Neighborhood Boundaries

[MN Mark]

The end game for many of today's appraisers seems to be defining neighborhoods as largely as possible in an effort to make the data as applicable in as many future reports as possible.

Personally, I believe that it has been overzealous underwriters who have caused the widening of neighborhood boundaries.

Let's see, define the neighborhood boundaries accurately, wherein you have 1 reasonable comp, with two from outside the neighborhood, knowing that the underwriter will harass you for the non-existent comps within the neighborhood that they think grow on trees. OR Define broader neighborhood boundaries so that all three of your sales are "in the subject's neighborhood" and keep the underwriter off your back. It became a pretty easy decision for many appraisers.

Of course, Fannie Mae says, no problem, if you have to use comps from outside the neighborhood simply explain why it was necessary (I'm paraphrasing) but that doesn't stop the underwriter from treating the guidelines as black and white law.

We can find example after example of other areas in which the same principle applies. Overzealous underwriters and/or overzealous internal policies by the lenders caused appraisers to distort reality in order to create the illusion that the appraisal and the property met the sometimes impossible internal standards of the lenders, which were well beyond Fannie Mae guidelines.

Here's another one. Anyone ever heard it said not to make adjustments above the room count on a 1004? Generally speaking, it could be said that a property for which an adjustment above the room count is necessary, may not be such a good comparable after all. Those are the most significant characteristics of the property, with everything below the GLA being of lesser significance in how a buyer makes a buying decision. Problem is, when there are no other comps, or you have various other reasons why something is a good comp in spite of the necessity for an adjustment above the room list, then you get to have the underwriter come back and ask for the imaginary comparables that require no adjustments above the room list and/or add to the already detailed commentary you'd made that they didn't bother to read. So, what did appraisers do in response? They stopped making adjustments above the room list even when it was warranted.

The reason good appraisers get harassed and hounded by underwriters, while skippy goes about his merry way is that skippy doesn't make adjustments that the underwriter will find unpalatable. He uses superior comparables, but just calls them all similar, whether they are or not, and the underwriter leaves him alone.

AND, the larger the adjustment, the more likely the underwriter is to harass you. So what did appraisers do in response? When adjustments were so obviously necessary that it wouldn't get past the underwriter, they started making smaller and smaller adjustments, regardless of what was warranted. Let's see, if I adjust the acreage for this comp correctly, it should be $5000 per acre, but that would exceed the 10% guideline and the underwriter will make me provide vacant land comps in order to support the adjustments. Hmm, but if instead I brought the acreage adjustment down to $1000 per acre, then the adjustment will not exceed guidelines and the underwriter will leave me alone.

So skippy makes few, if any, adjustments above the room count, even though one of his comps is superior quality, two are in a superior neighborhood, and another is superior condition. No problem says skippy, I'll just call them all similar and leave my adjusted range very wide. I can just throw a dart somewhere in the middle and it should be okay. And what happens? Nothing. The underwriter leaves him alone.

Now, Quality Appraiser makes adjustments in cases like that, and defines realistic neighborhood boundaries. But that means two of his comps are outside of his defined neighborhood. The underwriter sees this and thinks, "Skippy can find comparables that are within the neighborhood and that don't require adjustments above the room count, so this appraiser should be able to as well." And you get the endless struggle of explaining to the underwriter why everything you did was warranted and necessary.

A big part of the problem in our industry is that underwriters want reports where everything fits into a neat little box. Quality Appraiser understands his market and knows when adjustments are warranted, and he makes them. And he provides detailed commentary explaining it all, but the underwriter doesn't bother to read that, he's just looking at the grid and sees that it doesn't fit into a neat little box. Skippy doesn't need to waste his time on such ridiculous notions as analysis and commentary. Just slap it together, make wide neighborhood boundaries and minimal adjustments. Net result? Skippy's report has the illusion of being a "cleaner" report than Quality Appraiser's report.

