"Sample" Appraisal: Subjective Value Containment Approach

[RCA]

Some were asking for a copy of the real thing. This is an estate/IRS appraisal. It is heavily redacted, to remove identifying info.

The appraisal is on my website:

Sample Valuation - Intangible Value Containment Approach

This is a heavily redacted report that was created using the Subjective Value Containment Approach

valuationengineer.com

This is a relatively difficult home in the subject neighborhood, as it ranks in the lower 5-10% of homes involved in sales transactions in terms of condition, quality, upgrades. .... This is a neighborhood of small homes in Pacifica, and most have significant upgrades, since it is relatively cheap to upgrade a small home - as compared to a large home. This one, under one owner for the past several decades, is way behind the pack.

I plan on coming out with a PDF that shows the many steps in detail, in the right sequence. But it will be a while before I get that done, as I have other things to do.

In the meantime, maybe some of you can use some of the ideas, in particular, analysis of residuals to "contain" your condition, quality and other subjective adjustments.

 

[Michigan CG]

You left the client and intended users name on page 19 unredacted.

 

[RCA]

You left the client and intended users name on page 19 unredacted.

Yes, somewhere along the way that pdf became corrupted and I did rebuild it from InDesign. InDesign -> PDF -> PDF Redacted -> PDF Redacted with Password --> Publish in Wordpress. So, it can be time-consuming and everything is a bit fragile and quirky with WordPress.

Although, I have to say I consider WordPress to be a very very good product. I have a lot of plugins on my site. One thing I like is the latest GTranslate with "Neural" translation. It does a very good job of translating your website into 30+ languages. SSL and lots of security and backup features.

 

[Michigan CG]

Well the first umpteen pages are very thorough but are they needed for the intended user? Does the intended user really need all of this? They certainly don't expect it. That is more detail than I put in a commercial report.

Your effective date has been redacted but I am going to assume 2015 or 2016 since those are the latest land sales included. How is a land sale from 2000 or 2009 pertinent to the effective date?

In the land value section you give 18 sales from 2000-2018 and then with nothing else tell me a land value of $345,000? This section doesn't tell me how you got there. I am going to assume it is far later in the report? Wouldn't a column telling the reader the $/SF for the land sales be useful information?

In the lease comparable table I would (as an appraiser) like to see $/SF for the leased properties. It tells a lot more story than the table included.

Are we comparing apples to apples here? Two of your rent comps are 2,100 SF while others are about 1,000 SF. We have only 18 data points with significant size differences and an R2 of ~0.70.

A cap rate was used similar to apartment buildings? I am not sure I buy that and your peers do not use cap rates for residential properties but rather GRMs. Maybe the GRM analysis comes later. Is it not typical for landlords to pay water/sewer and trash? If so that would be an added expense.

I like Figure 23 on page 50.

On page 77 it appears you are implying an adjustment of $70/SF for difference in GLA yet the total cost new of the improvements is only ~$130/SF (for the house).

The hardwood only feature indicates that my house with 50% hardwood is worth $10,000 more when the total cost new is only $130/SF and the depreciated value is ~50% of that.

The difference in one bathroom vs. two bathrooms is ~$18,000? That is higher than cost new for a bathroom.

I like the interior photos of the comps in the report. We do that for all of our reports.

You use a lot of subjective interpretations throughout the report.

I got to page 82 of the report and from the beginning I didn't buy any of this. Then I saw a $1,484 adjustment for a ~$800,000 property in your grid. $2k is 0.00025% of the property value. Appraisers are not that good and this is based on a regression model with a ~0.7 R2.

I couldn't quit reading this. So we have a cost approach value of $400,000, an Income Approach Value of $500,000 and a SCA value in the $800,000 range.

Houston, we have a serious problem here. When one approach is 50% of another approach one of them was completed completely wrong (actually two in this case).

If the land value is $345,000 (I don't buy that either as there is nothing telling me how you got there) and the value of the home by the SCA is ~$800,000 then the improvements have a contributory value of $455,000 or ~$529/SF which is more than three times your cost of the improvements NEW.

Your income approach is not even remotely reliable. Using a GRM of 200 ($3,600/month rent) would be a value of $720,000. Your cost approach does not take into account EI which in my world is 20% but even that doesn't help your valuation although it does push the cost approach to $480,000.

Your ten sales, adjusted (from the grid), tell us that your value is somewhere between $747,000 and $806,000 but it takes you 150 pages to give us completely unsupported analysis for two approaches and you make a $1,454 adjustment for an $800,000 property. I find the whole thing to be hogwash.

 

[Artemis Fowl]

I really like how you've approached the "soft" influences using residuals. Some of these methods are pretty cool.

