Lender says no time of sale adjustments!

[Steve Owen]

George:

As usual, I don't disagree with the basics of anything you have said. I'm just glad I don't have to deal with the kind of market dynamics you are describing. Still, I kind of wonder, if you can't find new comps how you justify an adjustment for six month old ones. Like I said before, it might be different in your market.

 

[George Hatch]

Austin,

First of all, you notice that none of the SoCal appraisers on this forum have disputed the types of increases that we're talking about here. If you or anyone else is skeptical about these increases, all you have to do is use a national database, find a tract of $100,000 - $300,000 homes anywhere in the region, and compare all of the sale prices from last year to this year's sales. There will be a couple of anomolies in each group, to be sure; but the overall trends should be quite apparent. And no, appraisers did not create these trends by aggressive valuation methods. And I know for a fact that ours is not the only region to experience value increases. Other metro areas have similarly increased. Soon, some areas, maybe including ours, will experience significant price declines. At that point, using a dated sale of 6 months will require a downward adjustment.

You're kidding about a 'built-in' time adjustment, right? We shouldn't be making 'built-in' adjustments of any type without being able to demonstrate that such an adjustment is warranted. I wouldn't abritrarily make an adjustment for a 4th bedroom over a 3-bd home unless there was some indication in that market segment that such an adjustment was necessary. Matter of fact, I wouldn't bother with a time adjustment of any sort in a 4% annual increase market, or even an 8% annual market. C'mon, why should we bother with a 1.5% adjustment that is iffy at best? Better to leave it alone and just use it to demonstrate a trend.

It's true enough that sufficient data to support such an adjustment may not exist within the comparable sales presented on a comparison grid. Genuine 'Matched Pairs' are actually not that common. Nevertheless, data can often be found in the same market segment, albeit with different sized properties or in nearby competing neighborhoods. Sure, these data may not be directly comparable to the subject for the purpose of documenting the appraiser's value for the subject, but they can provide background and context for some of the adjustments.

How about this; when one of your comparable sales has a prior sale within the previous year and there have been no significant improvements. Would that be sufficient to document a change in value based only on the effects of time? We do run into those types of situations here, on an occassional basis. Then there is the comparison of whole sets of data; like comparing sales within a tract of homes from last year to this year's sales. No adjustments, just straight up mean and mode comparisons. This would be a perfect use for one of your regression analyses.

Bottom line, an appraiser will always be looking for the more recent, proximate and similar comparables to use if for no other reason than it makes their job easier. Adjustments are made in a comparison grid only because the appraiser failed to come up with sufficient 'identical' comparables. Sure, time adjustments as a tool can be abused, particularly by the semi-informed. But so can any other tool, like Marshall and Swift, or a DCF analysis tool like Argus, or a Gross Rent Multplier adjustment spreadsheet, or (and especially) a regression analysis. The possibility of abuse should not justify their prohibition.


George Hatch

 

[Farm Gal]

Austin:
You will also note that no No. Cal appraiser will dispute the increases either... My folks originally purchased thier home just south of San Francisco for $22,000. It is considered a 'starter' home, being built in 65, and not in a desireable area of town. It is a not uncommon tract house built by the same builder in exactly the same finishes no less than 30 times in the specific subdivision and one or two toher of which I am aware.

House next door sold last month, same floor plan, similar condition. $499,000.

Three years ago they were going for $450,000 or so, then they dropped to $350,000 due to a drop in the market, but the market is 'good' again so 1/2 a million.

So SOME areas have honest to goodness value changes that require time adjustments.

I have a friend who 'Bought High and Sold Low' three times in a row in moving from CA to CO. Sometimes within under a year of purchasing a home, there were value changes of up to 15%... You might want to debate with HER wallet about time adjustments and changing markets!

Last time lucky (so far) she seems to have purchased on a low which was lower than the current low... and MUCH lower than last years high. Timing in those markets is EVRYTHING. Appraisers in such markets HAVE to address it.

Now us folks in the stable (as in who wants to live here) midwest... have not such problems, as we are largely dealing with the general rate of inflation instead of market appreciation... and I will quietly point out htat in many areas we do not even have that much 'appreciation', but rather property 'values' in real 'time adjusted' terms are dropping like stones.

 

[Alan Simmons]

Rijman, please understand I do not have ANY knowledge of your market or situation. I am just trying to connect some dots.

First, "If the appraiser believes that it is appropriate, he or she also may use contract offerings and current listings as SUPPORTING DATA." (Fannie Mae Selling Guide, Section 406.03 - Sales Comparison Approach - Subsection A (emphasis added).

