adjustments
515) Time Adjustments
09/19/09
Dear H2,
Is the best way to determine a reasonable time adjustment through matched pair analysis of sale prices of older, similar closed sales and current sales and/or current listings??
Name Withheld By Request
Dear Friend,
The method you describe is a good method and is the one used by the Case-Shiller S & P index. However, using listings rather than closed sales makes it much less accurate especially in the current market. As every Realtor know, a listing price is NOT a sale price.
H2
Is the best way to determine a reasonable time adjustment through matched pair analysis of sale prices of older, similar closed sales and current sales and/or current listings??
Name Withheld By Request
Dear Friend,
The method you describe is a good method and is the one used by the Case-Shiller S & P index. However, using listings rather than closed sales makes it much less accurate especially in the current market. As every Realtor know, a listing price is NOT a sale price.
H2
454) Cost to Cure
02/16/09
Dear Henry,
A client asked me to reflect the cost to cure of items which in this circumstance may or may not cause a market reaction. The property has a garage conversion and the garage doors are still intact and could be operational; however, the rest of the conversion is finished like the rest of the home. The client wanted a cost to cure figure to remove the garage doors and finish the resulting doorway area more conventionally as interior living space. I provided them with an estimated range of a cost to cure; however, now they want me to make this adjustment in the sales comparision approach grid. I feel making this adjusment in the sales comparison grid would be misleading, due the fact that all my adjustments in the grid are market based using paired sales. I cannot show either a postivie or negative reaction to this in the market -- so therefore I would not make an adjustment. Are there any USPAP or other standards I can cite to show them why you would not make this cost to cure adjusment in the sales comparision approach? Do you think that I am correct?
Thanks
Cassie Everett cassie@okappraiser.com
Dear Cassie,
There is nothing in the USPAP that covers how to make adjustments. The new 13th Edition of The Appraisal of Real Estate on page 319 addresses your question. It points out that the cost to cure is not a perfect adjustment. How the market reacts to the needed work must also be considered. I suggest that you also look at the answers to Ask Henry questions #29, #31 and #167 below.
H2
A client asked me to reflect the cost to cure of items which in this circumstance may or may not cause a market reaction. The property has a garage conversion and the garage doors are still intact and could be operational; however, the rest of the conversion is finished like the rest of the home. The client wanted a cost to cure figure to remove the garage doors and finish the resulting doorway area more conventionally as interior living space. I provided them with an estimated range of a cost to cure; however, now they want me to make this adjustment in the sales comparision approach grid. I feel making this adjusment in the sales comparison grid would be misleading, due the fact that all my adjustments in the grid are market based using paired sales. I cannot show either a postivie or negative reaction to this in the market -- so therefore I would not make an adjustment. Are there any USPAP or other standards I can cite to show them why you would not make this cost to cure adjusment in the sales comparision approach? Do you think that I am correct?
Thanks
Cassie Everett cassie@okappraiser.com
Dear Cassie,
There is nothing in the USPAP that covers how to make adjustments. The new 13th Edition of The Appraisal of Real Estate on page 319 addresses your question. It points out that the cost to cure is not a perfect adjustment. How the market reacts to the needed work must also be considered. I suggest that you also look at the answers to Ask Henry questions #29, #31 and #167 below.
H2
450) Adjusting Short Sales
01/19/09
Dear H2,
Is it appropriate and acceptable to make an adjustment to a bank owned or short sale comparable using the percentage difference between the average sale price for arms-length sales vs. the average sale price for bank owned or short sale sales? In other words, if the average sale price of arms-length sales in a neighborhood is 5% higher than the average sale price of bank owned or short sale sales in the same neighborhood, can a 5% adjustment be made to the bank owned and short sale comparables used in the report? An explanation of the adjustment would be stated in the report and backup for the conclusion would be part of the work file.
Linda Sigari benfranklin-lin@charter.net
P.S. Thank you for all your invaluable information and assistance.
Dear Linda,
Your idea of making an adjustment based on data you have developed from the market is a very good one. This is the best basis for most adjustments. Your explanation of the methodology you used to obtain your data and your process of analysis should be part of the comments included in the report.
