Must You Prove All Adjustments?

[Thomas N. Morgan]

In a December 30th thread started by Rachel Massey, the idea was expressed twice that one must "prove" adjustments. One Forumite did not agree.

In the past, when I did work for loan origination, I occasionally I would say, adjustment for _____ was appraisers judgment. Never had anyone question it.

I think a little honesty is appreciated by lots of readers.

Tom

 

[CANative]

It's my opinion that you can not make unsupported adjustments. That being said, it's not always possible to "prove" these adjustments in each assignment using a limited data set. I've had no choice but to use the "appraisers experience" from time to time. This comes up most often when there is an across the board adjustment for a particular feature (or lack of) that you can't find in a similar comparable for this particular assignment but you've seen them before in this market. My markets are rural and geographically and economically diverse. What else can you do? I make sure I explain my reasoning and make them aware that they're taking the risk same as I am. This goes for both negative and postive adjustments.

 

[Carnivore]

Thomas,

Cost is one way to support your adjustments. for example, a 18x36 swimming pool in your market might cost 15,000 turn key. Do you think its fair to say that an adjustment for a pool is likely to be less than 15K. Estimating depreciation of the pool would then get you closer and a swag after that could not be disproved.

Hope that was helpful.

How about apartment rentals would that give you and idea for an income approach in the4 absence of other data?

Lots of way to skin a cat.

 

[Ghost Rider]

You don't need to prove them in the report, but you had better have evidence that the adjustment is justified in your work file if you are ever reviewed on it....It depends a lot on the adjustment - I don't give the data I have for a lot of adjustment that I make, but I do comment on ALL adjustments - especially the ones that are highly subjective (View, quality, condition) as to WHY the adjustment is made.....

 

[Michigander]

I like to have a lot of information at my fingertips (on my computer) where I have tried to extract value for one feature or another. Got at least 100 different items that I have done this on over the last 4 years (the age of my current computer, and accessible to me) which I can refer back to time and again. That said, I certainly don't have "proof" on every single adjustment that I make, but I do on any that I think are important and might be questioned (e.g., swimming pools, time adjustments, view adjustments, basement finish adjustments, basement size, etc.) Would imagine others have similar things on file, but not necessarily in their appraisals. Every once in awhile I'll actually include my defense for a paired sales analysis in the report, particularly if I think there might be an issue with that particular adjustment.

 

[Don Clark]

B) Andrew,

Hate to disagree with you but cost has nothing to do with market reaction. In the sales comparison approach adjustments are made on the basis of market reaction to an individual feature or aspect of a subject property in comparison with other similar properties that are as comparable to subject as possible. Now, in every single assignment you may not have to prove why you made an adjsutment for a particular feature. However, over time, and with experience, anyone and everyone should be able to draw certain conslusions. Example. In my market inground pools are not very common, although they are becoming more common. In certain neighborhoods/markets I have noticed, over time, that a certain style and model of home may sell for $5,000 to $8,000 more than a comparable without a pool, all other things being equal. Then, I can form an opinion, on the basis of market reaction to the value of a pool. That same pool may have cost in excess of $20,000. Even with depreciation, that would not indicate a market reaction since depreciation is an element of cost, not market reaction. I have also seen where such a feature is a negative to value. In one case a property would not sell, even in a hot sellers market. Then the seller filled in the inground pool and it sold in a few days. Why? It was most likely due to the fact that the neighborhood was occupied primarily by young families who desired a large yard for their kids to play in rather than one where a pool took up most of the back yard. That is market reaction.

 

[GeorgiaBoy]

I think it is impossible to prove an adjustment as it is just another opinion that the appraiser holds. Like market value, two knowledgeable and experienced appraisers could come to two different conclusions about their adjustments. I do believe, however, that an appraiser should be able to support, with hard data, anything that he/she puts in a report.

 

[Rob Bodkin]

I generally comment on any adjustments above square footage, and can provide the reasoning/support for all of the adjustments if the reviewer needs it.

I would say/agree that adjustments are typically opinions supported by market evidence and experience.

On the Cost Vs. Market reaction issue, I would say that they have a direct connection. A general attitude/approach that I take is adjustments reflect market reaction to the differences, and can/will also be impacted by costs.

There are times when that is probably not true, but it would seem odd that the markets reaction to say a fireplace or deck or extra garage space would be much more or less than the cost to install construct the same. Obviously zoning, land use, over-improvement issues play into that as well. Pools or other "funky" improvements in my market would be different.

Rob Bodkin

 

[Mike Garrett RAA]

The text book answer is ..."adjustments are the results of paired sales analysis". The fact of the matter is...."adjustments are made from the appraiser's experience and knowledge of the market as supported by data in the appraiser's work file and other appraisal work files".

Adjustments are "market perception of value rather than cost"; however, they can be supported by cost information such as builder's price lists of options. Many times buyers shopping for homes compare items such as fireplaces, central air conditioning, patios, and decks from what they see offered in new homes.

I am always ask by REALTORS® for a list of adjustments for certain features. I always reply...there is no magic list. Classic example is ... what is the adjustment for a two car vs three car garage in, say, a $185,000? After they answer, I say...."then would you use the same adjustment in a $350,000 to $400,000 home? Same with fireplaces. Is there one standard dollar adjustment for a fireplace? Of course not! As an example, in my $175,000 ranch style home, the builder charges $3200 for a gas log fireplace. My pairs analysis of similar sized and featured homes indicates a market perception of $2,500. In a $400,000 home the adjustment might be $5,000 to $6,000 for a two story stone front fireplace.

Adjustments are the appraiser's interpretation of the market perception of value. As long as your adjustments are reasonable...and supportable, you should not be required to "prove" them in each and every appraisal report. Just be careful because if you say...."as a result of pairs analysis" the underwriter might just call you on it and want to see that "pairs analysis".

 

[Carnivore]

Don,

My suggestiuon was for those times one might not have data. For example in a rural area with few sales such as where Greg Boyd practices.

In my area it would not work well nor be acceptable.