Conditional/quality Adjustments

[Artemis Fowl]

Most residential appraisers when adjusting for complex markets with poor comps just make up their values to look good, at least in the reports that I have seen. They are flying by the seat of their pants. They do a good job of it in many cases, for flying by the seat of their pants. - They don't have much choice.

Interesting observation. Methinks there is some subconscious regression going on in experienced appraisers heads...otherwise there would be no basis for what "looks good". Thousands of market data observations DO matter.

To continue the Star Wars theme:
Credibility relative to intended use comes to mind (lending). Most of us are those cartoon guys...generally shooting in the right direction. The MARS system is closer to the Death Star. Perhaps a bit overkill to take on a single house but definately gonna do the job.

Don't get me wrong...I would happily play with the Death Star all day for every job but I can't afford a moon-sized station like that.

 

[RCA]

Interesting observation. Methinks there is some subconscious regression going on in experienced appraisers heads...otherwise there would be no basis for what "looks good". Thousands of market data observations DO matter.

To continue the Star Wars theme:
Credibility relative to intended use comes to mind (lending). Most of us are those cartoon guys...generally shooting in the right direction. The MARS system is closer to the Death Star. Perhaps a bit overkill to take on a single house but definately gonna do the job.

Don't get me wrong...I would happily play with the Death Star all day for every job but I can't afford a moon-sized station like that.

Well, Salford-Systems MARS costs $15,000 now. So forget about that. I've had it for 13 years and my license was grandfathered in at $360/year.

Now, you could use any multivariate regression program. Same procedure. Create a model on the tangible features. Run it on the data to get the sale price estimate from the model, subtract it from the actual sale price to get the residual. And, assuming you've removed the anomalies, like shorts, REOs, probates and auction sales, your residuals are are your best evidence of the value contributions of intangibles like Condition, Quality, Appeal, Style and dependending on your data - View. Those residuals can be broken down between these variables however you want, it is the total that is used value these intangibles. Now you translate those residuals into a score, e.g. 0.0-10.0 in 0.5 increments representing percentage lower, e.g. 4.5 means 45% are lower valued residuals. Such a score can be estimated for the subect by an appraiser experienced in the subject market area, and an adjustment made by a function that relates the scores and the residuals.

The only problem with not using Salford-Systems MARS, is that you are much less likely to get a simple, understandable initial model of the tangibles that also has a high R2 of say 0.75-0.85, in other words, a model that uses the tangible variables such as GLA and LotSize to account for 75% to 85% of the variations in sales prices. That leaves only 15%-25% for adjusting the intangibles. This is important, because the appraiser has to subjectively estimate the value of the intangibles for the subject as a percentage ranking. This ranking is subject to some inaccuracy. The better model you have for the tangibles, the less effect in error in the subjective estimate of the subject's intangible value.

But I don't see any choice for complex markets, when you have weak comps. You have to do the best you can with whatever regression program you have. Anybody lucky or rich enough to have Salford-Systems MARS is ahead of the game - and not just because of it's ability to produce high R2 - but also because of the many potent features it has, such as forcing variables such as AGE to be strictly linear.

 

[Overimprovement]

So JG: since you hold (rather tenaciously I might add ) that a home is Q4 OR Q3, but will only be ONE of those in its lifetime, let me ask this:

Taking just this barrier, Q4->Q3, what item(s) or amenities, which by your thinking could only be done during construction), would push a home from 4 to 3? In other words, what practical, easily identifiable things would make you, possibly at first glance, say this is definitely a Q3, not even close to a Q4, or vice versa? Are there NO borderline Q4/Q3 homes in your market? NONE at all that putting granite and stainless in the kitchen, and replacing dimensional shingles with clay and copper gutters would push over the line?

One other thought--that well built home that was a Q2 when constructed in 1920, and has been well-maintained, but NOT upgraded in any way, what quality is that home today?

 

[Terrel L. Shields]

that well built home that was a Q2 when constructed in 1920, and has been well-maintained, but NOT upgraded in any way, what quality is that home today

Good point since very outdated - wiring, plumbing, had tall windows and walls to circulate air, etc. Much incurable obsolescences.

