I don't disagree with you)...my OMV is lower today than before, so "yes" the market value of the subject property has declined...but I also see (and agree) with Glenn's short point, that 145k vs. 150k seems pretty stable (especially considering that comps, adjustments, opinions/conclusions are imperfect). It's like a "spirit of the law" vs. "letter of the law" argument.

 

[hastalavista]

Denis - I understand your point (and I don't disagree with you)...my OMV is lower today than before, so "yes" the market value of the subject property has declined...but I also see (and agree) with Glenn's short point, that 145k vs. 150k seems pretty stable (especially considering that comps, adjustments, opinions/conclusions are imperfect). It's like a "spirit of the law" vs. "letter of the law" argument.

Yeah, I see Glenn's point and don't disagree with him or you ($145k vs. $150k).
My bigger point- not so much directed at you but directed at all who sometimes get caught up in the grind of the process and lose sight of the fundamentals behind the process... which certainly includes myself - is this:

• Forget about the benchmark and do the SCA analysis. That's the same process but with maybe different data. Do it to the same level as was done in the first assignment. This cannot be short-cutted if you ask me.
• Conclude the value.
• Measure it against the benchmark.
• Make the conclusion
• Show the work necessary for the client to evaluate the value conclusion (expressed as a benchmark)
• Reconcile the approach and conclusion
  
• Make the EA statement
• Sign a new certificate

I bolded the "reconcile the approach and conclusion" In this case because from what you describe, you have better comparables "now" then you did before. The quality of the data is superior. One would expect that the reliability of the value with the higher quality data would be superior as well. You know for a fact that a lender is going to look at an update that says the value declined very closely. That's why the reconciliation is very important. The overall market can be "stable"; that isn't the issue. The quality of the data can be different; that is the issue. That is a reason for concluding "decline" as measured by the benchmark.

But, I'm not an idiot and I don't advise anyone not to take a second look when it is this close. I certainly would want to be 100% confident and comfortable with my decision.
All other things being the same, that $5k is within the fuzziness of the data/imperfections of most markets; and if the current data weren't any better than the prior data, I'd probably consider all of it since the overall market conditions haven't changed and my conclusion would likely be the subject's value hasn't declined; that is what the data would be telling me.
But things are not the same. Your data is better now than before, and a pending sale that was included in the analysis before (indicating it was a substitute) has now closed; it still is a good substitute.

IMO, the tie goes to the runner. If the data isn't persuasive enough, then the overall market conditions argue for no decline and I conclude that.
In this case, I need to make that call: is it a tie, or is the new data superior such that it persuades me a new value conclusion is the best call to make?
(no one roots for the umpire!)

Good luck!

 

[J Grant]

It's a trick question...has the value of the subject declined?

How to answer it... did the subject value "decline" relative to the market?

Or did the value decline relative to the prior market value opinion?

What happens when the prior date opinion of market value either from subsequent events or review by our own work seems to be faulty? .