Sensitivity Analysis To Drive Square Footage Adjustment

[timd354]

Thanks Renee!

Ok well dont kill me on this (regretting this already). There are condition adjustments, above and location for busy roads as well as the ones shown. View attachment 31282

From what you post, sensitivity analysis would indicate a GLA adjustment of somewhere around $30/sf (applied to all comps since they all differ from the subject by >100 sf). If you plug that adjustment in you will see that your range of adjusted sale prices tightens up quite a bit. I would confirm that is a reasonable adjustment using some other technique such as paired sales analysis or regression analysis and if it is shown to be reasonable by those other techniques, then that is what I would go ahead and use

 

[timd354]

Why are you using an excel spreadsheet giving you unreliable results? You posted in prior threads about statistics and regression re exploring it, but if you dont' understand how to use it or are using it with such weird results (of $2 per sf adjustment ), $2 per sf makes no sense in cost approach nor in price reaction seen for larger sf , so why use it? The sales most relevant to subject are there on your grid. Do a simple but effective sensitivity analysis on the grid with those sales.

Comp at 2060 sf is closest to subject 19060 sf. Look at the value difference of its adjusted price vs adjusted value of the comps.

You already adjusted for other factors of value and now are left with blank SF on the grid. I rough calculated by that grid contributory value per SF as anywhere from $20 to $25 per sf. Put in $20 per sf in software and see if it tightens up the value range, and then see if you want to refine it further for best results. Sensitivity analysis on the grid you adjust for other factors, the blank is then adjusted for amount that tightens the value range up ( and that makes sense )

Your analysis is good but I think you are probably a little light on the suggested adjustment of $25-$5/sf as using $30/sf will tighten up the value range even more than $20 or $25/sf. Of course the problem with sensitivity analysis is that if the other adjustments that are applied before the sensitivity analysis are off, then the results of the sensitivity analysis can be way off. That is why the results of sensitivity analysis should be crossed checked by also utilizing some other method to derive the adjustment.

 

[J Grant]

Agree.. rough figure I gave of $20 per for a strart point might be light

. The beauty of sotfware is it lets us easily change things. The OP can put in $20 a sf, or $25 a sf, or $30 a sf , or $35 , see which one tightens the range up the best and use the one that works best in his appraisal..

As you said, the other adjustments have to be reasonable for sensitivity analysis to work and it should be cross checked by other methods,.

It should usually correlate to our experience (unless an oddball scenario) from appraising similar properties. There's a reason experience counts...unless one learns nothing from it.

If I've appraised hundreds of houses over the years in the market area in the 100k-120k price range and time after time that a SF adjustment of $20-$35 a sf is the contributory value seen in market, that is additional support. If my cost approach says $X per sf to build the house, has a reasonable relationship to depreciated cost and the adjustment correlates to that, then we have more support. More avenues of support leads to credible support vs flimsy support.

 

[Valueseeker]

Hey Guys- I removed the adjustment for GLA to show for the #2 post. He wanted to see what it showed before GLA adjustments

Valueseeker, first off, Kudos for posting part of your grid; you've got more stones than me! (and probably the majority of others on here!)

The first thing that jumps out at me, though, is why no GLA adjustments on comps 2, 3, 4 & 5?
I typically don't make adjustments for less than ~100sf difference in GLA, but said comps are well beyond that and I would think generally would have an adjustment. There are exceptions, but even that being said, comps 2 & 5 are approximately 300 - 400 sf smaller; I would think the avg buyer would notice said difference (unless you're adjusting for BR's instead of GLA?)

im responding to #2's question regarding adjusted values Before sqft adjustment.

 

[Valueseeker]

Why are you using an excel spreadsheet giving you unreliable results? You posted in prior threads about statistics and regression re exploring it, but if you dont' understand how to use it or are using it with such weird results (of $2 per sf adjustment ), $2 per sf makes no sense in cost approach nor in price reaction seen for larger sf , so why use it? The sales most relevant to subject are there on your grid. Do a simple but effective sensitivity analysis on the grid with those sales.

Comp at 2060 sf is closest to subject 19060 sf. Look at the value difference of its adjusted price vs adjusted value of the comps.

You already adjusted for other factors of value and now are left with blank SF on the grid. I rough calculated by that grid contributory value per SF as anywhere from $20 to $25 per sf. Put in $20 per sf in software and see if it tightens up the value range, and then see if you want to refine it further for best results. Sensitivity analysis on the grid you adjust for other factors, the blank is then adjusted for amount that tightens the value range up ( and that makes sense )

I do understand how the sensitivity sheet works. For fun I'd thought I'd use it to see what it tells me is the suggested
Adjustment is.


The above rates mentioned above are usually what I adjust for as well. 20-30 is usually the rate for this area. The original question (I don't want to get hung up on this specific grid data) is simply, would you use a sqft'age adjustment if sensitivity analysis suggest a value that is low? Would you just forgo making an adjustment? Would you revisit comp selection or other adjustments, all the above? Just looking to see what goes through your brains when you're left with the final adjustment (sqft'age adjustment in my case) and its lower than you typically do?

 

[Michigan CG]

While sensitivity analysis for GLA after all adjustments have been made is a VERY acceptable way to derive an adjustment it does not always work as sometimes there are things we can't know that we can't adjust for.

With that being said I see a lot of reports that have adjustments that simply are not supported.

I admire Valueseeker for posting his grid, few would do this, kudos.