The short version? Fannie Mae makes guidelines, the guidelines make sense and have sound reasoning behind them. But Fannie allows exceptions to the guidelines because they understand that things don't always fit into a neat little box. Lender glances over guidelines, decides they are the 10,000 Commandments and concludes that if he wants to sell paper to Fannie, the appraisals must meet the 10,000 Commandments. Lender requires his under-paid and under-qualified underwriters to check for compliance with the guidelines and gives them a handy-dandy checklist to work off of. Underwriter takes the checklist provided by his employer, decides it's a bible and demands compliance with the 10,000 Commandments. Appraiser begins to realize that the more accurate and thorough his adjustments are, the more he gets harassed by underwriting. Appraiser begins making fewer and fewer adjustments. Appraiser then becomes Supervisory Appraiser and teaches his trainee how to make adjustments (or the lack thereof) that will avoid underwriting conditions. Trainee goes on to become a Supervisory Appraiser and teaches his trainees how to make the same adjustments (or lack thereof), though he can't quite remember why it's done that way, but that's the way his supervisor said to do it, so it must be right. And voila', Skippy is born. And underwriters across the nation can't wait to sign off on Skippy's reports, which look like they fit so nicely into that neat little box. Why do I feel like this is the part where I say, "...and they all lived happily ever after"?

 

[Terrel L. Shields]

Sigh. If you all had a copy of the "rules" you would know that the boundaries are whatever streets successfully enclose all of your cherry-picked comps.

That "rule" is listed right under the one that says that the predominate value must equal the subject's value.

No wonder why you can't get 5 reports done a day. Who trained you?

Wendy, you are being naughty...someone will take you serious.

Well.... GP would describe it as anywhere you'd let your child bicycle to is the neighorhood, but anywhere with similar contigious market conditions could be the "market area"...

It is ill defined and I wouldn't worry a lot about it personally. In a small town (say, less than 3000 folks) typically, the whole town is my "neighborhood". In a rural property, i likely would expand that to include the rural properties in that school district. Lack of comps however might require me to use comps from nearby towns of similar economic conditions.

Some things are clear. If I am appraising a chicken farm, then the "market area" is the area served by the poultry company that has the contract...that might be a 4 or 5 county region. A SFR of 1,400, then no bigger than a school district usually.

 

[Wendy]

Wendy, you are being naughty...

Am I going to get a spanking from Janet?

 

[mp2277]

Neighborhood Bounderies: See Market Area Addendum

**Market Area Addendum**
The defined geographic area in which the subject property competes for the attentions of market participants; the term broadly defines an area containing diverse land uses.
Social, economic, governmental, and environmental forces influence property values in the vicinity of a subject property. As a result, they affect the value of the subject property. Therefore, to conduct a thorough analysis, the appraiser must delineate the boundaries of the area of influence. Although physical boundaries may be drawn, the most important boundaries are those that identify factors influencing property values.
The area of influence, commonly called a neighborhood, can be defined as a group of complementary land uses. A residential neighborhood, for example, may contain single-family homes and commercial properties that provide services for local residents. A district, on the other hand, has one predominant land use. Districts are commonly composed of apartments or commercial, industrial, or agricultural properties. In broader terms, appraisers analyze the market area for the attentions of buyers and sellers in the real estate market. A market area can encompass one or more neighborhoods and/or districts.
The term market area may be more useful than either neighborhood or district for several reasons:
Using the umbrella term market area avoids the confusing and negative implications of the other terms.
**A market area can include neighborhoods, districts, and combinations of both.**
Understanding how real estate markets work is essential in almost every step of the valuation process. The term market area - more than the terms neighborhood and district - refers to an area where market participants live and work. The term also refers to areas on which appraisers focus when analyzing value influences.
From: The Appraisal of Real Estate - Twelfth Edition - Appraisal Institute

 

[Mr Rex]

Here's FHA protocol:


Section 3 – Neighborhood



This section should reflect the area surrounding the subject property. The appraiser must observe neighborhood characteristics and surrounding properties to make determinations that will be incorporated into the valuation of the subject property. In all instances, the appraiser must mark the appropriate box for each line in neighborhood characteristics and housing trends. Failure to note conditions that may adversely affect the value of the property is poor appraisal practice and violates the Uniform Standards of Professional Appraisal Practice

.......


