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A Curious Review

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Terrel L. Shields

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Arkansas
Does anyone here adhere to the notion that no matter how close your estimate comes to the sales price without getting there, it does not matter? In other words, say you are 2% under the sales price. You came in at 98,000 and the sales price was 100,000, you ignore the offer and defend the value regardless. I was taught that a 5% ± estimate was not abnormal. It would be acceptable practice to allow the sales price to influence your final estimate of value to appraise at 100,000 because that appears to be the likely selling price? And, if you do adhere to that, then can I assume you won't use that sale in the future without making a 2% adjustment??? for conditions of sale?

I was reviewed on a farm appraisal and the reviewer wrote a reject based upon her notion that I over valued the land tract by $300/ac, or roughly $24,000 or less than 3% of the sales price. While I vigorously defend my estimate of the land as if vacant, I still cannot see how I would not examine the sales contract and determining the offer to be arm's length and the buyers and sellers well advised and uncompelled; and therefore, not consider the offer as valid market data in a market of very sparse data. Even if I were dead wrong about the land value, the amount is small in relationship to the sales price of nearly a million dollars.

The reviewer also questioned my fourth comparable because it was out of state (but is actually closer than one sale that was in the same county). The property is a poultry farm of specialized breeder operation and there are only 4 sales in two states with barns of this size and equipped to these specs in the past 3 years (with the exception of a sale on a very large tract of land.) Basically, the reviewer argued that I used it only to "inflate" the sales price! How wild! That comp was the lowest indicator of value coming in nearly $50,000 below the sales price. It would have served only to deflate the sales price, not inflate it.

This has been the first review that I have ever had an outright reject on. And I disagree with it strongly. But I am dealing with a Federal Agency and the same reviewer who argued that you must use the Cost approach and Income approach to value vacant agricultural tracts.

ticked in AR
 

Austin

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Jan 16, 2002
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Certified General Appraiser
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Virginia
Terrell:
I think you lost me in the details of that deal, but I will make a few comments on the general subject you are addressing. I want to address two points you brought out: Value range (you stated 5%+- was normal) and sequence of adjustments, which I think, is your reviewers problem.
For a lot of years I used regression analysis to do the sales comparison approach. Most of the time in residential work I would use a minimum of 20 of the most comparable sales. I have always heard that two appraisers should be within 5% +- each other but that is totally off the wall. The residential market is much closer to the perfect market model than any other market segment, and 5% never happens outside of a cookie cutter subdivision and is even then is suspicious. Generally, if you can explain 70% or better of the price variance you are doing well. I say this based on the fact that after all value factors are tested and accounted for, then you use a procedure to verify the validity of the regression equation, graph the results of GLA or whatever unit of comparison vs predicted price and estimate the trend line and view the variance, the graph shows it all. In my residential market 8%+- is as good as it gets. The easiest kind of appraisal to do using these methods is for a mortgage when you have the sale price of the subject. Just put the subject in the regression with 20 most similar sales and see where it falls in relation to the trend line. If you do this your whole view of the appraisal process will change, the reason being it will demonstrate that market value cannot be defined in any other than statistical terms as expressed in a probability density function or bell curve. If you had such a graph in your appraisal, the reviewer would not have leg to stand on. The last edition of the AI’s magazine, “Appraiser's Journal” has an excellent article on this subject and says what I have been practicing for 10 years.
Second: As the AI states in the 12th edition of “The Appraisal of Real Estate”: “The sequence of adjustments comes from the market.” Nowhere in the book or any AI book I am aware of do they even address the subject of what the procedure to extract the adjustments from the market is. Fortunately, I think I know what it is. I worked the sales comparison example in the aforementioned book using the correct sequence of adjustments and in my view their answer is 15% to high. You are probably thinking: “Well how do you know you are correct and the AI is wrong?” Good question. The answer is that I verify both results by using their equation and my equation to see how well they predict the actual prices of the subject and all comps, and my method has a much lower prediction variance, which proves that my equation is a better predictor than theirs. If your reviewer knew how to use the correct sequence of adjustments, she never would have said what she did about the out of state sale or question any of your adjustments simply because the comparability would be obvious just by looking at the graph of the raw data. I say all of this to point out that your reviewer is a dinosaur who has no idea in hell which end is up; to make you feel better; and to point out the state of the appraisal science, which in relation to our present enforcement environment, reminds me of the middle ages and the Spanish inquisition.
Don’t be offended by this review because in my view, as of this moment in time the appraisal science is in a state of flux and in transition from one era to a much more advance era. The problem is to be careful and not get caught up in the upheaval and get burned at the stake. You should have read the review of the person that said the earth revolved around the Sun. He really took a hit.
 

Terrel L. Shields

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Arkansas
I guess my problem is simple. There are only 4 real comparables. Other poultry farms could be used but the adjustments will be in the 50 - 300% range net.

If you build 4 identical houses side by side on a flat level street, do you expect each to sell for exactly what the other did?

The poultry barns are all circa 1996-98; 40 x 520' long with generator, well, and change huts. In my case if the range of thoses Sales were $775,000- 50 ac. OK, No dwelling; $850,000 sold 2 years ago - dwelling + 200 acre (swampy but only one on a paved road); $850,000 (MH + 150 ac. Rocky; and, $1,000,000 (double wide, 160 acre flat land subject to being wet.) Your subject is selling for $860,000 - 80 acres. The subject site is middlin' in size, but superior in quality (drains well and is on a paved road). It, frankly, is better kept than any of the above (I have been on all them), but does not have a dwelling (the low sale does not either)

Go figure. The property brackets well, only the low sale suggests a price less than the offer.
 

