Using Plus & Minus Instead Of Numerical Adjustments

[J Grant]

I don't think that the quantitative process we use for GSE work reflects the way most buyers of SF houses intended for owner-occupancy react to differences between properties.

Actually, it does reflect how buyers react in term of prices paid, though it may not reflect the way buyers think or react in mirror fashion. Our adjustments do come from the market, and if we extract out that buyers are paying 20-30k more for houses with pools, then making a 25k adjustment is reasonable approximation. Which does not mean every single buyer is paying 25k more, one buyer spent 20k more, one spent 28k more, etc. It just means an application that aligns with a good sample of properties for analysis purposes

I happen to agree that using superior or inferior and narrative to explain with no adjustments made would work... except we know it makes too much sense ; so lenders/secondary market demand to see adjustments.

 

[Michigan CG]

..............I personally think an appraisal using plus and minus with narrative could be credible, but would not be accepted, at least not now, by lenders and the secondary market............

Who is the more sophisticated user of an appraisal report, the LO selling the loan to a GSE or the LO making a commercial loan where the bank is on the hook for the loan should it go bad? Every single day a loan is given for a commercial property where nothing but qualitative analysis is completed in the appraisal. Lenders accept them as credible on properties worth millions of dollars.

 

[J Grant]

I agree with your assessment re who is more sophisticated user. But how do we change the mindset and policy of the lenders, Fannie, FHA etc? I would love to not have to make adjustments and would rather explain analysis qualitatively in narrative.

 

[George Hatch]

One reason we do adjustments is because we (often) can identify those factors by virtue of the quantity and quality of data we deal in.

 

[J Grant]

Agree with GH..whether we want to make them or not, adjustments can be quantified in the market (and if not we should not make them)

As far as how buyers behave...I sold RE for over 5 years and the reality is that most buyers negotiate off the list price and that forms a large basis of what they pay. Agents in a way do more "adjusting" than buyers in that sense.

Why do houses with pools sell for more than houses without pools in the areas pools command value? Because agents price houses with pools higher than houses without pools. Obviously, buyers would rather , if they could, get the pools for "free", pay the lower price which would be that of houses without pools. But in area where they command value, are in demand with a history of buyers that do pay more, the agents and then FISBO owners will list price houses with pools higher. A well informed buyer knows it might cost 30k aprox to put in a pool. Thus for them to pay 20k more for a depreciated pool and roll the cost into the loan makes sense. And remember that the seller paid 30k for the pool 5 years ago and wants to get at least some of that money back .

If we see 20k range paid for a good number of pools on similar properties, than that is a market supported adjustment. On a resale the buyer paid for the pool as a package with the property and did not separate it out as they do in new construction contracts.

 

[Gobears81]

I use qualitative adjustments fairly frequently in commercial appraisals. The variance in the market (or should I say, in many of the markets that I work) is such that some properties sell for a wide range from what they should. In that case, could I make a 20% upward adjustment for certain elements of comparison? Perhaps, but I have seen reviewer's grading sheets for commercial properties and many "grade" them based on how recent the sales are and how few adjustments were made, so if you see a 20% upward adjustment, a reviewer may say that property is not comparable. Obviously, we are at the whim of the quality of the data in the marketplace, but in many markets where I work, there aren't good sales out there, and the ones that are out there have such a wide range. You could argue that the sales comparison approach is not applicable in those cases, but sometimes prospective purchasers do not have as narrow of a checklist in smaller markets and they may even look at properties of a different type and consider costs to convert. It bothers me when some clients indicate qualitative adjustments are inferior, as that is the method that is able to weather greater market variance and often suggests stronger support for a certain unit value. You show me statistical support for quantitative adjustments, and I am guessing that I could poke a hole in it. For example, they release data with average home prices in the community. Appraisers could be tempted to peg market conditions adjustments on those changes, but if you look at home price changes in a specific neighborhood, they are typically much more stable, as the average home prices for the community might be based on a lower percentage of houses in a certain sector selling. Paired data analysis is another case. While it works well when two properties are highly similar, if there is even a 5% range in market variation, it could indicate that a certain attribute with contributory value does not have any value.

I've done some adjustment grids where quantitative adjustments of the comps result in adjusted unit prices of say $22, $22, $24, $30, and $35. Which is better-that or having a range where a comp at $22 has an overall rating of inferior, a comp at $28 has a superior rating, and a comp at $25 is similar?

That is not to suggest that I prefer qualitative adjustments or that I don't buy into statistical support for quantitative adjustments-I do quantitative adjustments fairly frequently, but am a big believer in qualitative also.