H2
Is it appropriate and acceptable to make an adjustment to a bank owned or short sale comparable using the percentage difference between the average sale price for arms-length sales vs. the average sale price for bank owned or short sale sales? In other words, if the average sale price of arms-length sales in a neighborhood is 5% higher than the average sale price of bank owned or short sale sales in the same neighborhood, can a 5% adjustment be made to the bank owned and short sale comparables used in the report? An explanation of the adjustment would be stated in the report and backup for the conclusion would be part of the work file.
Linda Sigari benfranklin-lin@charter.net
P.S. Thank you for all your invaluable information and assistance.
Dear Linda,
Your idea of making an adjustment based on data you have developed from the market is a very good one. This is the best basis for most adjustments. Your explanation of the methodology you used to obtain your data and your process of analysis should be part of the comments included in the report.
H2
440) Extra Bath
01/05/09
Dear H2,
If there is a full bath above grade that is in a home and the town hall does not have any record of it, do I still include it in the room count and make an adjustment if a comparable does not have the same bathroom count?
Name withheld by request
Dear Friend,
Usually, you describe the house and make adjustments based on what you actually find when you do your inspection.
If you discover an illegal addition to the house or an illegal use, that should be a separate adjustment.
H2
If there is a full bath above grade that is in a home and the town hall does not have any record of it, do I still include it in the room count and make an adjustment if a comparable does not have the same bathroom count?
Name withheld by request
Dear Friend,
Usually, you describe the house and make adjustments based on what you actually find when you do your inspection.
If you discover an illegal addition to the house or an illegal use, that should be a separate adjustment.
H2
426) Unique Configuration
10/26/08
Dear Henry,
I am currently appraising a raised-ranch style home. Lower level, which is below grade, is where the kitchen, dining room, 1/2 bath, and family room are located. There are windows throughout the basement and a sliding glass door to the rear yard. My problem is that I cannot find a single home in the area or beyond with the kitchen in the lower level! Should I appraise it using as comps similar style homes with partially finished basements? Should I adjust for functional utility in the sales grid? Thank you in advance for your help.
Jill jillmandragouras@msn.com
Dear Jill,
It is tricky to appraise an atypical house. The first thing you should do is expand your comparable sale search both in time and distance to see if you can find any comparable sales. Guessing the amount of functional obsolescence caused by this design can get you into trouble. If you can't find a comparable sale anywhere, I would seriously consider not doing the appraisal.
H2
I am currently appraising a raised-ranch style home. Lower level, which is below grade, is where the kitchen, dining room, 1/2 bath, and family room are located. There are windows throughout the basement and a sliding glass door to the rear yard. My problem is that I cannot find a single home in the area or beyond with the kitchen in the lower level! Should I appraise it using as comps similar style homes with partially finished basements? Should I adjust for functional utility in the sales grid? Thank you in advance for your help.
Jill jillmandragouras@msn.com
Dear Jill,
It is tricky to appraise an atypical house. The first thing you should do is expand your comparable sale search both in time and distance to see if you can find any comparable sales. Guessing the amount of functional obsolescence caused by this design can get you into trouble. If you can't find a comparable sale anywhere, I would seriously consider not doing the appraisal.
H2
393) Paved Driveways
08/24/08
Dear Henry:
Do you think that we should make an adjustment on the comparable grids for driveways that are paved versus not paved, such as cement vs tar, or pavers vs tar, or stones vs shale, or dirt vs stones or shale? Seems most appraisers don't even consider this. Some of these paving materials and methods are quite costly, and do add value to the properties.
Larry Fenimore Larfeni@hotmail.com
Daer Larry,
YES. Anything that adds (or detracts) from the value of the subject or comps should be reported in your appraisal report. The blank lines on the grid are there for this purpose.
H2
Do you think that we should make an adjustment on the comparable grids for driveways that are paved versus not paved, such as cement vs tar, or pavers vs tar, or stones vs shale, or dirt vs stones or shale? Seems most appraisers don't even consider this. Some of these paving materials and methods are quite costly, and do add value to the properties.
Larry Fenimore Larfeni@hotmail.com
Daer Larry,
YES. Anything that adds (or detracts) from the value of the subject or comps should be reported in your appraisal report. The blank lines on the grid are there for this purpose.
