Time adjustment in the declining market

[Mo Ashraf]

Thanks for all your replies.

I admit it was a silly question on my part the way I worded, I did NOT put it right.

It was interesting to see the different ideas on how to get the statistical value for the declining market.

Mo

 

[Alan H]

It is hard for me to see a licensed appraiser admitting to submitting reports without time adjustments when it was known before hand that it was a declining market. In my opinion that diminishes your credibility and you should not be accepting assignments until you have learned how to make time adjustments. No wonder your client is asking why you didn't make time adjustments....

As to how to make an adjustment, the decline is different from neighborhood to neighborhood, so why would anyone use statistics from an MLS? My guess is because it is quicker than figuring it out everytime...still better than not making any adjustment at all.

Here is some reasonable approaches to the problem that has worked for me:
If it is not in a rural area, I would take a sample of possible comparables (no less than 30 sales) within the last year and graph it in excell. See what the average decline is per month over the past year, then apply that decline percentage. Watch out to make sure..overall that the amount of decline per month is steady, if it increased in the last couple of months, then try to take that into account. If you are looking for the most accurate...from my experience this has been the best. As a secondary approach if you do not have a big enough sample is to simply compare newer sales to older sales and see what the reasonable adjustment would be. If you have conflicting information and can't make sense of it by doing it that way, then of course you could use the MLS statistics.

Again, I would not be accepting assignments until you figure out how to make these adjustments.

Obviously you read something other than what I posted. I stated that the PUD values were STABLE (that means neither appreciation or depreciation in value) over the past yr. The 5% was from prior years, which the market would have absorbed already.

But I'm not in the mood to bother with you. I'll just presume that I wasn't clear enough for you or that you were in a rush to trash talk someone and didn't take time to actually read my post.

 

[Elliott]

timd observed, "Not only did tmany lenders not insist on market condition a/k/a time adjustments when the market was on the way up, many lenders simply would not accept any market condition a/k/a time adjustments. "

CNBC has a new series called House of Cards (check for your local time). It did a
very good job of explaining the 'crisis'. When they got to the rating agencies which
stamped everything AAA, they asked what their value assumption was for all
of the subprime crap....it was based on the real estate appreciating into infinity at
6 to 8% per year!!! so there wouldn't be any problems with a few foreclosures
and getting the money back.

 

[Arthur Leo]

I think you all provide great points. But here is the reality of our jobs... you can spend days on an appraisal trying to dig up every fact. We are under time constraints and getting paid less. I believe in giving quality, but really how much time can you invest on an appraisal your getting paid $175 to complete in California from an AMC? Please don't bother replying with reasons why we need to keep our fees high. The truth is that appraisers are starving and the next guy will phase you out if you don't compete on fee. I use a data service, such as www.dqnews.com, that lists decline rates by zip code over a 1 year period. It's not perfect, but it's something you can point to and pass liability. I go one step further than a monthly decline. I take the decline rate over 12 months and divide it by 365 to get a "per day" decline. Then I multiply this rate by the number of days from contract to effective date. Then I multiply that number by the sales price. It usually works decently. I'm guessing that some of the guys who are suggesting a complex analysis of the market are not "backing" into the cost approach either.

 

[Tucson Appraisals]

I presume allot

Obviously you read something other than what I posted. I stated that the PUD values were STABLE (that means neither appreciation or depreciation in value) over the past yr. The 5% was from prior years, which the market would have absorbed already.

But I'm not in the mood to bother with you. I'll just presume that I wasn't clear enough for you or that you were in a rush to trash talk someone and didn't take time to actually read my post.

Just to be clear, I was replying to the person that started this topic...not you. Hopefully you did not "presume" that you were the only one in this thread. You are right though...I read your first sentence and did not even bother reading the rest of your post...it was kind of boring. And you were also right about taking the opportunity to "trash" someone.

But knowing I was stating something that might make him feel insecure, I also offered some information that might point him in the right direction; that is what I "presume" he came in here for in the first place.

 

[Vegan702]

I think you all provide great points. But here is the reality of our jobs... you can spend days on an appraisal trying to dig up every fact. We are under time constraints and getting paid less. I believe in giving quality, but really how much time can you invest on an appraisal your getting paid $175 to complete in California from an AMC? Please don't bother replying with reasons why we need to keep our fees high. The truth is that appraisers are starving and the next guy will phase you out if you don't compete on fee. I use a data service, such as www.dqnews.com, that lists decline rates by zip code over a 1 year period. It's not perfect, but it's something you can point to and pass liability. I go one step further than a monthly decline. I take the decline rate over 12 months and divide it by 365 to get a "per day" decline. Then I multiply this rate by the number of days from contract to effective date. Then I multiply that number by the sales price. It usually works decently. I'm guessing that some of the guys who are suggesting a complex analysis of the market are not "backing" into the cost approach either.

Wow, so many things wrong in this post it is incredible!