Neighborhood Narrative

Neighborhood Boundaries
The appraiser must clearly define the boundaries – north, south, east and west – of the subject’s neighborhood. Providing a description of neighborhood boundaries by physical features such as streets, rail lines, other man-made barriers or well defined natural barriers (i.e. rivers, lakes, etc.) details the make up and understanding regarding neighborhood composition.

Neighborhood Description



Discuss factors that would attract residents or cause them to reject the neighborhood. Some typical factors important to discuss include:

• • Level of maintenance and condition of homes
  • Housing styles, ages, sizes, etc.
  • Land uses
  • Proximity to employment and amenities, including travel distance and time to local employment sources and community amenities
  • Employment stability, in terms of variety of employment opportunities and industries
  • Overall appeal of the neighborhood as compared to competitive neighborhoods in the same market
  • Convenience to shopping with respect to distance, time and required means of transportation
  • Convenience to schools in terms of the distance and time for travel to school

Market Conditions (including support for the above conclusions)

• Provide relevant information in support of conclusions relating to trends in property values, demand/supply and marketing time.
• Provide a description of the prevalence and impact of sales and financing concessions and/or down payment assistance in the subject’s market area.
• Other areas of discussion may include days on market, list to sale price ratios, and/or financing availability.

 

[DMZwerg]

If you are doing a SF appraisal in a major city that is nice enough to have defined and named neighborhoods then, unless it is on a border or strange (lake frontage, lake view) then the definition of neighborhood is probably straight forward. In places that don't then builder plats, elementary school districts (generally most local/least busing), or same lake typically define the neighborhood. As things get stranger or less urban what exactly defines a neighborhood can change radically. Look at lakefront houses for instance when the lake is Lake Michigan. The "same lake" standard obviously no longer applies but valid comparables could be found over 5 miles away.

The subject should be your guide. How odd is it for the area and is it something that would typically indicate a "neighborhood" that large? (an actual medieval castle could potentially have comparable neighborhood of "all of Europe")

 

[Laughing Heir]

IMO the fannie/freddie forms just muddy the waters, they ask for the neighborhood then don't give any thought to the market area ... at least in the preprinted portions of the report.

What a lot of you are describing sounds like a market area - the geographic area, sub-markets, etc. that (somewhat) equally compete for the same pool of potential homebuyers. I like how the GP forms from Ala Mode handle this and IMO it generates a better picture for the intended user to understand what the appraiser is trying to tell them ... if the appraiser actually understands what they're trying to tell the intended user, that is. I've assisted on a couple of commercial appraisals that had a neighborhood that consisted of a small borough and a market area that spanned the entire northeast of the country.

To each their own, but, I really think that the GSE forms cause a lot of confusion. There's always the chance that the comparable sales could be located outside of the neighborhood, it seems it's much more common that the footprint of the market area exceeds that of the neighborhood. Including additional maps in the reports makes it much easier for underwriters, homeowners, and attorneys to understand in my experience. It also takes much less time to include them as exhibits the first time around then having to open up a file weeks after it initially was signed, sealed and delivered.

As to the OP, outside of a very rural area, the neighborhood description that you cited seems like a pretty wide berth and not too believable nor supportable. But, it very well could be, based on your location - you make the call.

 

[David Sawyer]

A lot of my coverage area is waterfrontage. The neighborhood is defined by the type of waterfrontage, wheather it be gulf, river, direct gulf access canals, or indirect gulf access (bridge clearance requirred), fresh water canals/ lakes.

In my coverage area, I have areas where within a 1/4 mile radius from the subject are three different types of waterfrontage, (direct gulf access canals, indirect gulf access canals and fresh water canals) with each type of waterfrontage a $100,000+ "upgrade" occurrs. Plus, the same waterfrontage can be 3 miles away. I have seen a lot of skippys inflate some values by using the wrong waterfrontage for the comps!

Needless to say, I am always defining the term that certain underwriters desiring all comps within one mile radius from the subject. (Since we are on this subject of one mile radius, somebody produce any docs from FNMA, Feddie stating comps within one mile radius from subject)