H2
369) Special Financing
07/29/08
Dear Henry,
I'm trying very hard to understand how we appraisers should properly account for Subject Sales Concessions when using standard Fannie & Freddie forms.
Instructions appear in the Definition of Market Value, but I believe that few appraisers agree with them. Please comment on the excerpt below from their Definition of Market Value, and the following sentence preceeded with the (*). How should those instructions should be applied mathematically in our reports?
DEFINITION OF MARKET VALUE: ... and (5) the price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.
*Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are
necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are
readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing
adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional
lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical
dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market's
reaction to the financing or concessions based on the appraiser's judgment.
Dave Towne dtowne@fidalgo.net
Dear Dave,
I am not sure I agree with you that few appraisers agree with the standard way of making adjustments for special financing and special conditions. I believe (although not everyone agrees with me) that all adjustments should be made to the comparable sales and not to the subject property. The adjustment should reflect how the market reacts to the special financing and special conditions. It should not just be a mathematical calculation. If the subject property will have the same special conditions and special financing, usually no adjustment is needed.
H2
keywords: adjustments, special financing
I'm trying very hard to understand how we appraisers should properly account for Subject Sales Concessions when using standard Fannie & Freddie forms.
Instructions appear in the Definition of Market Value, but I believe that few appraisers agree with them. Please comment on the excerpt below from their Definition of Market Value, and the following sentence preceeded with the (*). How should those instructions should be applied mathematically in our reports?
DEFINITION OF MARKET VALUE: ... and (5) the price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.
*Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are
necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are
readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing
adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional
lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical
dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market's
reaction to the financing or concessions based on the appraiser's judgment.
Dave Towne dtowne@fidalgo.net
Dear Dave,
I am not sure I agree with you that few appraisers agree with the standard way of making adjustments for special financing and special conditions. I believe (although not everyone agrees with me) that all adjustments should be made to the comparable sales and not to the subject property. The adjustment should reflect how the market reacts to the special financing and special conditions. It should not just be a mathematical calculation. If the subject property will have the same special conditions and special financing, usually no adjustment is needed.
H2
keywords: adjustments, special financing
300) Declining Market Adjustments
04/16/08
Greetings Henry!
Some of the real estate companies are promoting new techniques to get properties priced correctly so they sell quickly. That is, not using the CMA approach of last sale and adjusting to the subject property; rather, just using the last sale and pegging the sale price under the last sale.
I am curious to know what the appraisers are doing with these markets, and if there is a formula in use for this, e.g., a 5% "haircut" from last sale? I am in the North Jersey area, not in Florida or Nevada where I think things are even worse.
Thanks,
Carolyn Galant carolyngalant@att.net
Dear Carolyn,
In a declining market, there is a lot to be said for using comparable sales with selling dates as near as possible to the effective date of the appraisal.
I have problems with what you are reporting. First, it is the use of just one sale. This is always a dangerous practice. The other error is to make a time adjustment beyond what is indicated by the data in the market, based on an unsupported assumption that a trend will continue. To directly answer your question, there is no acceptable formula to do this that I am aware of.
H2
Some of the real estate companies are promoting new techniques to get properties priced correctly so they sell quickly. That is, not using the CMA approach of last sale and adjusting to the subject property; rather, just using the last sale and pegging the sale price under the last sale.
I am curious to know what the appraisers are doing with these markets, and if there is a formula in use for this, e.g., a 5% "haircut" from last sale? I am in the North Jersey area, not in Florida or Nevada where I think things are even worse.
Thanks,
Carolyn Galant carolyngalant@att.net
Dear Carolyn,
In a declining market, there is a lot to be said for using comparable sales with selling dates as near as possible to the effective date of the appraisal.
I have problems with what you are reporting. First, it is the use of just one sale. This is always a dangerous practice. The other error is to make a time adjustment beyond what is indicated by the data in the market, based on an unsupported assumption that a trend will continue. To directly answer your question, there is no acceptable formula to do this that I am aware of.
H2
290) School System Adjustment
04/03/08
Dear Henry,
How and when do you adjust a comparable sale for a different school system when the subject home and comparable sale home are very similar in all respects, are within 1 mile of each other, and the school system boundaries are next to each other? This is important as this scenario is in a question on an appraisal.
