"Quantifiable Market-Derived Methods" for adjustments required by FNMA/USPAP

[Joe Flacco]

Super rural is not as complex as urban / suburban high-end.

Super rural you are dealing with mostly locations that have similar appeal. Urban / suburban that level of appeal shifts in small distances.

What is feasible in one location might not be feasible a couple miles away.

 

[J Grant]

Super rural is not as complex as urban / suburban high-end.

Super rural you are dealing with mostly locations that have similar appeal. Urban / suburban that level of appeal shifts in small distances.

What is feasible in one location might not be feasible a couple miles away.

Exactly. The feasibility of market acceptance in one location, but not another, is why an over improvement ( or super adequacy) exists as a factor in appraising.

Dragging in a comp from another area may or may not be relevant, and using a different area sale may or may not need a location adjustment. Past sales in the immediate subject market area are often more reliable - if they can be found. The distance radius for what is reasonable changes with each appraisal; however, a fundamental principle is that it would be an area the buyer for the subject would consider (and taht includes a range of price ) -not just some place on a map or within X miles.

 

[Sadie]

Before we discuss this further, we have to discuss what the acceptable area is where something similar has sold. Ale Brewer previously mentioned that his standard is something like a 50 mile radius which based on my experience and observations is ridiculous.

Let me describe an example.

In a neighborhood about five miles away from me in Potomac, they could buy a two acre lot for $2 million, spend $6 million on construction, and sell it for $10 million. It is feasible in this specific location.

In my neighborhood, five miles away, which is adjacent to Potomac, a two acre lot would be about $400,000. If someone built the exact same house for $6 million, it would be a major overimprovement.

If it was feasible to build, then with entreprenurial incentive, it would be worth $8-$8.5 million.

If it is over-improved, how much is it over-improved?

The highest sale price on less than 10 acres is $2.3 million. If it is worth what it cost but there is no entreprenurial incentive to build it, then it would be worth $6.4 million. But I doubt someone would even pay that.

There is no rule as to what constitutes your search radius. No rule about what defines your neighborhood. Each property is unique in that way. You are hired as an expert in the area and you should know. For example, you are in a neighborhood of mostly 1950's single level homes with SF between 1000 and 2000 SF, that 1 year old 3000 SF two story home is an outlier. The question is, is it an over improvement or have other similar homes not sold. Based on the neighborhood, an argument could be made for both. Its your job to explain which is it and support your analysis.

Fannie has provided guidance: A neighborhood is defined as a congruous group of complementary land uses. Fannie Mae requires the appraiser to perform an objective neighborhood analysis by identifying neighborhood boundaries, neighborhood characteristics, and the factors that affect the value and marketability of properties in the neighborhood.

 

[Joe Flacco]

There is no rule as to what constitutes your search radius. No rule about what defines your neighborhood. Each property is unique in that way. You are hired as an expert in the area and you should know. For example, you are in a neighborhood of mostly 1950's single level homes with SF between 1000 and 2000 SF, that 1 year old 3000 SF two story home is an outlier. The question is, is it an over improvement or have other similar homes not sold. Based on the neighborhood, an argument could be made for both. Its your job to explain which is it and support your analysis.

Fannie has provided guidance: A neighborhood is defined as a congruous group of complementary land uses. Fannie Mae requires the appraiser to perform an objective neighborhood analysis by identifying neighborhood boundaries, neighborhood characteristics, and the factors that affect the value and marketability of properties in the neighborhood.

OK.

So how much is it over improved? If it is not overimproved, then it is worth cost + entreprenurial incentive. If it is over improved then it is worth less than that. It might be worth cost without entreprenurial incentive. That difference alone might be a 20% range.

Is it worth less than cost? Then how much?

 

[Joe Flacco]

You would probably have to find another brand new house in a similar neighborhood of all 50's houses that sold to accurately measure the depreciation. At least a new house in a 50's neighborhood with very little developer activity. If it was feasible then there would be developer activity.

 

[Sadie]

OK.

So how much is it over improved? If it is not overimproved, then it is worth cost + entreprenurial incentive. If it is over improved then it is worth less than that. It might be worth cost without entreprenurial incentive. That difference alone might be a 20% range.

Is it worth less than cost? Then how much?

You are the expert, you get to decide. Once you figure that out, you make your adjustment. That is why you make the big bucks writing addendums explaining your thought process.

 

[Joe Flacco]

You are the expert, you get to decide. Once you figure that out, you make your adjustment. That is why you make the big bucks writing addendums explaining your thought process.

I know what the job is.

You expect two appraisals to be within 10% all the time in that scenario? That is what you are arguing with me about.

 

[Sadie]

You would probably have to find another brand new house in a similar neighborhood of all 50's houses that sold to accurately measure the depreciation. At least a new house in a 50's neighborhood with very little developer activity. If it was feasible then there would be developer activity.

Or, maybe its a neighborhood where there are homes that are undergoing massive renovations that double the SF.

I think we have probably all been in a neighborhood that could be referred to as maybe Felony Flats. And in that modest to say the least neighborhood, is a great big fancy home, next to a literal junk yard. And its your luck to have that as the subject. There is no rule, per square foot, percentage amount to apply. Each situation is different.

 

[djd09]

come on now...waivers make no adjustments...so all the data is flawed, eh DW?

 

[Joe Flacco]

You know what I've noticed. Residential appraisals for community banks when the borrower is a developer are pretty straight forward. It's stright foward when the motivation for what gets built is profit. The appraisals from the banks that do build on your lot construction are hard. It's hard when the borrowers motivation is not profit.