But...

Aside from the approach deviation issues already noted: To pretty much any user/reader...the MARS thing is "black-box tech". Explain all you want they are not going to understand it without a few advanced mathmatics courses. IMO you took what was a relatively simple valuation problem and over-complicated it to the point that it just gets lost. I really struggle to see how this methodology is representative of the thought process of a TYPICAL BUYER. I understand you have attempted to quantify that and applaud and admire the effort. I just don't think the report is understandable...which is kinda required.

A simple relative ranking of those presented sales could have yielded a sufficiently supported value opinion that is totally appropriate for its INTENDED USE and understandable by the INTENDED USER.

Sorry Sir. I do respect and appreciate the effort.

 

[RCA]

Well the first umpteen pages are very thorough but are they needed for the intended user? Does the intended user really need all of this? They certainly don't expect it. That is more detail than I put in a commercial report.

Your effective date has been redacted but I am going to assume 2015 or 2016 since those are the latest land sales included. How is a land sale from 2000 or 2009 pertinent to the effective date?

In the land value section you give 18 sales from 2000-2018 and then with nothing else tell me a land value of $345,000? This section doesn't tell me how you got there. I am going to assume it is far later in the report? Wouldn't a column telling the reader the $/SF for the land sales be useful information?

In the lease comparable table I would (as an appraiser) like to see $/SF for the leased properties. It tells a lot more story than the table included.

Are we comparing apples to apples here? Two of your rent comps are 2,100 SF while others are about 1,000 SF. We have only 18 data points with significant size differences and an R2 of ~0.70.

A cap rate was used similar to apartment buildings? I am not sure I buy that and your peers do not use cap rates for residential properties but rather GRMs. Maybe the GRM analysis comes later. Is it not typical for landlords to pay water/sewer and trash? If so that would be an added expense.

I like Figure 23 on page 50.

On page 77 it appears you are implying an adjustment of $70/SF for difference in GLA yet the total cost new of the improvements is only ~$130/SF (for the house).

The hardwood only feature indicates that my house with 50% hardwood is worth $10,000 more when the total cost new is only $130/SF and the depreciated value is ~50% of that.

The difference in one bathroom vs. two bathrooms is ~$18,000? That is higher than cost new for a bathroom.

I like the interior photos of the comps in the report. We do that for all of our reports.

You use a lot of subjective interpretations throughout the report.

I got to page 82 of the report and from the beginning I didn't buy any of this. Then I saw a $1,484 adjustment for a ~$800,000 property in your grid. $2k is 0.00025% of the property value. Appraisers are not that good and this is based on a regression model with a ~0.7 R2.

I couldn't quit reading this. So we have a cost approach value of $400,000, an Income Approach Value of $500,000 and a SCA value in the $800,000 range.

Houston, we have a serious problem here. When one approach is 50% of another approach one of them was completed completely wrong (actually two in this case).

If the land value is $345,000 (I don't buy that either as there is nothing telling me how you got there) and the value of the home by the SCA is ~$800,000 then the improvements have a contributory value of $455,000 or ~$529/SF which is more than three times your cost of the improvements NEW.

Your income approach is not even remotely reliable. Using a GRM of 200 ($3,600/month rent) would be a value of $720,000. Your cost approach does not take into account EI which in my world is 20% but even that doesn't help your valuation although it does push the cost approach to $480,000.

Your ten sales, adjusted (from the grid), tell us that your value is somewhere between $747,000 and $806,000 but it takes you 150 pages to give us completely unsupported analysis for two approaches and you make a $1,454 adjustment for an $800,000 property. I find the whole thing to be hogwash.

You are a pretty good example of the profession.

Hey look, are you asking me to explain these things - or simply stating a biased opinion? I think the latter. Meaning to say, I could counter each and every objection and you would simply come back with more dumb objections.

But, I'll do this:

1. Generally, unless guidelines state otherwise, you can go back as far as you want in time to get the information you need. Lot sales in this area are few and far between. And have in fact remained rather constant over the past twenty years. I'm going to leave it to you to figure that one out.

2. You can also go back as many years as you want for regression - as long as you adjust for time/market conditions in the sales comps grid.

3. The cost approach and income approach conclusions don't have to match the SCA. In fact in an area like Pacifica, where homes are very expensive, small homes tend to cost far more than what they worth (in terms of the cost or income approach).

4. The cost values in the current California Tax Assessor Handbooks are less that the actual effective costs. You know, you are lucky to even find a decent contractor around here to do anything. And it is going to cost you. And, by the way, they include EI.

5. This is an SRA level report, the kind you would find at CBRE - where I have done residential appraisals. Yes, it is overkill if all you want is a standard Fannie Mae report. I don't do those.