When we are talking about a property such as the one here I caution that with a $100,000 property does a deck or porch really matter to the buyer? What is the motivation for a person buying a $100,000 house? In my area if you are buying a $100,000 house you don't care about a porch or a deck, you care about having a home instead of paying rent. If you are an investor you are looking for homes that can attain the most rent with the least amount of maintenance, and again, the deck or porch does not matter.

Going to another market type, a $300,000 home tends to have that same $2,500 adjustment for a deck. The cost of my deck was $12,000 so the depreciated value of the deck is 21% of cost? And why are appraisers making $2,500 deck adjustments on $300,000 homes? That is an adjustment of less than 1%. We aren't that good. The $2,500 deck adjustment but no adjustment for the solid oak floors that had a cost of $25,000?

As Res Guy stated, sometimes less is better. Appraisers need to stop with the automatic adjustments.

 

[Valueseeker]

I want to move in that direction (the less is more direction). Would either one of you be able to share some commentary you use in your reports as to why no adjustments warranted for deck, patio, porch, fireplace, etc? That would be most helpful I would honestly feel more comfortable doing without the adjustments.

It would be kind of a mindblow to send in reports without the adjustments for the smaller items. Mainly because I never did it before. Fear of the unknown I suppose.

On a random topic of being mind blown. I was going through the bedtime routine with the little one and I just realized that the ABC melody is the same melody as twinkle little star. How I never knew this is beyond me. Anyhow, that's basically the speed I catch on to things..The things you learn later on in life!

 

[Michigan CG]

Would either one of you be able to share some commentary you use in your reports as to why no adjustments warranted for deck, patio, porch, fireplace, etc?

Much of the analysis in the comparable sales grid is quantitative (dollar/numerical adjustments) although some of it, as explained above is qualitative. Qualitative analyses of the comparable properties can include location, land size, condition, upgrades and other factors pertinent to the subject property. Qualitative analysis is considered somewhat subjective and introspective and many times will take into consideration rankings and other qualitative exercises.


Location adjustments are, for the most part, considered in the Site Value line of the grid. It is not typical to make location adjustments in this market as the land values will account for any atypical characteristic. The same is true for views; land values typically account for any positive or negative views. Site adjustments are based on actual land sales in the market. An active land sale database is maintained in my office.



View adjustments are not considered unless otherwise noted as the view is accounted for in the overall land value and is considered when adjusting for site.



Quality of Construction is based on perception of the subject and the comparables. Every attempt is made not to use comparable properties that are not similar in quality. Any differences in quality of construction is addressed individually in the report should it be necessary.


No age adjustments have been made in this report as the market does not differentiate in age but rather condition unless otherwise noted. Studies in my office show that there are homes built in the 1940’s that will compete with homes built in the 1970’s if the condition of the properties are similar. That is also sometimes the case with properties built in the 2000’s compared to some new construction.


Condition adjustments are based on observation and interviews with the parties to the transaction which may include the buying or selling Realtor or the buyer or seller of the comparable property.


This market shows no discernible market reaction to total room count or for bedroom count differences from two to three bedrooms or three to four bedrooms and therefore no bedroom adjustments have been made unless specifically addressed in the report.



Energy Efficient Items are difficult to discern in this market and the MLS details rarely describes any extra-ordinary energy efficient items. Unless otherwise noted in this report the energy efficient items in this report are unknown. Some homes have updates in energy efficient features such as a new furnace or windows and those items are noted if found. A home built in 2005 will have an air-conditioner with a SEER rating of 10-12 while a home built from 2006-2014 will have a minimum SEER rating of 13. Starting in 2015 the required SEER rating is 14 for some parts of the country while Michigan’s minimum SEER rating remains at 13. A new construction home will have energy efficient items and those energy efficient items will be typical of other similar homes.


When addressing Heating/Cooling systems most have systems that are “typical” of their age or of typical updating of a home. In this market there is no discernable favorable market reaction for geothermal systems. The local market does not discern heating types (natural gas/propane, radiant/forced air, etc.) or show any market reaction to different heating types. If the heating is believed to be inferior or superior, there is not market data that can be extracted that can be represented quantitatively. As a result, the item is considered in the reconciliation qualitatively. Cooling is adjusted quantitatively using depreciated cost analysis or is addressed in the reconciliation qualitatively.


Garages are adjusted using depreciated cost analysis and matched pairs as are porches, patios and decks. When there is little measurable difference, these items are addressed in the reconciliation qualitatively.

 

[George Hatch]

I'm seeing 20% gross adjustments in what appears to be a market segment with monthly mortgage payments of $500-$600. The two factors seem incongruent. I have to wonder a bit if your comps are of comparable age and quality and have somewhat comparable sized sites.


The purpose of adjustment factors is to refine the range. They don't exist on their own outside of that context. Your adjustments serve you, not the other way around. Most of your valuation is occurring when you select your most comparable sales. Starting with that unadjusted range you should be able to rank your subject within that range and eyeball a value on a qualitative basis that's reasonably close to the one you get with the quantitative analysis. After all, "qualitative" is what all those buyers are doing IRL.

Conventional theology is that we adjust for the big things before the little things. You save GLA as the last adjustment when you think it has the least effect on value. So if it's location then GLA then condition then amenities you'd go in that order. Then after you get the range tightened you can go back and reverse the order for a couple of the bigger factors to see if *the combination* is the most effective one you can some up with.

On a stand back basis, which do you think will be of more effect on value in that market segment, the GLA (inclusive of the room count) or the garages? 'Cause if its GLA then you do that adjustment before you get to garages. Etc, etc.

Adding more data to the analysis might be real instructive, too.

 

[jay trotta]

This appears to be sensitive;

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