Appreciation and Lenders

[Suzanne K Hansen]

Dear New Friends,

Thanks to those of you who so remarkably fell into discussing, in the purest sense, my concerns over a rent survey ( see Urgent Forum). I decided to go ahead and do the rent survey through my mentor and provide it as an appraisal of a partial right.

I have another question-- less urgent-- more confusing to me, about which I'd love to read your opinions:

In Southern California (San Diego), increases over time are easy to determine and document using pairwise comparisons. On the low end, the rate is 1.4% per month and in some areas it can be documented to be over 2.7% per month increase. It's incredible to see homes doubling in value in a short period of time.

My frustration is that this very real and useful adjustment is not permitted by my mentor for the reason that "lenders do not accept time adjustments."

Please let me know if you find lenders to be unwilling to allow time adjustments. Perhaps if I understand the nuance of time adjustments and the lender's points, I could get over being annoyed at doing the pairwise analyses and not getting to use the data. I know that this has been discussed briefly, but it seems to me that if it can be documented by strong pairwise data, it should be acceptable.

What are your thoughts?

 

[Mike Garrett RAA]

Most, if not all lenders, dislike time adjustments unless they are in their favor; therefore, use the most current comps available and forget about doing time adjustments.

I do appraisals for the VA here and they will allow time adjustments but they want us to add three listings (gridded) which support the time adjustments which is time consuming and, quite frankly, a waste of time because you can list a property for any thing you want and it has no real bearing on market value.

 

[Restrain]

Lenders will not accept time adjustments for PMI release, period. If prices are increasing at the rate that you show, then you should be able to get comps within 3 months and not make time adjustments.

The concern is an overheated economy and overheated market which can come down just as fast as it went up.

Roger

 

[Farm Gal]

:lol:

Isn't it frustrating to 'know' and have proven something is right and still be told not to use it?

Truthfully NOT making time adjustments results in a slightly more conservative value and precludes an error in forecasting to future sales the observed past increases - which as Mike and Roger both pointed out can "go away real fast".

Call it Lenders rubber baby buggy bumper : and stay on the sidewalk even if you know it is 'safe' to walk in the street as long as you watch for cars.

I believe Mike has stated elsewhere and I have heard (but never had to worry about in MY market) it is adviseable to work in no less than 'quarterly' increases for development of your adjustment percentages, rather than fine tuning sales down to monthly analysis. Of course folks like us aren't usually in such a hot market, tho there have been times Colorado has slid up AND down nearly as fast... :roll:

Problem is even if you are 'watching for cars' some darn truck going the wrong way on a one way can still flatten you. It is real difficult to tell when the market has 'topped out' and is ready to slide the other way: it CAN happen 8O do you WANT to be caught out still happy slappin time adjustments on something that mightbe going d.o.w.n? 8O

I'd stick with mentor's policy simply because he/she likely has a reason besides being older and theoretically wiser :idea:

 

[John Hassler]

Suzanne

I'm in CA too and I am still seeing a strong market in some segments (low end). I also understand where your mentor is comming from as I just clipped the wings of my trainee who used a time adjustment on a condo last week. Told him to use the most recent sales w/o a time adj even if they weren't physically the best comps as it's going to be a hard sell to a 25 year old underwriter who likely lives in the 90% of the US where values have been level (or falling) for months. However, I did use a conservative time adjustment recently for a luxury property where I used comps up to a year old.

Provided the comparables are competitive with the subject, and your value conclusion is not misleading, I would tend to favor using recent sales over perfect sales.

John Hassler

 

[xmmcsmielr]

Lee Ann says:

"......it is adviseable to work in no less than 'quarterly' increases for development of your adjustment percentages, rather than fine tuning sales down to monthly analysis." AND

"It is real difficult to tell when the market has 'topped out' and is ready to slide the other way: it CAN happen do you WANT to be caught out still happy slappin time adjustments on something that mightbe going d.o.w.n?"

Last month, according to a mortgage broker, one of my SFR reports was rejected by FNMA underwriters, because I adjusted upward for time. He told me to remove the time adjustments. I refused.

Time adjustments CAN be fine tuned to monthly rates! It is my job as an appraiser to fine tune my opinions of values.

And, it is NOT difficult to tell when a market has 'topped out'!

There are several analyses that are readily available in Tucson with a large MLS database, with Metroscan or Real Quest summaries of public recordations and with Excel or some other analytical software.

These several tools are:

1. graphed sale prices sorted by time with trend lines,
2. graphed days on the market sorted by time with trend lines,
3. time / supply calculations.

And, there is regression analysis, which I do not know how to do, yet.

In spite of supporting the time adjustments, my report stayed rejected. In spite of FNMA's recent (April 2002) guidelines that include a policy accepting supported time adjustments, my report stayed rejected. Some underwriters and many appraisers are too lazy to do the work necessary to understand time trends.

So, I rejected all future work from this lender, who happens to be the only one who has ever rejected any of my time adjusted reports, and I regularly adjust for time, both UP and DOWN, depending on results of my analyses.