Jean Y. Mueller jeanyorkmueller@aol.com
Dear Jean,
To make this kind of an adjustment, you will need to find a matched pair in the market, and try to develop the adjustment.
H2
How and when do you adjust a comparable sale for a different school system when the subject home and comparable sale home are very similar in all respects, are within 1 mile of each other, and the school system boundaries are next to each other? This is important as this scenario is in a question on an appraisal.
Jean Y. Mueller jeanyorkmueller@aol.com
Dear Jean,
To make this kind of an adjustment, you will need to find a matched pair in the market, and try to develop the adjustment.
H2
285) GLA Adjustment
03/29/08
Hi Henry --
I love this site.
I have seen several questions to you about the GLA adjustment. Yes -- if we had the perfect comparables, the matched pairs technique would work. With a wide range in single family values within the same subdivision, I'm finding it difficult.
What other formula is there? I have looked through all of your books and still there is only a mention of matched pairs.
Julie Schilling jschillappr@msn.com
Dear Julie,
You could take a sample of sales in your market and see if there is a correlation between their size and the price per square foot. I have seen people plot this information on a graph and base their opinion on the results.
H2
I love this site.
I have seen several questions to you about the GLA adjustment. Yes -- if we had the perfect comparables, the matched pairs technique would work. With a wide range in single family values within the same subdivision, I'm finding it difficult.
What other formula is there? I have looked through all of your books and still there is only a mention of matched pairs.
Julie Schilling jschillappr@msn.com
Dear Julie,
You could take a sample of sales in your market and see if there is a correlation between their size and the price per square foot. I have seen people plot this information on a graph and base their opinion on the results.
H2
272) Adjustments
03/16/08
Dear Henry:
If you have one comparable with a concession and the other comparables have none, is the amount of that comparable's concession deducted from the sold price of all comparables? Another appraiser told me the adjustment has to be to all comparables, whether or not they have a seller concession.
Your website is very helpful, thanks for all the information.
Name Withheld by Request
Dear Friend,
Each comparable sale is adjusted separately, relative to the subject -- NOT to each other.
H2
If you have one comparable with a concession and the other comparables have none, is the amount of that comparable's concession deducted from the sold price of all comparables? Another appraiser told me the adjustment has to be to all comparables, whether or not they have a seller concession.
Your website is very helpful, thanks for all the information.
Name Withheld by Request
Dear Friend,
Each comparable sale is adjusted separately, relative to the subject -- NOT to each other.
H2
241) Investor Sales
02/12/08
Good afternoon Mr. Harrison,
I have a condo subdivision that has several sales in it. However the owners on all of them appear to be investors from down south as they all own many at a time. I am appraising a unit in this development but I do not think that it is right to use any of these sales as they are not arms length transactions and the contracts may have been signed a year or so ago. Also I have pulled listings in other developments which are much lower than the sales in my area. Please let me know what you think?
mary taylor mh_taylor@bellsouth.net
Dear Mary,
There is nothing to prevent you from using sales to investors if you believe they are the best sales available. It is usually better to also get some non-investor sales if they are available. It sounds like you are in a declining market and need to be making some time adjustments.
H2
I have a condo subdivision that has several sales in it. However the owners on all of them appear to be investors from down south as they all own many at a time. I am appraising a unit in this development but I do not think that it is right to use any of these sales as they are not arms length transactions and the contracts may have been signed a year or so ago. Also I have pulled listings in other developments which are much lower than the sales in my area. Please let me know what you think?
mary taylor mh_taylor@bellsouth.net
Dear Mary,
There is nothing to prevent you from using sales to investors if you believe they are the best sales available. It is usually better to also get some non-investor sales if they are available. It sounds like you are in a declining market and need to be making some time adjustments.
H2
224) Adjustments Without Data
01/28/08
Dear H2,
I'm appraising a home which I think may suffer from some functional obsolescence and I'm wondering how best to approach it.
The home itself has recently been constructed with a relatively high degree of custom detail; however there is no access to the basement from the main living area. To get to the basement, it is necessary to go through the garage. This arrangement is not typical for this particular market, but was specifically requested as a feature by the homeowner to allow guests to access the basement without having to go through the main living area. Unfortunately, there do not appear to be any comparables that would indicate a value for a home with this type of basement access.
