market analysis conflicts within report

[gbnumbercruncher]

HF Mudd - your example is very similar to my situation. Depending upon how I frame the search parameters, I could support a couple of different conclusions for the price trend in the market. Since my comps are fairly recent, the resulting time adjustments or lack thereof will have a minimal affect on the value, but again the neighborhood trend checkboxes could drastically impact the loan. I am hesitant to give too much weight to the market participants (primarily brokers) as they typically will have a strong bias to put as positive a spin on the market as possible. Given these circumstances, I must rely on my judgment as an appraiser and my familiarity and experience with the market area to arrive at a conclusion as to the trend of the market. It's more subjective than I would like, but without a definitive trend jumping out from the data, it is up to my interpretation of the data based upon my judgment and expertise. I guess that is why they pay us the big bucks!

 

[J Grant]

Two different appraisers can look at the same data set and arrive at different, well supported opinions of the market trend

I am not arguing this on a personal level, but on a methodology level. How can two differing opinions be both well supported AND credible?

Well supported is only one of the tests,because one can find outlier sales to "support" any opinion of value, and one can frame a statistical search in the same manner. But neither would be credible, if tested against the best substitute comps for subject or credibly developed and explained data search that might include statistics. The same for a market trend, it's either there, or not there, and can be shown through data as well as verified with inerviews and recent experience in the area.

If prices are declining and clearly shown to be declining, how can an appraiser look at the data, and form an opinion that it is not declining, and call that opinion "well supported"? What, exactly, is supporting the opinion?


Let's say the sales below is one possible scenario.

Sales in Market X Which are comparable to Subject:

1/11 - Median S/P = $225,000
2/11 - Median S/P = $225,000
3/11 - Median S/P = $230,000
4/11 - Median S/P = $235,000
5/11 - Median S/P = $230,000
6/11 - Median S/P = $225,000
7/11 - Median S/P = $240,000
8/11 - Median S/P = $245,000
9/11 - Median S/P = $240,000
10/11 - Median S/P = $235,000
11/11 - Median S/P = $230,000
12/11 - Median S/P = $235,000

Median Sales price for 2011 = $235,000
Median Sales price in Q4/2011 = $235,000

1/12 - Median S/P = $230,000
2/12 - Median S/P = $225,000
3/12 - Median S/P = $220,000
4/12 - Median S/P = $225,000
5/12 - Median S/P = $225,000
6/12 - Median S/P = $230,000
7/12 - Median S/P = $230,000
8/12 - Median S/P = $240,000
9/12 - Median S/P = $240,000
10/12 - Median S/P = $255,000
11/12 - Median S/P = $250,000
12/12 - Median S/P = $245,000

Median Sales price for 2012 = $235,000
Median Sales price for Q4/2012 = $250,000

Appraiser A concludes that the market is stable, as median sales prices for 2011 are the same as they are for 2012.

Appraiser B concludes that the market is increasing, as recent trends indicate an increase of approximately 6% in the current quarter over the prior year's final quarter.

As both appraisers aren't talking to exactly the same market participants, their conclusions are confirmed by the market participants they speake with on a regular basis.

Both could be considered to be well supported conclusions based on the available data.

I appreciate such a detailed presentation and example to work with!

My feedback is that both conclusions might be well supported, but appraiser's B 's conclusions are better supported and more relevant to the assignment. Why? Because the report is asking about market TRENDS, not a comparison of median prices this year and last year.

Appraiser A conclusion is static, mechanical. Worse, it ignored pertinent recent information. While it may be of interest that this year's median price is stable compared to last year's median price, that is not what is being asked. The question asks about the market price trend. A trend needs to include some historic data, but also needs to include any recent changes in the market, as well as an indication of where the market is headed.

The conclusion that most recent quarter saw rising prices might indicate the "increasing" price be checked (that is, unless the appraiser believes that the last quarter price increase was a fluke, due to a few high sales, in which case they could mark stable and explain.)

On the other hand, marking increasing as the trend would mean appraiser analyzed the activity and concludes that rising prices are likely to continue and thus constitutes a trend...for example that rising prices are based on less inventory, lower interest rates, a better economy, and confirmed by listing/pending data..

A conclusion that is relevant to the assignment is superior to a mechancial, static conclusion , even if a mechanical static conclusion is well supported.

 

[J Grant]

As an aside, just because the last quarter shows price increases, does not mean an appraiser automatically "has" to make time adjustments .

Though an appraiser may choose to make time adjustments, support for time adjustments due to one quarter is a bit questionable.

