Sales Comparison Grid & Cost to Cure

[RCA]

Where do you get that adjustments in the sales grid have to be based on measurable or quantifiable attributes? The vast majority of appraisals are based to a large extent on subjective judgment for items such as view, condition, quality of construction, functional utility, and so on. But of course, it shouldn't be this way!!

HOWEVER, my method which I call the Residual Constraint Approach (RCA) lumps all variables without measures into one bag and uses the regression residual to in fact indirectly measure their value in a fairly accurate way. It simply subtracts the value of the measurable features, as obtained from MARS regression from the comparable sale price to get the residual - which by logic must be the value of everything else. It turns out that once you have the value of that "everything else" you can divvy it up any way you want without impacting the final adjusted sale price.

(Noticed in the first comment - I did make a correction to one of the equations.)

It is all mathematical and proven. There is the issue of Error, such as data errors. We can't do much about that, so the underlying assumption is that such errors, positive and negative, generally cancel out and don't have much, if any, impact on the final result.

There is an additional technique I haven't gotten around to documenting yet. -- That is the one single point where the appraiser using this method has to make a subjective estimate ---> the Subject residual has to be estimated because there is no sale price for the Subject. The way this is done is to rank all comparables (as fed to the MARS regression) based on their residual values - and by studying the ranking, place the subject within that ranking where it best fits. Noting of course that a ranking based on residuals will indeed be from the worst appeal to highest appeal homes: Homes that sell for more than expected are because the "Other" features have more market appeal and those with the lowest residuals have the "least" market appeal.

So you can quantify the value of the unmeasurable features - as a lump sum, - but that is all you need actually.

And, by the way, the Cost to Cure, definitely does not go in the Sales Grid. What goes in the Sales Grid is "Market Reaction". So, do it with RCA and you will have "measurable" and "market reaction." It is the ONLY way that it can be done.

None of the other appraisers on the face of the earth, as far as I know, can do this - except for me. If you can figure it out (it appears you are fairly bright and have the right mind set) -- good for you.

 

[J Grant]

And, by the way, the Cost to Cure, definitely does not go in the Sales Grid. What goes in the Sales Grid is "Market Reaction". So, do it with RCA and you will have "measurable" and "market reaction." It is the ONLY way that it can be done.

None of the other appraisers on the face of the earth, as far as I know, can do this - except for me. If you can figure it out (it appears you are fairly bright and have the right mind set) -- good for you.

Adjusted sales prices must be equal seems to belong to you only, I never see it in any text books and it does not sync with peer practice and peer practice is a standard of USPAP.

If you consider all the appraisers (peers) successfully appraising for MV for decades to be idiots that is your problem - and out of sync with the billions lent by mortgages and the reliance on it by attorneys, the IRS etc. They are all wrong and only you are right .

 

[TekJ42]

i'm sure by the time you read this, the roof has been finished. close enough to drive by and take new pictures. sometimes you get the bear, and sometimes it gets you. and sometimes you bite the cost to get it done, should have waited. i can't believe the lender could settle that fast, before it was done.

I'm sure it was completed days ago. I offered to go back out - they refused. As has been suggested previously, I should have contacted the AMC as soon as I saw it was not finished. Not that it would have mattered at that point... the real problem is I didn't understand that assignment condition prior to completing the inspection. Noted and corrected for future assignments.

 

[TekJ42]

And, by the way, the Cost to Cure, definitely does not go in the Sales Grid. What goes in the Sales Grid is "Market Reaction".

Amen. Thank you.

 

[Tom D]

WTF , that is the day he went out, stop confusing the issue - the lender needs it done on x date and for their own loan purpose can not wait - appraiser can deal with it or turn down the assignment.

watch the mouth. so it takes weeks to do a roof? but they can wait for the back and forth time wise. i've been in the mort business, don't make this so dramatic. were you an undewritter in your past life.

 

[RCA]

Adjusted sales prices must be equal seems to belong to you only, I never see it in any text books and it does not sync with peer practice and peer practice is a standard of USPAP.

