Cost Manuals

[Austin]

George: You missed the whole point. I don’t select comparables on the basis that they are less trouble and require less adjustments, I select comparables on the basis of bracketing all value contributing variables. If you can’t bracket it, you can’t measure it. You learn absolutely nothing by using clones as comparables. With a variety of data you can guage the gravity of how certain variables affect price; the same for a lot of other value influencing factors. You can demonstrate location differences, differences in quality of construction, etc. to yourself if for no other reason. The difference between you and me is that I appraise because I like economics and the science of appraising and you appraise for a fee. I understand what I know but you only suspect what you know. That is the difference.

 

[George Hatch]

Austin,

I will agree with you there; I am not in love with the "Science of Appraisal" because I don't really believe it is a science. I don't believe that economics is a science. And I know a number of real scientists that would argue those two assumptions right into the ground.

While we're at it, I don't believe an opinion of value represents a fact or truth to be found. If it were, an appraisal would have a different definition:

Appraisalnoun) the act or process of determining the specific value as a fact; an mathematical expression of the only possible or predicted value.
(adjective) of or pertaining to appraising and related functions such as appraisal science or appraisal services.


It looks like we have some ways to go before we get to that definition. Good thing, too; because if appraisal ever becomes a science and value becomes a fact to be found, we are all in for some unhappy clients. At that point, our value conclusions are either absolutely right or absolutely wrong. Exactly how good are you, anyway?


To me, the "Art of Appraisal" and its rather limited use of economic theory encompasses a lot more elements than that which is mathematically calculated. Regression Analysis is merely one of many tools. Useful under the right circumstances, but just as prone to abuse and misapplication as any other method. Might be good for a secondary check or statistical analysis, but very rarely as the primary method for a single property. Regardless of the 'mathematically proven' theory, your bell curve gets outclassed in the market by a couple of really similar comparables, or even reasonably similar comparables. Reason being, buyers and sellers are watching for specific comparables, not megatrends. They look for comparability over bracketing. They are looking for fewer adjustments, not more.

Heck, if I wanted to, I could convince my clients that DCF analysis was the right way to value SFRs. All I have to do is find a couple of designated appraisers to author the book and get it published. Voila, instant credibility using a land residual technique or mortgage/equity. So what? Being more technical doesn't make the final opinion more credible unless my readers are easily impressed.

Come to think of it, the feedback I get is that my readers are most impressed when they can follow along in the analysis and when it makes sense to them. That occurs mostly when I use our common experiences to communicate not only the what of my opinion, but how I got there. Believe it or not, knowledgeable users of appraisals are not primarily concerned only with the final number, alone and with no context. They want the appraiser to use the data that best illustrates the opinion as if it were their decision and their money. They aren't looking for the predicted middle point of the range. Maybe they're wrong, but that's the way it is. Until someone, such as yourself, can convince them that their emotional needs and desires are secondary to the cold hard numbers, they will continue to solicit appraisals they can both understand and relate to.

So there you have it. The question here isn't whether Regression Analysis or Yield Capitalization can be used to justify a value opinion or to 'prove' to an appraiser that their own judgment is reasonable. The real question here is whether appraisal is an art or a science.


George Hatch

 

[Blue1]

George,

I enjoyed reading your post. I have to agree. In my area the market is on a steep increase. In this market bell curves just don't apply because buyers (and realtors) are trying to get as much as they can for their inventory. Therefore, historical sales do not accurately represent the market in any one month and if the "house next door" happens to sell for 5% more then the bell curve gets deflated.

Bottom line (in my opinion) the appraiser has to be ethical, familiar with the area and has to consider historical sales, active listings and current market trends in order to find the most "probable" value. Not an easy job and (also in my opinion) not conducive to mathmatical calculations.

I agree, appraisal is an "art."