An appraiser instead can chose to weight the most recent sales more, and/or arrive at a MVO on the higher end of value, if the appraiser feels the last quarter price raise is a trend, not just a fluke .

 

[J Grant]

HF Mudd - your example is very similar to my situation. Depending upon how I frame the search parameters, I could support a couple of different conclusions for the price trend in the market. Since my comps are fairly recent, the resulting time adjustments or lack thereof will have a minimal affect on the value, but again the neighborhood trend checkboxes could drastically impact the loan. I am hesitant to give too much weight to the market participants (primarily brokers) as they typically will have a strong bias to put as positive a spin on the market as possible. Given these circumstances, I must rely on my judgment as an appraiser and my familiarity and experience with the market area to arrive at a conclusion as to the trend of the market. It's more subjective than I would like, but without a definitive trend jumping out from the data, it is up to my interpretation of the data based upon my judgment and expertise. I guess that is why they pay us the big bucks!

Very true lol, why we are paid the big bucks...

To address the comment about judgement being subjective, to support a judgement, particulary in a changing market or with an emerging trend, there is a way to do it.

for example, take a changing market with an emerging trend. The market was stable for 2 years and now had a recent quarter price increase. How do you verify this to be a credible trend, and make a judgement you feel confident about? How can you be relatively sure this is a rising price trend, and not due to a few high random sales?

The way to do it is to cross verify the sources of information, and see if they match up as a consistently indicating the market change.

Source 1) Interview realtors: You would not want to rely totally on this, as they have a bias, still, they know the market, and asking specific questions, such as are there multiple offers, will get results.

Source 2) Recent past sales: Increasing the last 3 months.

Source 3) Listing/pending prices: Listing prices are higher and more contracts are in pending status

Source 4) Inventory absorbtion: Less inventory present, demand equal to or exceeding supply

Source 5) Marketing time: Recent listings have short days on market and some have multiple offers.

Source 6) Statistics: Statistics show a median price increase.

Source 7) Economic news: Economic news shows a slight uptick in job market, increased consumer spending

Source 8) Lending/credit: Interest rates are low, leading to more buyers qualifying for homes in subject price range.

So, now you have 8 different sources all pointing in the same direction to support a judgement and prove it is not just subjective.

 

[Terrel L. Shields]

Terrel is channeling Ludwig Wittgenstein

Almost

More Eugene Pasymowski MAI who pointed out the flaw in using more adjustments than comps. As he points out the typical appraiser

"violates two simple rules in statistics:
1. Sample size is too small
2. Variance in the real estate market is not calculated"

3 sales or even 6 is a very small sampling.

As shown above, the maximum number of mathematically possible adjustments from a​

sample of three (3) sales is one (1) adjustment, so the appraiser’s calculations are fatally flawed.

If we have to rely upon "judgment" then relying on part judgment and part math is a waste of time. Just rely upon your judgment in the first place.

 

[coolhandluke]

Almost

More Eugene Pasymowski MAI who pointed out the flaw in using more adjustments than comps. As he points out the typical appraiser 3 sales or even 6 is a very small sampling.

If we have to rely upon "judgment" then relying on part judgment and part math is a waste of time. Just rely upon your judgment in the first place.

Why not expand the criteria to compound a more inclusive and less flawed sampling, analyze that information and then rely on your judgement? Then you will have a supported opinion rather than a 'because I said so' conclusion.

 

[J Grant]

I read the MAI article and it left me questioning portions of the content. First of all, he is trying to sell his own software (realstat). The article is a form of advertisement as journalsim, designed to promote software. How can a piece that directs you to the website to buy his software be objective?

To "prove" that his software delivers a "correct" value, he puts down traditional appraiser techniques as guessing and for using too small a data sample. He refers to his software solutions as math based econometrics as well as being scientic.

Appraising, partic res appraising, is not a math problem or a scientific problem. It is a market and valuation problem based on analyzing market activity and behaviour of particpants. (Though some math is involved),

He refers to arriving at a "correct" value. What is a "correct" value in a res report? Correct as compared to what benchmark? I suppose he means that statistics or spreadsheets would, in a circular fashion, support the value as "correct", but that it still might not be a credible and supported value according to the most relevant market activity.

He states the res data sample of 3-6 comps as "too small". He suggests using numerous comparable sales, such as 50! He misses the fact that a sale is not a comp, and it is rare, like hitting the lottery, for any subject to have 50 interchangeably good recent sales that are truly comparable. The res appraiser uses the 3 or 4 or 5 most relevant comp sales, but not after sifting through and analyzing numerous others.