I have used listings as comparables 4 and 5 to support values JUST beyond the range of comparables 1, 2, and 3. (Had nothing to do with time though)

"Time adjustments must be representative of the market and should be supported by the comparable sales whenever possible. The adjustments must reflect the time that elapsed between the contract date (or the date of the "meeting of the minds") for the comparable sale and the effective date of the appraisal for the subject property. (Fannie Mae Selling Guide, Section 406.03 - Sales Comparison Approach - Subsection B)

I do agree with you that many Appraisers are scared to make some adjustments. Around here it is mostly noticeable in the $S/F adjustments.

 

[Susan Priore]

What is wrong with that picture to begin with????

If your opinion is justified by market evidence etc. than I would report the Lender/LO to his governing authority!

Think about it...

We, as appraisers, are under such scrutiny (USPAP)…

The Lenders are as well; and if your adjustments are valid, the lender is practicing unethical behavior…plain and simple!

 

[Steve Owen]

Excellent point, Susan. The only problem is that most of the governing agencies for mortgage lenders are toothless watchdogs. I turned one in to my state for unethical behavior (not paying; and then conditioning payment on loan closing, among other things) and they sent the lender a letter asking them to explain themselves (quoted the law real nicely). Three months later they sent another letter asking why the lender didn't respond to their first letter. Ho hum.

 

[bradellis]

Austin,

I am obliged to confirm what the SoCal appraisers are saying. 1% per month is nothing in many areas. MY house incresed that much and I am NOT in a relatively high demand/hot area. There is simply a lack of inventory. We are seeing bidding wars on homes the day they come on the market. All the realtors are aware of this and so are the better appraisers.

Short term? Perhaps you should apply your statistics to the SoCal market. You will find this has been going on for quite a while now.

By the way, the AI many years ago via some of its instructors claimed the only true basis for a time adjustment is the home that sold and re-sold within a defineable period with nothing having happened to it except for the passage of time.

Why not go to them and offer your solutions? Maybe they will adopt them.

Brad Ellis, IFA,RAA

 

[Austin]

Brad: The AI instructors told me the same thing about how to make time adjustments; finding a house that sold then resold. The same instructor taught me the wrong sequence of adjustments, matched pairing, and a lot of other voodoo tricks. I couldn’t believe anybody in his or her right mind would find a house that sold then resold and derive a compound rate of increase. Ever heard of flipping? The very fact that it resold should tell you something. That is the algorithm used by AVM. It completely ignores normal random variance in the market and is based on the assumption of a perfect market.
What you are talking about in CA has nothing to do with time; it has to do with growth outpacing supply. As long as the growth continues you will never have a problem. Funny how the growth rate is always the same around 1% per month. Problem is, growth can’t continue forever. Sooner or later market equilibrium is reached or the local market gets so far out of balance with the rest of the country and then the bottom falls out. My grandson is three months old. If he keeps growing at the present rate, I estimated that by the time he is 21 years old he will be 15 feet tall and weigh 72,000,000,000 pounds. His weight is increasing at 10% per month. Same principle.
Austin NAIT (Non Affiliated Independent Thinker)

 

[bradellis]

Austin,

Of COURSE it has to do with time. During the periods when demand exceeds supply the prices do not change over night- it takes TIME. Time for the market to adjust to the realities for both buyers and sellers. Coupled with inflation and other factors, it takes time for the information to saturate the market.

Flipping has nothing at all to do with it. I could show you tons of examples where increases occur with nothing having happened to the house/property except for the passage of time- and they are not flips. I know what flipping is. If demand and supply both stay static- even when demand is exceeding supply- as it is here in SoCal- it is the passage of time that makes the values increase. Only when the demand/supply factors change would you see increasing/decreasing prices that vary in ways other than based upon time.

Keep doing your statistical stuff and have fun. As they say, firgures lie and (well you know the rest- I do not mean to insult you so I'll leave off the balance).

Brad Ellis

 

[jtrotta]

Bradellis
we have similar situations here in New England, and actually don't know if it is a "Time Adjustment" or "Market Trend Adjustment" that would depict market activity/value. And the Real Estate market is in a cycle, currently upward and eventually downward. Now if there are any *allstars out there that can predict when the downside will happen, you are in the wrong bidnez - similarily, if you know the next time it will track upward :?:

Austin;
with regards to "FLIPS" - the sequence you describe is not Flipping :!:
sometimes I think you get carried away with yourself and your tounge & brain collide and we have to interpret your meaning - thats a tough call :roll:

Please think responsibly 8)