Age/Depreciation Adjustments in Sales Comparison

[Frank Vanderwall]

I have been sailing along for many years plugging in various $/year adjustments in my appraisal software for either actual or effective age differences as compared to the subject.

This week a reviewer (who has considerable power over my work flow) read me the USPAP chapter and verse that I was not compliant, not credible, etc., etc. due to this practice, because I had no support for the $/yr I was using (However, he has not asked me to pair out my GLA or BR and BA adjustments... not yet anyway).

He insists that I perform a Market Extraction Depreciation Analysis for all comps on every report to arrive at each comp's age adjustment. If you don't recall, this entails basically doing a Cost Approach for each comp plus additional analysis.

So, I built a spreadsheet and have done a few appraisals this way. It is an interesting exercise, but very time consuming. Due to the wide variations of depreciation I am getting from the different comps, I am not feeling that my reports are any more reliable for my efforts.

So, what do you do? Any other methods of determing Age adjustments that will stand up to State Board level review?

 

[Doug Smith SRA]

Mentor Book Vs Real World

View attachment Review Grids.pdf

This might be a coincidence but I got a call from an appraiser saying she had been saddled by an underwriter with this same request worded the same way.

I hope this doesn't catch on. It is going to make it difficult for all the appraisers who employ their "mentor book" and use .5% per year or some such made up intelligent sounding number. Jeesh, these underwriters. I think they are on to us.

Anyway trot out the speech about market extraction with a strong finish about a summary report and stick in a handy dandy work sheet (see above) that, in fact, extracts from the market, declare victory and go home. An appraiser does not have to prove depreciation for every comparable, just be able to address what the market is doing. We are interpreting market behavior; not proving every line.

Doug

P.S. I would be excited to learn the USPAP Chapter and Verse that degrees this calculation.

 

[Lee Lansford]

Quoting from "Appraising Residential Properties", 3rd ed., Appraisal Insitute, page 355:

"Appraisal is an art in which appraisers apply their judgment to the analysis and interpretation of data. Paired data analysis is a tool that an appraiser can apply to market data in some circumstances. When used in conjunction with other tools, this type of analysis supports and guides the appraiser's judgment, but it does not take it place."

The problem, of course, is that many appraisers aren't too good at either "analysis" or "judgment". Hence, "The List of Adjustments".

 

[Frank Vanderwall]

View attachment 18288

This might be a coincidence but I got a call from an appraiser saying she had been saddled by an underwriter with this same request worded the same way. .

I see you are located in Montana. This reviewer covers E. Washington, Idaho and Montana for a VERY large national entity. I expect the request was from the same reviewer. He is on a mission.

View attachment 18288

P.S. I would be excited to learn the USPAP Chapter and Verse that degrees this calculation.

Well, here you go....here is a list of my USPAP "sins" as enumarated in the reviewer's email:


"Standard 1-1 "In developing a real property appraisal, an appraiser must:"
(a)"...correctly employ those recognized methods and techniques that are necessary to produce a creditable appraisal:"

The data in your report does not support the reported depreciation adjustments reported.

USPAP states that if the methodology is not creditable then the reports value is not creditable. (Summarized)

Due to lack of required comments by USPAP the report is not USPAP compliant as state in the signed certificate.
I will site some of the USPAP standards, violated in the report. I will not spend the time typing all the remarks as you should have access to USPAP. Standard 1-1 "In developing a real property appraisal, an appraiser must:"
(a) "...correctly employ those recognized methods and techniques that are necessary to produce a creditable appraisal:"
(b) "not commit a substantial error of omission or commission that significantly affects an appraisal:" yours is a commission.
(c) "not render appraisal services in a careless or negligent manner,... in the aggregate affects the creditability of the those results"
Standard 1-2
(h) ... necessary to produce creditable results..."
Standard 2-2 (b) (i) “state the identity of the client and any intended users, by name or type”
(iii) "...in addition to written comments about the legal, physical and economical attributes..."
(iv) see comment , "must be substantiated' you did not state if any encumbrances exist or do not exist.
(vii) "Summarize the scope of work..." (Letter of Engagement usually contains more than is summarized in the URAR)
(viii) "Summarize the information analyzed...." "in accordance with Standard rule 1-5..." “ The appraiser must provide sufficient information to enable the client and intended users to understand the rational for the opinions and conclusions….” "

