changing the sequence of adjustments

[krnole2002]

I'm reveiwing a report that uses "pg 443 of the Appraisal of Real Estate, 12th ed" to change the sequence of adjustments using market data. I have researched every book I own on appraisal, borrowed books, searched online appraiser forums, asked guys in the office, and now I'm asking anyone out there. In fact, I just completed the AI class on sales approach...nothing i can find on this topic.

Example of appraisal comp..simplified...combined transactional adj for illustration only.

Sales price 90,000
Transactional Adj +5000
Adj Sales Price 95,000

Physical Adjustments
Size +5,000
Adj Sales Price after size 100,000
Location +5% of 100,000 (+5,000)
Shape/ Utility -5% of 100,000 (-5,000)
Misc improvements +10% of 100,000 (+10,000)
(seawall, dock, etc)
Net % adj +10% of 100,000 (+10,000)
Final Adj Sales Price 110,000

I agree that you can change the sequence of adjustments as the market indicates....but has this really changed the sequence of adjustments? They still appear in the same order. I have looked up all I can on the subject, and only find that compounding stops after market conditions, and physical adjustments are additive. I have looked up lump sum and dollar adjustments...I can't ever find where this is an accepted method. From the info I find... the transactional adjustments make your adjusted sales price, and percentage adjustment are off that number, and dollar adjusted are added to that number...however, I never see dollar adjustments compounded and then added to after the market condition adjustment. Which is correct that data above or my analysis below? Maybe I'm missing something?

I would do it this way....small difference, but as the numbers get bigger, larger adjustments etc...the margin error grows on the data grid above.

Sales price 90,000
Transactional Adj +5000
Adj Sales Price 95,000

Physical Adjustments
Size +5,000
Location +5% of 95,000 (+4,750)
Shape/ Utility -5% of 95,000 (-4,750)
Misc improvements +10% of 95,000 (+9,500)
(seawall, dock, etc)
Total Net Adj after transaction adj +14,500
Total Net % Adj after transaction adj +/- 15%
Final Adj Sales Price 109,500

 

[Austin]

This is probably the number one misunderstood issue in appraising and the appraiser is exactly correct; the sequence of adjustments comes from the market. I don't know if your example is made up or from his report but the fact that he made a size adjustment first tells me he or she knows what they are doing to an extent. The reason is they are taking out covariance of variables first which forces the remaining variance to be proportional to their value contribution to value and the next item in the pecking order is -physical differences.

My question on your example is making a location adjustment second before adjusting for physical differences and some of those other adjustments are obviously off the wall and out of sequence.

You can take the same data set and use 10 different sequence of adjustments and get 10 different results. That is why the additive model is voodoo.

I always make a size adjustment first based on linear regression just to spot any other adjustments that may be there that should come first like for example an extra lot, surplus land, sales concessions etc. The additive model cannot be based on market derived data because you can't derive market supported adjustments using the additive model algorithm.

Don't be fooled by sales concessions or anything else and assume they have to be adjusted for because until you have used the correct sequence you don't know if they do or not.

 

[Fred]

Krnole,
You obtained different results NOT because of the order of the adjustments, but because you used two different mathematical procedures. In the first example, you let the first adjustment change the base from 95 to 100, and made the last three adjustments on the 100 base. In the second example, you did not let the first adjustment change the 95 base, and you made the last three adjustments against a 95 base.

As long as you keep the base the same, it won’t matter what order you make the adjustments in – unless you do cumulative percentages.

I think another problem is AI text. It often contains assertions of how things ought to be done, none of which seem like they are based on any empirical study – at least there aren’t any in the book. Look at the chapters on the cost approach, just one unfounded assertion after another. I find this intriguing because the book generally refers to the - data, analysis and conclusion – protocol.

 

[Mike Garrett RAA]

Was fun teaching that segment of the registered appraiser's course.

 

[Austin]

Let me explain this in different terms. I have been appraising for one community bank for 22 years using my method and they are the 5th rated bank its size in the nation, best earnings ratio in the region and almost no loses with 22 consecutive years of increasing profits.

On the other hand, the FNMA method GSE additive method uses the additive model and their success with it is there for all to see. I rest my case!!!!!

 

[krnole2002]

Krnole,
You obtained different results because of the order of the adjustments, but because you used two different mathematical procedures. In the first example, you let the first adjustment change the base from 95 to 100, and made the last three adjustments on the 100 base. In the second example, you did not let the first adjustment change the 95 base, and you made the last three adjustments against a 95 base.

As long as you keep the base the same, it won’t matter what order you make the adjustments in – unless you do cumulative percentages.

I think another problem is AI text. It often contains assertions of how things ought to be done, none of which seem like they are based on any empirical study – at least there aren’t any in the book. Look at the chapters on the cost approach, just one unfounded assertion after another. I find this intriguing because the book generally refers to the - data, analysis and conclusion – protocol.