Austin

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State
Virginia
Terrell: I just did a quick analysis based on the information about the subject and comparable sales that you just described. Using what I consider to be the correct sequence of adjustments; the 160-acre sale is about $700 per acre out of kilter (high) with the remainder of the sales, but other than that, the price per acre trend line explains 98% of the variance in this data set. Other than that, the exponential equation pretty well defines this data set. I would give you the formula but it has an exponent to the base e of the -power exponent and I can’t type it. If you will go into Excell and graph acreage vs price per acre you will see what I mean. Then add a trend line and you have a graphical picture of this market segment. No adjustments necessary. Just plug your subject into the equation and you have an almost mathematically perfect answer. Or so it seems to me. I have never seen such a clean pattern. Did you make that data up or something?
 

George Hatch

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California
Terr,

One of the things I always do in an appraisal that involves a sale is to specifically comment about considering the pending sales agreement in the valuation. I don't believe it is out of line to give a pending sales contract as much weight as any other comparable sale. I usually stick this comment in with the Sales Comparison Approach, and usually repeat it in the Reconciliation. The comment that I use is as follows:

"The subject's pending sales agreement was also given some consideration in this analysis, on a similar basis as the other sales data."

Then (as most of us do) I reconcile for a value opinion that may or may not come in at the sale price. If I think the pending sale is at the high side of the range, I say so. If I think the sale price is not supported by being way too high or way too low, I say that, too.

I don't think it's reasonable to ask an appraiser to not consider the pending sales price or a current listing in their appraisal. It's a relevant piece of information. And this goes double for special use properties that have a limited market and a limited amount of comparable data. IMO, the reviewer has no business yanking you for a 3% variance between your best sale and a pending sales contract, especially if it is a market sale that is the result of adequate exposure. If they think you lied about the subject or some aspects of your sales data, or if they think you manipulated the analysis to come in at the desired number then that's another story; they should have the hair to call you on those "errors of fact". But to jerk you for a difference of opinion is unprofessional on their part, particularly if they haven't physically seen the property.

This is what happens when FNMA types get involved in non-residential appraisal reviews. Actually, it sounds like a competency problem. Who is so good that they can argue a 3% difference of opinion?

George Hatch
 

Bill_FL

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Aug 23, 2002
Professional Status
Certified General Appraiser
State
Florida
Terrell,

On the comp he has a problem with, ask him if he knows how the local market works.

Does the typical investor in this type of property rule out nearby property because it crosses state lines? (could if there is a significant tax difference). If not, then it would be a valid comp. Would the buyer of the subject have also considered the "bad" comp if it were on the market at the same time the subject was?
 

Austin

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Certified General Appraiser
State
Virginia
I don’t know which one of the comps Terrell gave that is out of state, but if it is the 160-acre comp, he may have a problem, because when I graphed those sales that sale is the only one that showed any variance from a most unusually tight trend line, but even then, in the general scope of things, it was insignificant. If you have a trend line as a basis of comparison, a lot of things come into focus. You know where you are going and how far it is to where you are going. Using the conventional sales comparison method, you don't know where you are, where you are going, or when you get to where it was you didn't know you were going. Then when you get there, you are not sure where you are or how you got there.
 

EDWARD BERRY

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Jan 15, 2002
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Certified General Appraiser
State
Arkansas
Terri,

UNLESS the land sizes and quality are fairly close-forget the $/acre on poultry farms.

Use the vacant land plus the $/sf value of PH-or per bird if ages are similar.

The forms and mind set of most GOV. appraisals were developed for row crops not Poultry farms.

The guy at Fayetteville that does Farm Credit has a decent form for PH that will blow her mind.

The gal proably means well but has NO clue about farm appraisal.

5% diff on a breeder farm between appraisers is right on the money.

Sorryfull yours ed-owner operator, appraisers of 100's of farm appraisals.
 

Fred

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Jan 15, 2002
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Retired Appraiser
State
Virgin Islands
Austin,
You have got me going with this stuff.
the price per acre trend line explains 98% of the variance in this data set. Other than that, the exponential equation pretty well defines this data set.

When I first started regressing non linear sales sets, I called the statitician at the university and asked how do you know whether to use the logrithmic or exponential function and he cryptically replied, "You look at the data and see whether it is logrithmic or exponential." I always assumed that meant test it to see which one fits better. If use the exponential, I get the same 98% (.9791) you did for r-squared, but using the log I get an r-sqared of 99%. (Now wasn't it you that said, if my line fits the data better than yours I have a better appraisal :lol: )

Seriously, why did you use exponential?
 

Terrel L. Shields

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May 2, 2002
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Certified General Appraiser
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Arkansas
Right-o Ed - The land values vary - the one sale in Ar is much higher per unit but smallest site, the largest site has a wetlands type soil (Jay-Taloka), another of the large sites was large but recent dozed and rough. The subject is the only one that drains well and has a mild slope, paved road frontage + gravel, and the subject buildings are simply better built. Even the generator shed which on most farms is a pole shed or frame shed is masonry with hip roof and commercial wall shutters that open up when the generator fires up. Did I mention 2 more Cobb barns are under contract, each for $950,000? One may fall, but the other one is a go from what I understand.
 
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