Lee Ann also said, "I'd stick with mentor's policy simply because he/she likely has a reason besides being older and theoretically wiser"

Some mentors do not know how to measure time trends. Sticking with these people's policies is a professional limitation that diminishes accuracy and "fine tuning" opinions of values.

There are a couple of appraiser GURUs in Tucson who have taught their in-the-office apprentices and have taught classes that it is an appraiser's job to "hit the contract price". Sadly, there are several generations of apprentices who do exactly that to the detriment of the integrity of the appraisal profession.

Lee Ann, if you would like to see a set of the analyses, please email a request privately and I will forward copies of the graphs and time / supply analyses to you.

Ricardo Small in Tucson

 

[George Hatch]

I find the whole concept of appraisers having to ask permission to use time adjustments to be repulsive. It is just as wrong to knowingly undervalue a property as is to overvalue a property. If the market is truly appreciating that quickly it should be apparent in the sales data. One thing I've always done it to list my comps chronologically, with the most recent sale first. If I think the property value is going to come in at the top of the range or even beyond it a little, I'd want to bracket it with a pending sale if at all possible.

With an appreciating market, time adjustments can be a hard sell. But just wait until the market declines. The lenders won't have any trouble understanding negative time adjustments. They'll spaz the first time they see it, but they'll figure it out pretty quick. Just wait until you end up having to value the subject at the bottom of the range because we have no way of knowing how low the market will go when it falls.

Come to think of it, I have to wonder how many appraisers would ever seriously consider using a negative time adjustment, even when the data is there to support one. There are so many people who truly believe that time only does one thing to value, and that is to make it go up.

George Hatch

 

[Dee Dee]

Just wait until you end up having to value the subject at the bottom of the range because we have no way of knowing how low the market will go when it falls.

Come to think of it, I have to wonder how many appraisers would ever seriously consider using a negative time adjustment, even when the data is there to support one. There are so many people who truly believe that time only does one thing to value, and that is to make it go up.

Ha!
George, you're describing exactly the market that I'm contending with.
I can find comps that have sold within the past 6 months that would solidly justify a value, but when I look at the active listings there is a distinct downward trend that begs to be considered in much of my market area.
Because of the 'non-cookie-cutter' nature of my market niche, I learned quite some time ago that time adjustments were likely to get slapped down. It's nearly impossible to find 'perfect comps' that don't require adjustments, so adding more numbers to the grid tends to throw out red flags to the underwriters.

When we were in an increasing market I leaned toward adding a pending sale to justify a higher value estimate. If I were to do the same thing in the current market, more likely than not it would drive the value estimate down. The problem with doing this now is that many of the current pending sales are having a tendency to be anywhere from 5%-10% less than the listed price, sometimes with seller concessions, and this is information that the listing broker is not at liberty to discose to me until the sale is closed. Using a pending sale at this point in time could very well turn out to be misleading.

It's downright terrifying when I can put together a solid appraisal to justify a market value today, but in the back of my mind I feel haunted with the realization that the home probably won't be worth that estimate a few months from now based on active listings (and the number of those is growing steadily). Does that make my report misleading? I can't help but feel as if it does but I'm at a loss to know what the best way is to handle it.

For what it's worth, being an appraiser in a market that has turned upside down has been the greatest challenge I have ever faced. The people that I have to deal with on a daily basis....homeowners, mortgage lenders and real estate brokers....all know what is going on but want to pretend it isn't happening. They'd rather put on blinders and try to beat their way through it as if the market is going to turn back around at any moment. It's reaching a point where I'm learning to keep my mouth shut and quickly excuse myself when the topic of what the future holds is brought up. Nobody wants to be reminded that the inventory of active listing is growing and that the number of sales is declining. Nobody wants to look at the price tags on those homes compared to 6 months ago. Nobody wants to hear about the number of pending defaults, the job layoffs, or the rising vacancy rates. Merely mentioning those things will inevitably be met with scowls and counter-arguments, and the more evidence that I present to support my case, the more likely that I will be shunned.

The only glimmer of hope that I have to hang onto is that more and more underwriters are nit-picking loans coming out of this area and the appraisals that go with them. They can all ignore and push aside the silly pessimist appraiser, but when the investors put their foot down then that's the end of the debate. It's a refreshing change to see the big boys reminding everyone just who is in control.

Sorry to ramble and get off topic....

Dee Dee

 

[Pine Tree]

I find the whole concept of appraisers having to ask permission to use time adjustments to be repulsive. It is just as wrong to knowingly undervalue a property as is to overvalue a property. of knowing how low the market will go when it falls.
George Hatch

DITTO!

The client is purchasing the appraiser's expertise and then attempts to manipulate the out come on a number of levels.
Is is most folks regular practice to tell their doctors how to treat them or to explain to their accountant how to count beans or to rocket scientist what fuel to use or not use? You get the idea..

We are PROFESSIONALS and EXPERTS in our field. We are the folks with the knowlege of how best to report our appriaisal and it is completely proper for the APPRAISER to make that decision.
GRRRRR
Wendy Boston

 

[Mike Garrett RAA]

The market is what it is and we should be free to report it as we see it...not what some underwriter who has never done an appraisal thinks it should be.