Time Adjustment , huh?

[sputnam]

Ding, ding, ding! We have a winner! Appraisers when figuring out market adjustments always assume that it changes at a constant rate. This is how they get into trouble.

That's right. I know it's a time saver to create a 'list' or a 'rule' but, the proper way to determine adjustments is to extract them from the market for each appraisal.

 

[Vermonter]

Appraisers when figuring out market adjustments always assume that it changes at a constant rate. This is how they get into trouble.

Probably due to UWs preferring adjustments at a linear rate, and/or software auto-producing linear adjustments, which is what the "X% per month" comment addresses and couldn't be more wrong.

IMHO, I don' think most appraisers know how to extract and support a time adjustment or don't have adequate data to do so. In reviews I see a lot of either too vague (using national or regional statistics) or too specific with insufficient supporting data and both with just about ZERO explanation.

 

[J Grant]

Probably due to UWs preferring adjustments at a linear rate, and/or software auto-producing linear adjustments, which is what the "X% per month" comment addresses and couldn't be more wrong.

IMHO, I don' think most appraisers know how to extract and support a time adjustment or don't have adequate data to do so. In reviews I see a lot of either too vague (using national or regional statistics) or too specific with insufficient supporting data and both with just about ZERO explanation.

The credibility of a time adjustment should be visible from the comps themselves right there on the grid. If all the other factors are adjusted for and only the time adjustment remains, then applying the time adjustment should narrow the range and bring older sales to equivalence with more recent sales. If that does not happen then the adjustment is off -

A market condition ( time ) is a model - in the actual market the time adjustment is not the same for every property and not the same consistent change month after month. However breaking down depreciation or appreciation to a monthly average serves the appraisal model purpose.

The hard part is when the market changes, or stalls. What to do then - make time adjustment for older comps and then stop making them when market changed ? At what point in a change do we make adjustments for the most recent trend...those are the harder aspects to figure out.

 

[CGinMN]

Market conditions adjustments are transactional adjustments, which should among be the first adjustments you make. If you wait til the end, and you apply a sensitivity analysis to your property characteristic adjustments in between, then you'll more often than not screw up the entire adjustment process. You will be doing exactly what the GSEs have observed, fluffing up adjustments in other areas. We should be doing market conditions analysis prior to adjusting the comps anyway, in which case the time adjustment is already derived. So why wait til the end? It is pretty clear there are many appraisers who only treat market conditions as an afterthought, only to be made if it narrows the range at the end, but that is wrong. Over the past several years, market conditions has the predominant and most important element of comparison to get right. It should be treated as such.

 

[Vermonter]

The credibility of a time adjustment should be visible from the comps themselves right there on the grid. If all the other factors are adjusted for and only the time adjustment remains, then applying the time adjustment should narrow the range and bring older sales to equivalence with more recent sales.

3 sales can be representative of support for date of sale adjustments, but without additional market data and explanation, you are not giving anything credibility.

 

[J Grant]

3 sales can be representative of support for date of sale adjustments, but without additional market data and explanation, you are not giving anything credibility.

The 3 sale comps ( I like to use 4 or 5 comps) show if the adjustments applied make sense or not. The time/market condition adjustment is always developed using additional data, which would be explained and shown as an exhibit such as a graph or the MC form

 

[Terrel L. Shields]

the proper way to determine adjustments is to extract them from the market for each appraisal.

But "the market" is not 3 sales...Basing a time adjustment on those is nonsensical.

And the range of values are an issue. So you need to be confident in your market segments. I have rural homes, rural farms, vacant land, vacant lots, small tract new houses, small tract 5-15 years old and older homes. I also have to treat the luxury and lakeside markets separately (which they are pretty much the same market.) Buyers there are generally retirees and second home purchases from out of the area buyers.

Then I will look at the market for the previous year in each segment and see if a discernible trend exists. Sometimes I have enough data to make a month by month adjustment but otherwise, a quarterly adjustment is usually possible except the large vacant and rural farms. There are simply too few sales to make such an assessment.

The truest of the true is new construction and vacant lots ready to develop. I trust those numbers much more.

Over the past several years, market conditions has the predominant and most important element of comparison to get right.

I see the impact but market conditions can be misleading. No one made a 10% a month adjustment yet in the 2010-13 period I saw plenty of REOs sold, then flipped for huge profits and virtually no investment. So the chicken and egg problem was did the REO really become "market value" when first sold (if not, then it should never be used as a comp); or, was it "market value" when flipped? When looking at the big picture, prices increased far more modestly. The REOs were noise in the background, arbitraged sales of low priced REOs who were 'worth' far more but were being dumped onto a glutted market by banks who were told to clean up their balance sheets by the regulators.

without additional market data

Statistically, 3 sales are inadequate to define anything let alone a time adjustment. And the very range of prices within the subgroup being examined for comps will create a limitation upon accuracy. And, of course, the price range matters.

show if the adjustments applied make sense or not.

Exactly. When a time adjustment widens the spread between comps, then something is not right.

 

[J Grant]

Market conditions adjustments are transactional adjustments, which should among be the first adjustments you make. If you wait til the end, and you apply a sensitivity analysis to your property characteristic adjustments in between, then you'll more often than not screw up the entire adjustment process. You will be doing exactly what the GSEs have observed, fluffing up adjustments in other areas. We should be doing market conditions analysis prior to adjusting the comps anyway, in which case the time adjustment is already derived. So why wait til the end? It is pretty clear there are many appraisers who only treat market conditions as an afterthought, only to be made if it narrows the range at the end, but that is wrong. Over the past several years, market conditions has the predominant and most important element of comparison to get right. It should be treated as such.

The market condition adjustments come from the market so it is shown to be X ,whether we apply the X first or last.

Howevr, the top of grid is where they are applied under sale contract date. Their purpose is to bring older dated contract sales current to effective date trend. What I meant was, if you remove the time adjustment and apply all the others, then put the X time adjustment back in, it should serve its purpose of narrowing the range and bringing older sale date comp prices more in line with the recent. Sometimes that does not happen and there are big gaps. It could mean the time adjustment if off, so revisit it. Or the time adjustment is fine and the comp just sold at an outlier price. Especially in this crazy market some sale prices defy the norm and that is yet another comment to add - I tend to weight those sales less in the reconciliation ( or not use them )

 

[J Grant]

But "the market" is not 3 sales...Basing a time adjustment on those is nonsensical.


Just because a time adjustment is applied to 3 sales does not mean the time adjustment is based on just those 3 sales.

The time adjustment is based on wider market data and applied to the comps. The comps are the competitive alternatives to the subject and represent the most similar properties avail to a buyer..

 

[Tim Hicks (Texas)]

Every market is different. Some areas around here are like a roller coaster lately. Up 10% from six months ago, but down 10% from three months ago, but the three months ago was up 20% from six months ago. It is an imperfect market and not every area/neighborhood reacts the same as the next.