 

[Austin]

George & Blue 1: It would take me hours to address all of the holes you guys raised in above posts, and I have answered the same questions a 1,000 times before and it did no good, so I won’t waste my time doing it again. I have heard those arguments many times before. Basically what I hear when I hear appraisers contend that appraisal is an art and not a science is that to them by defining appraising as an art gives them a license to do it their way and not get trapped by the facts of science. Besides they don’t like science and math anyway so that makes it doubly convenient.
George, you remind me of my former and present dentists. My former dentist, who is dead and gone, was a man of art & science. He liked to make money but the art and science of doing a job right was his passion. He never let making money get in the way of the perfect procedure.
My present dentist is mass production type guy. He once told me that the secret to practicing dentistry was getting along with people and making them happy. Fixing teeth came second. I should know, his half *** work cost me half a day’s time yesterday. I say that because based on your last post, you seem to put yourself into that same category as my present dentist and I put myself in the category of my old dentist. I could not care less whether the client likes or understands my work product or not, my goal is coming up with right answers, evolving the science, and understanding the underlying economic and math forces that determine price.

Blue 1 wrote and I can’t let that one pass: “active listings and current market trends in order to find the most "probable" value.” Reply: Blue, what is your definition of probable? If I understand your implication based on what you said, you are saying that appraising is more akin to soothsaying than analyzing. Probable is a statistical functional used to find the sale price with the highest degree of probability. That is why the definition of market value specifically says “most probable price.” You seem to be saying that I read the tealeaves and Tara cards of historical data and current offerings, look into the crystal ball and predict the future. I don’t think that is what the appraisal process is about at all.

 

[Don Clark]

8)

Austin:

I have read your post, and the post of others with a great deal of interest. If what you say about appraisal being a science is true, then you will always only be measuring the past and current events. If however, appraisal is an art and a science you can measure the past, present, and reasonably predict or forecast the future. The art comes in bringing those factors all together. You wrote...."reading tea leaves & tara cards of historical data & current offerings, look into the crystal ball & predict the future"...
..."I don't think that is what the appraisal process is about at all"...

Come on Austin, have you not heard of a "Prospective Appraisal"?

When an income producing property is being built, an appraiser will study historical data as well as current data for an equivilant enetrprise, and forecast future earnings based on a hypothetical enterprise and a hypothetical operating income statement. The present worth of future benefits(such as income) is a hard core part of the appraisal process and theory.

A few years ago when I was still doing commercial appraisal(I stopped when licensing came along & concentrated solely on residential), it was common practice when appraising an income producing property to gather historical data about the property regarding past income, current income, and from that determine what actual market income should be derived, and then forecast future income.

I realize we do not generally forecast much in residential appraisal but to say that is not part of the appraisal process is not valid. In todays market, and in my area a sellers market, such things as time adjustments, factoring in current market data, and even if necessary using pending sales as 4th, 5th, 6th comps is necessary to establish current market value.

Don

 

[Austin]

Don: It all depends on your definition of “art” and “science.” The definition of science is the study of correlated and associated events. Science is all about associated events. We take what we can observe and if we can find out how it correlates with known events we can predict the outcome. Science is all about predicting outcomes or more to the point most probable outcomes. For example, appraising is all about finding the value factors that determine price. The value factors are the known and the price is the unknown. If these two sets of factors don’t correlate, then there is no basis for appraising. If we can explain the association between dependent and independent factors we can predict the outcome, the most probable price. That is the science in appraising. What would appraisal be without the science aspect?
My definition of art is taking anything and making an object of beauty out of it. For example, the game of golf is a form of recreation to millions of people, but to Tiger Woods, golf is an art. Tiger has taken a stupid game and make a thing of beauty out of it. To me, the art of appraising is using the science aspect and make a thing of beauty out of it. Tiger has taken the science of the golf swing and perfected it into an art form. Without the science, of what value is the art. What meaning could art have in this context? Is Mona Lisa the art or is the pictorial representation of Mona Lisa the art? Art has to have an object, otherwise we end up with a blank canvas. Or modern art which is art without a science like appraising is to some people I fear.