If you consider all the appraisers (peers) successfully appraising for MV for decades to be idiots that is your problem - and out of sync with the billions lent by mortgages and the reliance on it by attorneys, the IRS etc. They are all wrong and only you are right .

Yes, the so-called "Art of Appraisal" hasn't progressed in the past several decades due to idiots over at the Appraisal Instute and RICS. NOT A BIT.

It takes Software Engineers (hard-headed ones) to move the world forward.

That's just the way it is.

 

[J Grant]

watch the mouth. so it takes weeks to do a roof? but they can wait for the back and forth time wise. i've been in the mort business, don't make this so dramatic. were you an undewritter in your past life.

weeks or days, not our issue - if the lender wants it done AS IS as if x effective date that is what we do.

Maybe the owner needs funds released so they can finish the roof. Whatever the reason, that is the date of the inspection- we should notify lender or client and if they direct us to proceed when proceed.

 

[Tom D]

weeks or days, not our issue - if the lender wants it done AS IS as if x effective date that is what we do.

Maybe the owner needs funds released so they can finish the roof. Whatever the reason, that is the date of the inspection- we should notify lender or client and if they direct us to proceed when proceed.

i agree, what the lender wants reasonable, the lender should get. you think the home owner started the roof fix before they had any money. that an interesting thought.
i'll gladly pay you tues for a hamburger today. only old appraiser will know where that remark came from. shiver me timbers.

 

[J Grant]

I've had more than a few owners say to me at the appraisal inspection:" I hope the loan gets done so I can finish the (bathrom/kichen whatever)

Why they don't have enough money to finish it is not my business -

 

[George Hatch]

You still haven't answered my question. Do you use cost based adjustments in market based approaches?

As I read it, you didn't complete the assignment per the terms of the engagement and you didn't provide a competently developed "as is".

From the client's perspective you didn't complete the assignment competently, and based on your questions it appears you weren't competent to develop an "as is" because you're here asking people how to do it and challenging some of the responses.

There's no point in getting fragile over a lender offering suggestions on how to solve a situation that you didn't solve in your report. We wouldn't take it personally if a borrower or a broker did it; we would just blow it off and proceed to do what we are supposed to do.
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In any case, here's the answer on the "how to": The typical buyer for this property who would have closed their sale as of that date and with the structure in that "as is" condition might not even be an owner-user and that property might not even qualify for SFR financing at premium terms. The buyer might be a contractor or investor who will intend to complete the roof and flip the property for a profit. So no, "cost to cure" will probably not cover the market's reaction to those conditions. You should anticipate to find a discount consisting of "cost+contingencies+profit" which will exceed the cost to cure.

The way you would develop such a discount would be to START with the costs and then figure out what such investors expect in terms of profit. One way to do that would be to find flips where you can figure out what the difference was between the initial acquisition vs the subsequent resale. Figure out how much they spent - aka the costs - to do the rehab/remodel. From there, the equation amounts to [resale price - (acquisition+costs) = profit margin]. Find several examples of heavy fixers or flips to find the before/after and figure out how much these investors expect. If they spend $5K to fix a cracked slab or redo the finish on a pool then how much extra beyond that $5K do they clear upon resale?

You're not looking for direct comps for your SC grid; you're looking for matched pairs (beater vs finished) from which to extract the adjustment factor. Then you import the adjustment factor in for use with the direct comps in your SC grid.

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BTW, all RE is local; but in my region the discounts frequently amounts to "cost x 2". If they spend $75k on a remodel they expect to clear another $75k to offset their contingencies, their nobody-works-for-free and their opportunity costs for whatever resources it took to acquire, hold and market the project. If the roof is the only element and the cost is less than $5k then - based on what I've seen in the past - I would anticipate the discount to be more than cost x 2 due to the small cost involved, so perhaps cost x3 or cost x4.

Regardless of the above, you need to look at the market data for fixers and develop your own opinion as opposed to taking our word for anything. You're trying the emulate the market's reaction to these attributes, not ours'.