 

[TJSum]

To sum up many of the ideas posted here, rarely are two different market studies alike. It all depends on how much data is available and how simiilar the housing is within the study. There is no such thing as a perfect market study to come up with proper time adjustments, because if we had the perfect data, the time adjustments would not be needed because the comps would be so recent. I have not tried to attack the new one size fits all form as of yet, but it seems crazy to expect one standardized form to fit every time.

As TimD stated, zip code studies are basically worthless, at least in our area. I would also try to stay away from yearly comparisons. Suppose the yearly study shows a 20% decline, but the vast majority of that decline took place 7-12 months ago, and all your comps are within six months, you would be applying improper adjustments to them.

For the most part, I have used six month time periods when there is not enough data to make the quarterly numbers meaningful. The idea of using a matched sale for the same house (one that had a recent prior transaction), 99% of the time the previous transaction was a bank foreclosure which is not applicable (usually the loan amount outstanding).

I have a couple questions to throw out however, Lee stated not to use distressed sales within a market study, but what happens when that is the only or vast majority of activity taking place within any particular market? I also understand the rationale of adjusting from the contract date, but in this volitile market I am seeing many more changes to contracts between that contract date and settlement date for various reasons. It also seems inconsistent to use settlement dates within the market study to come up with the numbers, but then apply those numbers to the date of contract? Just some questions for discussion...

 

[Eturner]

I have been doing appraisal work off and on since 1966 and I had never ever had to make a negative time adjustment until late 2008. I also have had to make very few positive adjustments in an inflating market either. But I am there now with the negative dilemma in many of the neighborhoods, especially the small rural communities. I agree with those who say that the analysis should go back at least a year and the rate of drop should always be rounded down and applied with some disgression.

It doesn't really matter that the buyer is willing to offer a certain price based on his or her understanding of current market conditions. The problem for me is ,when market sales are scarce and I have to use one or more sales that may go back 9 mo. to a year, I need to determine by my market trend analysis what my comparable property would sell for if it were on the market today, so that I can compare it to the current sale.

If I were a "purist" and I had lots and lots of data, I would analyze trends by quarters and then get lost in how I am going to use it in a very fluid market. By going back a full year I can recognize a pattern without going into shock about what happened last month. This is especially true in small town " grain elevator towns in Illinois. I usually find that I must do county wide analyzes in some cases to get enough data to adequately evaluate what is happening.

It "ain't" perfect science, but it is the best I can do.

 

[Lee Lansford]

I think you all provide great points. But here is the reality of our jobs... you can spend days on an appraisal trying to dig up every fact. We are under time constraints and getting paid less. I believe in giving quality, but really how much time can you invest on an appraisal your getting paid $175 to complete in California from an AMC? Please don't bother replying with reasons why we need to keep our fees high. The truth is that appraisers are starving and the next guy will phase you out if you don't compete on fee. I use a data service, such as www.dqnews.com, that lists decline rates by zip code over a 1 year period. It's not perfect, but it's something you can point to and pass liability. I go one step further than a monthly decline. I take the decline rate over 12 months and divide it by 365 to get a "per day" decline. Then I multiply this rate by the number of days from contract to effective date. Then I multiply that number by the sales price. It usually works decently. I'm guessing that some of the guys who are suggesting a complex analysis of the market are not "backing" into the cost approach either.

Arthur, there is high-probability that the data and your analysis are affected by:

#1...Housing within the zip code are diverse.

#2...Market conditions impact different segments of the neighborhood different than others.

#3...The raw sales data contains REO/Short Sale and those that are not; increasing REO/SS activity may skew numbers.

As a side-note, one appraiser, in an attempt to cover his tracks, included a comment in an appraisal report to the effect "The client wanted this appraisal really fast so it may not be USPAP compliant." Uhhhh...how shall I say it...that didn't get him out of trouble.

I have to tell you, using your approach in a neighborhood (in your approach, the zip code) with housing that are not extremely homogeneous and without awareness of the effect of REO/SS activity, is not a credible (credible = worthy of belief) approach. Simple and easy to understand? Yes. Credible? No.

 

[Hamlet]

I agree that using zip code wide analysis is the wrong way to approach these adjustments. Unless you narrow down to the comparable properties within the subject neighborhood you will have too much noise in your data and will lead to misleading results.

I start by looking at all the properties in the neighborhood (not the zip code) to see a general trend and then start the analysis on the comparables only for the actual adjustment.

In situations where there is not enough data, I look at other competing neighborhoods sharing the same influences and characteristics as the subject neighborhood.

Distressed sales are a high percentage in most neighborhoods here, so they have a huge impact on the market and must be included in the analysis.

It really depends on the neighborhood and the type of distressed sales as well. Some neighborhoods have clean REOs and occupied short sales. Other neighborhoods the crime moves in as soon as the occupants are evicted. Then it is a race to secure the home before the plumbing is ripped out and the homeless move in.

Market analysis sure can be fun in a distressed neighborhood, almost as much fun as the inspection! Who does this for $175????