THanks, you hit the nail on the head the in AI Class even goes as far as to say "proper sequence of adjustments" . i also should have gone into more detail with the whole scenario. i realize the difference is in the math, but AI classes indicate that nothing is compounded after transactional adjustments. They are all additive after that point and applied to the adjusted sales/unit price. They don't talk about it or show examples of anything different in class or text, and put one sentence in the text to allow an exception. Anyway, this grid did a cumulative adjustment for site after the transaction adjustments, and did not develop a new adjusted sales/unit price...so it looked like a series of miscalculations. Anyway, the appraiser then tells me that it is a seqence change, which I'm cool with now....I just wish they wouldn't instill "proper" sequence, and imply improper for other orders. I have other beefs now that the sequence card is out there. Total disregard to size in matched pair analysis for market conditions after establishing 40% adjustments to oversized lots in the market. my view is the lot sale is not matched for direct comparison. If size is the driving force in the market, and so important that it is at a 40% adjustment and so important it should be compounded...wouldn't you want the lot sizes to match in a direct comparison for percentage change in market conditions? Instead of inferring a lot is a lot is a lot in the matched pair analysis.
Basically, if you change the sequence tell the reader about it, and the institute should have less emphasis on "proper" i just finished AI general Sales Approach for my general certification, and both Income classes....passed them all the first time. I'm gearing up for report writing, and advanced income approach.
and, yes I agree the appraiser should have latitude for change in sequence, and i agree wholeheartedly that the size is the driving force in this particular market.

 

[krnole2002]

Krnole,
You obtained different results because of the order of the adjustments, but because you used two different mathematical procedures. In the first example, you let the first adjustment change the base from 95 to 100, and made the last three adjustments on the 100 base. In the second example, you did not let the first adjustment change the 95 base, and you made the last three adjustments against a 95 base.

As long as you keep the base the same, it won’t matter what order you make the adjustments in – unless you do cumulative percentages.

I think another problem is AI text. It often contains assertions of how things ought to be done, none of which seem like they are based on any empirical study – at least there aren’t any in the book. Look at the chapters on the cost approach, just one unfounded assertion after another. I find this intriguing because the book generally refers to the - data, analysis and conclusion – protocol.

THanks, you hit the nail on the head the in AI Class even goes as far as to say "proper sequence of adjustments" . i also should have gone into more detail with the whole scenario. i realize the difference is in the math, but AI classes indicate that nothing is compounded after transactional adjustments. They are all additive after that point and applied to the adjusted sales/unit price. They don't talk about it or show examples of anything different in class or text, and put one sentence in the text to allow an exception. Anyway, this grid did a cumulative adjustment for site after the transaction adjustments, and did not develop a new adjusted sales/unit price...so it looked like a series of miscalculations. Anyway, the appraiser then tells me that it is a seqence change, which I'm cool with now....I just wish they wouldn't instill "proper" sequence, and imply improper for other orders. I have other beefs now that the sequence card is out there. Total disregard to size in matched pair analysis for market conditions after establishing 40% adjustments to oversized lots in the market. my view is the lot sale is not matched for direct comparison. If size is the driving force in the market, and so important that it is at a 40% adjustment and so important it should be compounded...wouldn't you want the lot sizes to match in a direct comparison for percentage change in market conditions? Instead of inferring a lot is a lot is a lot in the matched pair analysis.
Basically, if you change the sequence tell the reader about it, and the institute should have less emphasis on "proper" i just finished AI general Sales Approach for my general certification, and both Income classes....passed them all the first time. I'm gearing up for report writing, and advanced income approach.
and, yes I agree the appraiser should have latitude for change in sequence, and i agree wholeheartedly that the size is the driving force in this particular market.

 

[Fred]

THanks, you hit the nail on the head the in AI

Good. I hope it doesn't hit me back.

I just wish they wouldn't instill "proper" sequence, and imply improper for other orders.

I just wish they'd remove it from the text.

The first problem, to me, is that the term, adjustment, is used ambiguously. There are times when the nominal or recorded price is not correct, because there is other, perhaps non-realty, consideration given, or a giveback of money to the buyer. Obviously the price should be corrected by the appraiser, and corrected BEFORE trying to adjust the price for property differences. However, what I am calling correcting the price and adjusting the corrected price are both called "adjusting" by the AI. Yes, the correcting should come first, but by calling both adjusting, it sets up the whole idea that there is a "proper" order to adjustments that the text carries too far.

 

[krnole2002]

Was fun teaching that segment of the registered appraiser's course.

That's great what are your thoughts on the subject? I have provided more information in a reply to Steven. The institute preaches "proper sequence", and never talks about the one liner they sneak in. Never show anything that is not "proper", and imply "improper" at the same time. I have no problem with having an appraiser changing it up due to market data....the problem is that the Classes and text do not address the issue in any sort of example. Not one example of compounding after the transactional ajustments to arrive at a new adjusted sales/unit price after the change in sequence of adjustments. I've just finished several AI classes, and i have scoured every book I have own on appraisals....and one sentence is all the information that I can find on the subject. Seems like such a grand statement would warrant some sort of example or more explantion.

 

[krnole2002]

Good. I hope it doesn't hit me back.

I just wish they'd remove it from the text.

The first problem, to me, is that the term, adjustment, is used ambiguously. There are times when the nominal or recorded price is not correct, because there is other, perhaps non-realty, consideration given, or a giveback of money to the buyer. Obviously the price should be corrected by the appraiser, and corrected BEFORE trying to adjust the price for property differences. However, what I am calling correcting the price and adjusting the corrected price are both called "adjusting" by the AI. Yes, the correcting should come first, but by calling both adjusting, it sets up the whole idea that there is a "proper" order to adjustments that the text carries too far.

thanks....maybe i'm not crazy. The institute does put out quality text and classes, but sometimes they do take it too far.