View attachment 18288
Anyway trot out the speech about market extraction with a strong finish about a summary report and stick in a handy dandy work sheet (see above) that, in fact, extracts from the market, declare victory and go home. An appraiser does not have to prove depreciation for every comparable, just be able to address what the market is doing. We are interpreting market behavior; not proving every line.

Well, that does give me some hope about recapturing my productivity. But, even if I have extracted and reconciled a reasonable depreciation rate that reflects my market, don't I still need to calculate the Replacement Cost New for each comp in order to apply this adjustment by the book?

Help me out here. If I am understanding correctly,

Depreciation adjustment for Comp 1= (Difference from subject in effective/act age) X (reconciled annual depreciation rate) X (Replacement Cost New for Comp 1)

 

[Green Hornet]

I am probably missing something, but if you are doing this for the sales comparison approach, then what you are adjusting for is market reaction to the difference. This has nothing to do with actual depreciation.


It seems that he is building his case around recognized methods. I believe USPAP refers to what peers are doing. Ask him for some redacted samples of other appraisals that include this data...for guidance of course.

 

[NC Appraising]

In the sales grid, effective age should be a condition adjustment, not a actual age adjustment.

 

[CANative]

When and why did appraisers start putting their opinion of effective age in the sales grid? It's not relevant to the sales comparison method.

Market extraction methodology for estimating total depreciation (lump sum) is ridiculous for turn and burn residential appraisal assignments. You have to have an accurate site value estimate for each of the comparable sales and a defensible estimate of replacement cost for each sale. They must also have incurred similar amounts and TYPES of depreciation.

This level of analysis is just not necessary and would unneccesarily increase the costs and time and could probably not be done reliably by most residential appraisers who do this type of work.

The modified age-life method is just fine for the intended use of the appraisal.

This hot shot reviewer is an idiot.

 

[Terrel L. Shields]

am probably missing something, but if you are doing this for the sales comparison approach, then what you are adjusting for is market reaction to the difference. This has nothing to do with actual depreciation.

Market extraction methodology for estimating total depreciation (lump sum) is ridiculous for turn and burn residential appraisal assignments. You have to have an accurate site value estimate for each of the comparable sales and a defensible estimate of replacement cost for each sale. They must also have incurred similar amounts and TYPES of depreciation.

There is nothing wrong with that method. I do it routinely. But on the other hand there are alternative methods of analysis. Further, if i do say a bunch of similar homes with similar market conditions, then there is no call to do an individual analysis on each and every comp. Keep a running tab (spreadsheet) on the ones you do run. The patterns are obvious, and the "observed effective age" is exactly that. There is no mandate to eschew all other methods to 'get 'er done'.

My solution to such problems is to avoid making any age adjustments. I rarely do them because they are difficult. Many are hyperbolic curves not straight line depreciations if you have large differences to make, so if I use ONLY sales that are similar in condition, age, and quality, then Size and features becomes the dominate driver of value. I am also not bashful about making site adjustments where i have land sales to support it.

Of course, I won't get off the thread on the subject of self-important, self-serving, mavens of appraising that so many Reviewers think they are.

 

[Thomas Fiehler]

There is nothing wrong with the theory that is implied but I would love to be an attorney and quiz an appraiser on how they arrived at the EA of the comps-that is, without actually going inside them.

 

[Terrel L. Shields]

quiz an appraiser on how they arrived at the EA of the comps-that is, without actually going inside them.

then how could you ever use ANY house as a comp if you were never in it? same problem. I cannot see thru walls.