Weighted Averages

[Kalum Johnson]

I have been an appraiser for about a year now and I've come across several different approaches when it comes to appraising. Currently I am working for 2 supervisors and they have 2 different styles of appraising. My situation boils down to this.

Appraiser One (5 years experience)

One appraiser uses a wieghted average based on the EO insurance check on the wintotal software. They also include their on expertise to adjust the value up or down. Most times the value never comes in above thier second most valuable comp.

Appraiser Two (over 20 years)

Appraiser two says to never use any type of average what so ever. You should always choose the comp most like subject. You can adjust the final value up or down a couple of thousand after you've made your intial adjustments. Most appraisals read like this Greatest wieght given to comp #2 (that specific value is then used.)

Actual Example:

Three comps, 107, 108, 93. Adjusted 106, 109, 93.

Appraiser one says value would be aboout 100
Appraiser two says throw out 106, 109 comps. value would be 93.


What is the general take on this situation. I am trying to develop a personal philosophy on appraising.

-Kalum

 

[Richard Carlsen]

You never use an "average" for value in an appraisal. Averages are a really big NO-NO in appraising.

The Weighted Adjusted Sales Price of all comps is not an average. It ascribes a weight to an indicated value in the grid based on the necessary adjustments. Those comps with the least adjustments get the greater weight.

I use the Weighted Adjusted Sales Price of all comps quite often because it is very rare that I have a true comp. Based upon the kinds of comps I have and my confidence level in them, I will adjust up or down within the indicated value range on the grid, usually based on the indicated value of the cost approach which has a great deal of validity in my service area. That is called Reconciliation when we bring the various approaches of value together and form an opinion.

 

[Nancy Wyatt]

Ditto's Richard

 

[Bobby Bucks]

Rank your comparabless in the order of their similarity to the subject based upon net & gross adjustments.

Take the adjusted value of the comparable most similar to the subject and multiply it by 3.

Take the second most similar comp and multiply its adjusted value by 2. Add that figure to the comparable #1 figure.

Take the 3rd most similar comparable’s adjusted value and add it to the multiplied adjusted values of comparables 1 & 2.

Take this total & divide by 6.
then you have a weighted average of 3 adjusted values.
example
Comp 1 adjusted value= $200,000 (x3) = $600,000
Comp 2 adjusted value= $210,000 (x2) = $420,000
Comp 3 adjusted value= $230,000 (x1) = $230,000
Total: $1,250,000\ 6 = $208,333 is the weighted average.


It's simpler to just opt for the middle of the range because I can get more reports out the door which is still the name of the game.

 

[EDWARD BERRY]

Why not simply state:

Upper (lower) end of range most like subject?

Works in Arkansas.

 

[Fred]

Kalum,
It is good that you are surveying. You can make informed decisions that way. This is a very large topic.

There is nothing wrong with averaging. I have no idea why a widely accepted mathematical, business, economic and financial analysis benchmark would somehow be a “no-no” for appraisers. That must be the 11th standard in USPAP. Thou shalt not average.

As a general rule, each sales set is going to be different. If you are always going to work with forms and always use three sales, then the number of scenarios you deal with is cut down considerably. In any case, one of the things to be avoided is developing a singular formula or line of reasoning to be applied to every sales set.

The problem with Appraiser Two’s “method” is that it boils down to a one-comp appraisal that way. Why waste time collecting and analyzing data that is not going to get any consideration in your value conclusion? There is nothing per se wrong with a one-comp appraisal. For example, you say

Three comps, 107, 108, 93.

Without making “adjustments,” which one of these is most like subject? If it’s the 93, there could well be no reason to give any weight to the other two.

Bucks,
that’s the same as giving 50% weight (3/6) to the first sale, 33.3% weight (2/6) to the second sale, and 16.7% weight (1/6) to the third sale.

 

[George Hatch]

Is not the use of regression a form of weighted averaging? Is not a qualitative analysis (pick a value out of the range, based on ranking the subject in that range) also a form of weighted averaging?

I think the problem of averaging is proportionate to the size of the dataset. The fewer comparable sales you have, the less reliable the trend identified by those sales will be. I never ran it, but it seems to me that 10 sales showing a range between 93 - 107 would result in a more reliable trend line than 3 sales showing a range between 97 - 103.

 

[wyecoyote]

Kalum,

You have a great position. Since you work with two supervisors. Each has their own style of appraising. When you get your lic/cert you can take the best of the educational experince and put it into your own reporting style.

What you see here is a difference of opinion between two appraisers. Each opinion has their own valide points.

Here is what I would say is that it depends on the type of property. In some cases I will weight the most similar sale(s) to the subject. If I only have one similar I will weight that sale the most. If I have two or more then I will weight them both and possibly weight the most recent sale and/or the one with the least amount of adjustments. On the other hand if none of the sales are similar to the subject and I am having to trully mix and match sales then I may take the average adjusted sales prices.

Any way that you chose to do this when you are signing the report by yourself you need to fully explain in your final reconciliation. This way anyone reading the report can fully understand what you did and why.

 

[Mike Garrett RAA]

To be very simplistic....do not add the three adjusted values and divide by three...that is the no no. Consider which comparable is the best...you can use Bobby's formula if you like but I would like to see that defended in a court of law.

"The indicated value of the comparables, as adjusted, represent a relatively narrow value range. I have considered all of the factors presently affecting the market and have trended to the (higher end/middle/lower end) of the value range"

You as the appraiser decide what to use. There is no simple math formula, if there was, we would not be needed and AVMs could do everything. WinTotal has a very good reviewer and there is nothing wrong with hanging your hat on that if you so choose.

Example: Adjusted values of the comparables -


100,000 105,000 110,000

Comps #2 and #3 have the least net/gross adjustments. Comp # 2 looks the most like the subject also. Your contract on the subject is $108,000. All of the comps are very current sales, say last 90 days. What is the value of the subject from the sales comparison approach?

Added information.....the subject property has been on the market for 30 days, it is well maintained, nice yard, good view. The overall real estate market has shown good appreciation for the last 12 years.

The Real Estate agent says the buyers looked at about a dozen homes but when they saw this one it was the one they wanted and they immediately wrote an offer. They also told the agent..."we don't want to lose this house!".

A final thought...you use Marshall/Swift cost book and your cost approach comes in at, say, $105,000. You are not sure if you have used the correct effective age for the age/life method for depreciation. The subject property is owner occupied...and to be owner occupied. There are some similar single family homes in the neighborhood that are tenant occupied. You determine a market average rent to be, say $800 per month and your gross rent multiplier is, say 135.

 

[JSmith43]

To be very simplistic....do not add the three adjusted values and divide by three...that is the no no.

I'm in favor of the "no no" approach in situations where the comps are equally ugly or equally pretty good, or equally so-so. That happens more often than once in a while.

The biggest danger in saying that is what you have done is....well, look at the posts...some of these guys are also reviewers and are going to give you a"no no"nuking.

This reminds me of the statement "The Cost Approach tends to set the upper limit of value", I mean, where are the Taliban when we really need them? It should be illegal to repeat or publish some of this stuff. Just kidding....sort of.