 

[Don Clark]

8)

Sorry Austin but I am going to hold you feet to the fire. In your previous post you seemed to say that we could not forecast or do a prospective opion of value. What about it?

Also, we do not determine price in an appraisal. we form an opinion of value. the market, the buyer, the seller, and a closed sale determine price. To me the art is the formation of an opinion of value out of a a grouping of sometimes diverse data, some good, some bad. We could all just let a computer do an AVM. Now that is science. It takes a person who uses their education, training, and experience and their knowledge of the market to apply the art of forming that opinion. Otherwise it is a theory, or science by data only that estimates value, and, yes there is a difference between an estimate and an opinion. To me, the appraisal process is both an art and a science. We use scientific methods to lead us to the point where the art takes over and we form an opinion. We do not set price.

Don

 

[George Hatch]

Austin,

You're still going to have to get the definition of 'appraisal' changed in order for science to triumph over judgment.

Good Luck.

I maintain the technical and scientific aspects of our job are merely a partial means to an end, not our rationale for being.

Since this is now personal and we're directly comparing each other's point of view...... It's true enough that some appraisers feel they must know the truth and that after they are finished there can be no other truth; and it's true enough that I am not among those. I've seen them and even worked with a couple of them (including one of authors in your book collection). I admire the manner in which they pour their heart and soul into each assignment, and have witnessed their frustration and confusion when they invariably come up short from time to time (as do we all). So it's not like I'm unfamiliar with the concept or how it works.

The fact that I believe in earning a living off of my work doesn't make it any less reliable or less credible within its intended use. The fact that a professional athlete gets paid doesn't detract from their talent or their accomplishments, and also doesn't speak to their love of the game. So you will excuse me if I don't take my opinion of value any more or any less seriously than the assignment warrants. If you have the need to be the guru with your clients and represent that yours is the only opinion that counts, well go right ahead. I don't have that need. Matter of fact, I recognize that there is room in our industry for both points of view. Heck, I'm even be willing to co-exist with the gurus. How about you?


George Hatch

 

[Austin]

Don: I didn’t imply that you can’t do prospective appraisals; you just picked that particular special case to keep the door open to the artsey method of appraising. Both you and George, who represent the majority opinion on this issue, if I may briefly sum up the substance of both the last two post, is that you say appraisal is an art and a science, but you don’t want to show your science, you just want to exhibit your art.
What I glean from your opinions is that you are saying: “Don’t look at my numbers or science, just trust me. After all I am an artists.” Sorry but I don’t buy that line of thinking. If I go a doctor and he says: “Austin, you need an operation.” My response: “Operation on what. Show me the supporting data. Show me the X-rays. Let me see your diagnosis.”
If the doctor says: “Trust me Austin. I am an artists at this science,” I am heading out the door. There is a word for that kind of medicine and it is called quackery and I don’t buy it. I want a guru working on my case that has the numbers and the science to back him up and is not afraid to lay it out on the table for all to see.
I was involved in a case in Federal court a couple years ago and the lawyer sent me a copy of a letter from the court that stated: "From now on, nothing will be admitted as evidence in this court if it is not founded in scientific evidence. No more of that; Based on my vast experience stuff." Apparently artistic appraising is not admissible as evidence in Federal Court.

 

[Austin]

PS: The UPS man just left my new copy of “The Appraisal of Real Estate, 12th Edition.” From the AI: Quote from page 443: “Sequence of adjustments: The order in which quantitative adjustments are applied to the sale prices of comparable properties. The sequence of adjustments is determined by the market and through analysis of data.”
Same page: “Adjusted sale price: The figure produced when the transaction price of a comparable sale is adjusted for elements of comparison. When the appropriate sequence of adjustments is followed, several intermediate adjusted sale prices are calculated and used as the basis of subsequent adjustments.”
Sounds like the AI has been reading my posts.