Time adjustment in the declining market

[Mo Ashraf]

I had appraisal done, the lender came back asking me to comment as why the time adjustment was NOT done in the declining market.


Can someone please share the experience, what adjustment do you put there and which
column on the sale comp grid you put there and how would adjust.

I am thinking like this e.g. if market is down say 5K each month do you take each
comparable and find the duration b/w its COE and the report date and add that adjustment there? or this can be done differently?

Do we have to put the time adjusment or how would say the comment if you decide not
to put the time adjustment?

Thanks,

Mo

 

[Chris Stylen]

I'm not sure if I'm more shocked at the fact the lender WANTS negative time adjustments or the fact that you don't know how to apply them, being a licensed appraiser.

Within my defined subject neighborhood, I like to find average sales prices say in the last 3 months and compare that to average sale prices 3-6 months prior to the effective date. Then maybe compare last February with this February. Or even a year over year statistical analysis. Another way is to find homes which sold in the past year and compare that price to it's most recent sale or pending/active price.

After the analysis, determine an adequate % time adjustment times the number of months from the COE date of the comparable to the effective date of the report.

Example: Say a comp sold at $250,000 on 11/08 and say market values have declined approximately 23% in the past year. So I would typically apply a -2%/Mo. adjustment from COE of 11/08 to $250,000. For three months that would be -$15,000.

If a comp closed in February or (the current month) I usually don't include a time adjustment. I would do the same -2%/Mo. to all comparables sale prices.

Basically you need data to support adjustments or a lack of. If you truly believe your market area is not declining in value then add a statement to that effect and show some support for it.

Hope this helps a little.

 

[timd354]

I had appraisal done, the lender came back asking me to comment as why the time adjustment was NOT done in the declining market.
I would say that this is a reasonable request.

Can someone please share the experience, what adjustment do you put there and which
column on the sale comp grid you put there and how would adjust.

I am thinking like this e.g. if market is down say 5K each month do you take each
comparable and find the duration b/w its COE and the report date and add that adjustment there? or this can be done differently?

Do we have to put the time adjusment or how would say the comment if you decide not
to put the time adjustment?

Thanks,

Mo

If this is actually a serious post and you are not just pulling everyone's chain, then you need to find and take some classes on how to appraise in a down market. I am sure that you can find some good classes if you look around.

 

[Lee Lansford]

I sort of laugh when I "learn" from appraisers that the way to adjust for declining market conditions is via comparing neighborhood-wide average & median sold prices from different time periods to arrive at an overall percentage decline in prices that is then applicable to the appraisal of the subject property. Think about it.

 

[Restrain]

Mo:

You really need to go on line and study some basic statistics, because a statistical analysis is what you need to make the decision. Don't look month-month, but take it over a two-year period, and plot the sales activity for the sub-market you are looking at.

 

[Riick]

I sort of laugh when I "learn" from appraisers that the way to adjust for declining market conditions is via comparing neighborhood-wide average & median sold prices from different time periods to arrive at an overall percentage decline in prices that is then applicable to the appraisal of the subject property. Think about it.

You would prefer they used matched pairs?
Sales & ReSales of the same property?
Some other statistical method?

 

[LACKLAND27]

Time adjustments should be done per annum. First determine the % of decrease in sales prices over the past year. Let’s say 10%. Take 10% of the comps sale price, let’s say the comp sold for $200,000. So 10% is $20,000. Divide 20,000 by 12 months. 20,000/12 = $1,666.67. (0.83% per month). Then multiply that by the # of months since the comp sold. Let’s say its 5 months old. $1,666.67 x 5 months = $8,333.33 (4.17%) So the 10% per annum adjustment on a 5 month old comp is $8,333.33 or (4.17%). Now I know that some months might show significantly higher decrease then others and using a flat line is not perfect but it’s very difficult to prove how much of a decline there was in each specific 30 day period.

 

[timd354]

You would prefer they used matched pairs?
Sales & ReSales of the same property?
Some other statistical method?

The real problem is that, for example, just beacause property values in a given neighborhood have declined by 12% in the past year, it does not mean that decline was linear so applying a linear 1% monthly depreciation factor to each comparable sale may lead to misleading results.

 

[Riick]

The real problem is that, for example, just because property values in a given neighborhood have declined by 12%
in the past year, it does not mean that decline was linear so applying a linear 1% monthly depreciation factor to each comparable sale may lead to misleading results.

Just finished a report in a neighborhood I last visited in late October.
As of late October 2008, decrease in value 5/07-10/07 -vs- 5/08-10/08
was about 5-6%, and list-to-sell ratio about 95% IIRC.
NOW... 8/07-1/08 -vs- 8/08-1/09 periods show 29% decrease, and list-to-sell ratio now at 87%.

So... which is more correct, 29% annual decrease, using 6 month periods,
or should I look at the last 3 months only, where the % figure would be substantially higher?

I don't think there is a "right" answer here; use 6 months and smooth the data, or use 3 months
and have most radical change shown, which may or may not continue at same rate.
???? ????

 

[Mike Garrett RAA]

If the sales are within the last 90 days do you have data that will support a time adjustment?

I saw an appraisal the other day where the appraiser applied time adjustment because MLS reported a 17% decline in average sales price when comparing all of 2008 to all of 2007. She used 1.5% per month and then used the exact dollar amount, not rounded.

The end result was the appraised value was almost $15,000 below the contract AND almost $10,000 below a sale that occurred 90 days ago. As you can imagine, the buyer, seller, and agents were livid.

I think the appraiser erred for the following reasons:

The 17% decline was based on market average sales which included extremes in the market which distorted the data.

The is no proof the rate of decline was constant across four quarters.

There was no evidence of paired sales analysis with consideration to location, style, size, and amenities.

There was no consideration of the contract on the subject property as a possible indication of value, ie, what a ready, willing, and able buyer would pay.

The sales recited in the appraisal report did not show evidence of the decline as indicated by the appraiser.

The appraiser expressed an adjustment on a mechanical dollar for dollar to an exact amount which, in my opinion, indicates a level or degree of expertise well beyond that of most residential appraisers.