I don't know your name or who you are. But I would guess you are not an SRA or MAI. You are in fact hiding behind anonymity. Very brave and all.

 

[RCA]

I really like how you've approached the "soft" influences using residuals. Some of these methods are pretty cool.

But...

Aside from the approach deviation issues already noted: To pretty much any user/reader...the MARS thing is "black-box tech". Explain all you want they are not going to understand it without a few advanced mathmatics courses. IMO you took what was a relatively simple valuation problem and over-complicated it to the point that it just gets lost. I really struggle to see how this methodology is representative of the thought process of a TYPICAL BUYER. I understand you have attempted to quantify that and applaud and admire the effort. I just don't think the report is understandable...which is kinda required.

A simple relative ranking of those presented sales could have yielded a sufficiently supported value opinion that is totally appropriate for its INTENDED USE and understandable by the INTENDED USER.

Sorry Sir. I do respect and appreciate the effort.

No, you don't know what "back-box" means. The big advantage of MARS is in fact that it is not at all black-box. Look at all the graphs of value contributions. It is telling you everything. Of course, you do need to know basic statistics - and that pertaining to MARS.

It does seem like a lot of work. BUT YOU HAVE TO UNDERSTAND, the focus is on building the model, which can be used for ALL homes in the neighborhood that fall more or less within that property range. These models are fairly stable over time. If you update one every quarter or so, you are going to be just fine (assuming no major economic event). Once set up, they can be easily tweaked for market conditions.
In fact, once you have set up these models for a set of neighborhoods in a county, you are in a position to quickly turn out extensive reports on just about any property, subject to inspection issues.

You see, the model, - it works for all homes in the neighborhood. All docs are more or less in place if you do this right. I think, however, for Fannie Mae and the other GSEs - we will need some additional leeway with a few things.

This is the future! Well for those who can hack the statistics and computer programming. Although, there will be vendors around to make that issue less of a burden. But these guys will push out the others because they can quickly turn around accurately detailed appraisals a reasonable cost, I would say on the order of $150; although a full inspection will up the cost. They can also provide all kinds of other reports and are in a position to also provide "Mortgage Lending Value" - if that task ever gets turned over to appraisers, which it should.

 

[Artemis Fowl]

No, you don't know what "back-box" means. The big advantage of MARS is in fact that it is not at all black-box. Look at all the graphs of value contributions. It is telling you everything. Of course, you do need to know basic statistics - and that pertaining to MARS.

It does seem like a lot of work. BUT YOU HAVE TO UNDERSTAND, the focus is on building the model, which can be used for ALL homes in the neighborhood that fall more or less within that property range. These models are fairly stable over time. If you update one every quarter or so, you are going to be just fine (assuming no major economic event). Once set up, they can be easily tweaked for market conditions.
In fact, once you have set up these models for a set of neighborhoods in a county, you are in a position to quickly turn out extensive reports on just about any property, subject to inspection issues.

You see, the model, - it works for all homes in the neighborhood. All docs are more or less in place if you do this right. I think, however, for Fannie Mae and the other GSEs - we will need some additional leeway with a few things.

This is the future!

I get it. I spent a lot of time mathturbating and didn't come close to what you achieved with your model. None of that changes the fact that to a TYPICAL READER the tech might as well be "black-box". Yes I know what it means. It's great that YOU understand it. Our profession requires that the USER understand it tho...where it falls apart IMO. You haven't at all addressed some fundamental issues that were raised. While it is understandable that you have significant emotional investment in presenting this in a national forum (very courageous), citing SRA and MAI as some sort of divine level of methodology and reporting does not address those issues...nor does attacking your critics. FYI some posters here also do non-lending work for sophisticated clients and have been trained by MAI's to very high standards.

I think your intended user is not the typical appraisal report client.

 

[RCA]

I get it. I spent a lot of time mathturbating and didn't come close to what you achieved with your model. None of that changes the fact that to a TYPICAL READER the tech might as well be "black-box". Yes I know what it means. It's great that YOU understand it. Our profession requires that the USER understand it tho...where it falls apart IMO. You haven't at all addressed some fundamental issues that were raised. While it is understandable that you have significant emotional investment in presenting this in a national forum (very courageous), citing SRA and MAI as some sort of divine level of methodology and reporting does not address those issues...nor does attacking your critics. FYI some posters here also do non-lending work for sophisticated clients and have been trained by MAI's to very high standards.

I think you two anonymous Michigan appraisers are doing plenty of attacking. Reviewing appraisals without geographical competence. ... Yea.

 

[Artemis Fowl]

Not attacking. Honest criticism and open to the possibility that I could be wrong and your method will replace us all.