 

[J Grant]

So JG: since you hold (rather tenaciously I might add ) that a home is Q4 OR Q3, but will only be ONE of those in its lifetime, let me ask this:

Taking just this barrier, Q4->Q3, what item(s) or amenities, which by your thinking could only be done during construction), would push a home from 4 to 3? In other words, what practical, easily identifiable things would make you, possibly at first glance, say this is definitely a Q3, not even close to a Q4, or vice versa? Are there NO borderline Q4/Q3 homes in your market? NONE at all that putting granite and stainless in the kitchen, and replacing dimensional shingles with clay and copper gutters would push over the line?

One other thought--that well built home that was a Q2 when constructed in 1920, and has been well-maintained, but NOT upgraded in any way, what quality is that home today?

Are there ever times where a home might be border line between ratings in my market, sure, as in any other...then all I can do is make the best judgement call I can and try to view the home holistically- is it more a Q3 or a Q4 in majority of the floor plan, design and materials . As far as Q2 home built 1920 not upgraded, it it was a Q 2 then , great architecture, high ceilings, thick plaster walls, ornate and intricate carvings and moldings etc, it is still a Q 2 - but a dated condition Q 2. So it is a Q2 but C4 or C5 condition. And whether its floor plan has obsolescence or not , or is it a gem waiting to be restored....those are issues individual to a property and its demand in its market.

r, Q4->Q3, what item(s) or amenities, which by your thinking could only be done during construction)

The overall floor plan, layout, design/style of house, size of rooms, ceiling height, intrinsic to the architecture ext and interior detail, roof line, size of window openings...those things can't be changed ( or they can only be changed at such enormous expense that it is rarely done )

 

[J Grant]

Good point since very outdated - wiring, plumbing, had tall windows and walls to circulate air, etc. Much incurable obsolescences.

We have some homes like that here Flagler and Mizner and other noted architects or names of the day...built in the 20's and 30's, these homes were Q 2 or even Q1 back then and still are now. Some in Palm Beach ( Trump's Mar a Lago ) they are Palazzo or Mediterranean style, feature courtyards and arches and balustrades and thick plaster walls with stone exteriors, beamed and carved ceilings, marble fireplaces, intricate tile work etc....you get the idea..

Some of these grand homes or smaller lovely homes are restored and get photos in architectural magazines. Others get neglected to the point they have to be razed. Some modern replicas of these homes mirroring that style are built today, though there is also a trend toward contemporary as well.

It is true the lesser versions of these homes can become so dated and so expensive to maintain or repair they do get razed eventually ( unless historically protected)....but that is an age and condition issue, not a Q issue. Salt near ocean and humid air here might rot a home faster than in northern areas.

 

[Terrel L. Shields]

Is style a quality or a condition issue?

 

[J Grant]

Is style a quality or a condition issue?

Style is its own category! Style is what kind of style or design...Tudor or Contemporary or plain ranch or Mediterranean or Colonial. Then take any style home and ask what quality it is made of, and then consider its condition.

 

[Terrel L. Shields]

other noted architects or names of the day...built in the 20's and 30's, the

If like posted, they were not updated what? FL Wright had some houses and buildings that were notable but not necessarily well designed...but they all cost a mint. Leaking roofs were a constant problem with FLW homes.

 

[J Grant]

If like posted, they were not updated what? FL Wright had some houses and buildings that were notable but not necessarily well designed...but they all cost a mint. Leaking roofs were a constant problem with FLW homes.

Lack of updating and neglected condition can affect any home of any Q rating. So we have to analyze what we are looking at. I am no expert on FLW homes, but perhaps they had a lot of style but were only built of Q3 materials if they have so many roof leaks and other issues. Style or a famous architect is another facet apart from the Q ratings...

Appraisers have to understand what they are looking at and break down what belongs in what category .agree?

You can have a neglected Q2 home and a neglected Q4 home. The Q ratings don't change, it becomes a condition issue .Each of the Q rated homes if neglected are in C 5 condition. The Q2 home has a style (example: Mediterranean ) and the Q4 home has a style ( example: ranch) . Perhaps the Q2 home was designed by a noted architect.

The categories intersect and contribute value ( or detract from value ) of the whole, but we should not be mixing up or incorrectly applying the categories.