Final Opinion Matching Sales Approach

[timd354]

timd354,

In your example I would have probably shown a Final Opinion of $247,000, not $250k.
quote]

Teresa, in a typical residential mortgage related appraisal using the fannie definition of value found in the 1004, I don't see how your final opinion of value in this scenario would conform to fannie's definition of market value which is "The most probable price a property should bring in a competitive and open market..."

Clearly, in the given scenario, The most probable price the subject property should bring in a competitive and open market is $250,000, not $247,000 or any other amount. I can see exactly why a mortgage lender would have a problem with the final opinion of value not matching the indicated value by the SCA.

Perhaps you could explain how you arrived at a Final Opinion of $247,000 and what weight you gave to the SCA, the Cost Appraoach, and the Income Approach in relation to each other. It appears that, in this scenario, have given each of the 3 approaches approximately equal weight.

I would contend that, with the exception of a new or relatively new house or an atypical property, the cost approach is of minimal value in the case of a 1 unit residential property. In any case, it is certainly not nearly as reliable of an indicator of value as the SCA for several reasons, the chief among them being the issues of accurately calculating depreciation and accurately estimating site value in areas where there are few available building lots. Regarding the income approach, it is typically not a relaible approach when applied to 1 unit properties in areas where the predominant occupancy is owner occupied. Owner occupant purchasers simply do not typically even consider the property's income potential as part of their buying decision. This was demostrated beyond any doubt in my market areas during the bubble as GRM's doubled and even tripled in many of the areas that I cover. In effect, in markets like this, the income approach just essentially morphs into another, less credible and realiable expression of the sales comparison aproach in the case of most 1 unit residential properties. Thus, in most areas that I cover, the income approach, when applied to 1 unit properties has exactly zero credibility, and, therefore is not even really applicable to solving the appraisal problem on these types of properties.

 

[John Hassler]

I would contend that, with the exception of a new or relatively new house or an atypical property, the cost approach is of minimal value in the case of a 1 unit residential property. In any case, it is certainly not nearly as reliable of an indicator of value as the SCA for several reasons, the chief among them being the issues of accurately calculating depreciation and accurately estimating site value in areas where there are few available building lots. Regarding the income approach, it is typically not a relaible approach when applied to 1 unit properties in areas where the predominant occupancy is owner occupied. Owner occupant purchasers simply do not typically even consider the property's income potential as part of their buying decision. This was demostrated beyond any doubt in my market areas during the bubble as GRM's doubled and even tripled in many of the areas that I cover. In effect, in markets like this, the income approach just essentially morphs into another, less credible and realiable expression of the sales comparison aproach in the case of most 1 unit residential properties. Thus, in most areas that I cover, the income approach, when applied to 1 unit properties has exactly zero credibility, and, therefore is not even really applicable to solving the appraisal problem on these types of properties.

Tim, this is exactly the type of information that should be included in a reconciliation of approaches. I agree that for most reports by the average appraiser the SCA is almost always the best approach but even you admit that there are exceptions when the CA can be given more than "minimal" weight. USPAP is quite clear that the applicability and suitability of the approaches is how to arrive at a value conclusion, not because the client wants the SCA to "match" the FOV as Teresa's noted in the OP.

BTW There's nothing stopping the client from just picking and choosing what parts of the report they want to utilize while underwriting the loan. If this is such a client bug-a-boo then let them set their internal policy to rely on the SCA without regard to the FOV.

 

[Cowgirl]

timd354,

That figure was an error on my part as I was rushing through reading your post and my mines eye only saw the $245k and $247,500 figures thinking those were the Sales & Cost Approaches.

To sum it up "My Bad" You are right in that example.

But my whole point was the MC requiring the Sales Approch to match idential to the Final Opinion. It was not intended to start up discussion regarding how we got to that figure. Only that they have never been required to be idential but are typically rounded up or down based on which ever approach carries the most weight.

Thanks for all you input.

 

[farmguy]

You beat me to it Terrell. If you are appraising in the country you rely on what ever you can round up. It may be that it lends more support to the cost approach in that you found a good sale that supports some external or functional issue unique to your type property or location.

 

[timd354]

Tim, this is exactly the type of information that should be included in a reconciliation of approaches. I agree that for most reports by the average appraiser the SCA is almost always the best approach but even you admit that there are exceptions when the CA can be given more than "minimal" weight. USPAP is quite clear that the applicability and suitability of the approaches is how to arrive at a value conclusion, not because the client wants the SCA to "match" the FOV as Teresa's noted in the OP.
I agree with the above statement....the cost approach may well be the best appraoch in some cases, especially when appraising a unique property or a property which is atypical in the subject's market area. However, I will say that if you do a residential assignment where the cost approach (or income approach) is given significant weight, it is necessary to use a different definition of value than the standard Fanne mae definition of value utilized in the 1004. For such an assignment, it would be advisable to do a narrative or a different form.

BTW There's nothing stopping the client from just picking and choosing what parts of the report they want to utilize while underwriting the loan. If this is such a client bug-a-boo then let them set their internal policy to rely on the SCA without regard to the FOV.

True, but since most loans done need to be saleable on the secondary market, the lenders are hamstrung in what they can do....if they deviate from Fannie and/or FHA policies, they will end up with a loan that is not saleable.

 

[timd354]

timd354,

That figure was an error on my part as I was rushing through reading your post and my mines eye only saw the $245k and $247,500 figures thinking those were the Sales & Cost Approaches.

To sum it up "My Bad" You are right in that example.

But my whole point was the MC requiring the Sales Approch to match idential to the Final Opinion. It was not intended to start up discussion regarding how we got to that figure. Only that they have never been required to be idential but are typically rounded up or down based on which ever approach carries the most weight.
Thanks for all you input.

Okay, I guess I misunderstood your point...if you are complaining that the MC are not allowing you to round your final opinion of value, I agree that is ridiculous.