The more numerous sales that are introduced, it means a wider search for data that tend to stray form being true comparables . This skews results, aweakness of statistics he does not address.

I agree statistics or regression analyis could be used to support / derive adjustments, or to for median prices or for vacant land $ per sf and other functions. But to base it on as reliable to deliver a MVO is another thing. would that be more akin to AVM type valuations? They have been shown to be reliable in some cases and unreliable/ questionable in others.

I do agree with his point that a weakness in traditonal appraising is that an agenda can drive selection of comps or making choices in a report to supporting a pre conceived value direction.

If such an agenda is present, is a problem with the appraiser, not the methodolgy. However, his program on its own can't solve that. Since it's the appraiser's ethics that are the problem, an agenda driven appraiser will simply use his program the for the same ends. For example, if the data he loads does not result in a high enough value, the appraiser can filter the search and eliminate certain sales.

 

[Mike Garrett RAA]

I have changed my mind on what I use for analysis on page 1 Neighborhood market condition. Expanded my search criteria to two years instead of one so that I have a larger data set. While I do see some value increase it is so minimal I am reporting stable in most instances. Again, this is over-all and not comparable specific.

On the other hand, the market conditions (MC) form is comparable specific. I'm a bit conflicted about saying a buyer would consider a 2 story comparable to a rancher IN MY MARKET. Or, that a townhouse or condo is comparable to a single family detached.. With that in mind, I prefer to compare apples to apples and oranges to oranges. The data might be sparse but it is what it is. Not uncommon to have from 3 to 10 sales for each of the three time periods.

I do indicate how I filter the data in the summary section and also add a comment as to whether there is sufficient data for meaningful trend analysis. Since the MC form specifies a one year time period my data is limited to one year where as on page 1 of the 1004 to use a wider time period.

Have not had anyone question my analysis or say it is inconsistent. I do know they look closely at what is on the top of page two of the 1004 and compare that to what is reported on the MC form. That data should always reflect sale prices and numbers. During the last year I have included a one-line CMA for all of the active, pending, and closed sales that I considered comparable; however, I only grid my three most comparable sales unless the client asks for something different. I do have one client that wants four closed sales and two active or pending listings to be gridded. Over kill in my opinion.

A chief reviewer for the VA in Denver once told us..."three closed sales are sufficient UNLESS there is a wide spread in values which means you didn't select the BEST comparables". He also said, "we are not buying these appraisals by the pound, concise is better". My typical report is 21 pages and contains 19 photos of the subject and 3 comp photos. It still uploads to the VA portal in less than 20 seconds.

 

[Daystar]

MC Form

FNMA wants only relevant true comparables in the subjects market area on the MC form. I agree with most, that sales will be few in most markets and therfore the data imputed on the MC form will more than likely be an unreliable indicator.

A macro view of the market would be a better indicator of what is going on in the subjects market. (imho). Having said that, all three parts of the report should agree, otherwise you have contradictory information in the report and the reader more than likely will not be able to decipher through it.

 

[Metamorphic]

Almost

More Eugene Pasymowski MAI who pointed out the flaw in using more adjustments than comps. As he points out the typical appraiser 3 sales or even 6 is a very small sampling.

If we have to rely upon "judgment" then relying on part judgment and part math is a waste of time. Just rely upon your judgment in the first place.

You learn that on your first day in Linear Algebra Class. You have to have at least 1 more equation (comp) that variables (adjustment) you are trying to solve for. Of course that's when you're dealing with precise mathematics. In our situation our equations are all contaminated to various degrees with dozens of sub variables (buyer caprice, unusual buyer preferences, differences in negotiating skill, subtleties of location we can't realistically consider, etc.) that blur the pure mathematics and require an even greater number of equations to start to statistically cancel out these sub variables. So now you're back to what amounts to an AVM.

I agree with comment on judgement vs math. Even when you do the "math" in our business, the only time you get a discreet adjustment is when you quit thinking about it too soon. Any kind of vaguely thorough attempt to isolate an adjustment will yield a range of reasonable adjustments, so again you're left using judgement because most appraisal practice (unwisely) requires a point value instead of the more realistic value range, which means you must use judgement to pick a value within that range.

So after you've done the math often enough on a particular variable (whoops..."adjustment") to know what kind of reasonable range that effort will yield you, why not just jump straight to using the judgement to pick a reasonable number?

As I've evolved my philosophy on this I'm coming more to the opinion that a SCA grid can never be more than a plausible mathematical (quantitative) explanation of the most reasonable qualitative analysis of the situation.