If I'm correct in assuming that this is a case of functional obsolescence, how would one best approach this issue and determine an appropriate adjustment in the face of such limited market data?
Tim Peel timmpeel@gmail.com
Dear Tim,
Every time you run into some thing atypical in the design or construction of the house you are appraising you have to ask yourself what effect if any it has on the value of the house.
If it is a major item you need some basis for making an adjustment. If you can't develop the data you probably can't make a credible appraisal. For minor items some appraisers just guess, saying the adjustment is based on their opinion. At best this is questionable appraisal practice. Another possibility is to describe the item and make a statement that you could not find anything in the market that indicates what effect it has on value, and therefore you did not make any adjustments. Another possibility is to simply describe the item and make no comment about the need for an adjustment. Many appraisers do this for minor items.
H2
I'm appraising a home which I think may suffer from some functional obsolescence and I'm wondering how best to approach it.
The home itself has recently been constructed with a relatively high degree of custom detail; however there is no access to the basement from the main living area. To get to the basement, it is necessary to go through the garage. This arrangement is not typical for this particular market, but was specifically requested as a feature by the homeowner to allow guests to access the basement without having to go through the main living area. Unfortunately, there do not appear to be any comparables that would indicate a value for a home with this type of basement access.
If I'm correct in assuming that this is a case of functional obsolescence, how would one best approach this issue and determine an appropriate adjustment in the face of such limited market data?
Tim Peel timmpeel@gmail.com
Dear Tim,
Every time you run into some thing atypical in the design or construction of the house you are appraising you have to ask yourself what effect if any it has on the value of the house.
If it is a major item you need some basis for making an adjustment. If you can't develop the data you probably can't make a credible appraisal. For minor items some appraisers just guess, saying the adjustment is based on their opinion. At best this is questionable appraisal practice. Another possibility is to describe the item and make a statement that you could not find anything in the market that indicates what effect it has on value, and therefore you did not make any adjustments. Another possibility is to simply describe the item and make no comment about the need for an adjustment. Many appraisers do this for minor items.
H2
213) Matched Pair Technique
01/17/08
Dear Henry,
What would be a reasonable adjustment for "smart" house wiring installed by the builder in a 4,500 SF home?
Peter Carr peter.carr@ep-consult.com
Dear Peter,
As always with specialized construction details, the best way to find an adjustment amount is to use the matched pair technique to obtain an adjustment from the market. This technique is covered in detail in most appraisal text books. Anything else will probably not work.
You cannot simply use the cost of the item and its installation to estimate added value!
H2
What would be a reasonable adjustment for "smart" house wiring installed by the builder in a 4,500 SF home?
Peter Carr peter.carr@ep-consult.com
Dear Peter,
As always with specialized construction details, the best way to find an adjustment amount is to use the matched pair technique to obtain an adjustment from the market. This technique is covered in detail in most appraisal text books. Anything else will probably not work.
You cannot simply use the cost of the item and its installation to estimate added value!
H2
212) Value Trends & Over-Improvements
01/16/08
Dear Henry,
I suppose I have two questions in one. I am working on a house that is good quality, they have added a detached garage ( that could be converted into living area), and they have an upgraded poolhouse with a bathroom, kitchen, etc . and a covered deck, along with a patio. I cannot find any comps with these things, other than the inground pool. Do you think this could be an over-improvement? Also, this neghborhood is not declining but it is not increasing either: one comp sold in June of 2006 for $ 550,000 and just resold for $ 550, 000.
How would you address that issue, if at all?
Victoria victoria28@cox.net
Dear Victoria,
Over-improvements are always a problem. I would not make an adjustment for the over improvements unless I had some basis to make the adjustment like you seem to have had for the pool adjustment.
The neighborhood value trend should be based on more than one resale. In many places the best evidence about value trends can be found in the MLS system that covers the market area.
H2
I suppose I have two questions in one. I am working on a house that is good quality, they have added a detached garage ( that could be converted into living area), and they have an upgraded poolhouse with a bathroom, kitchen, etc . and a covered deck, along with a patio. I cannot find any comps with these things, other than the inground pool. Do you think this could be an over-improvement? Also, this neghborhood is not declining but it is not increasing either: one comp sold in June of 2006 for $ 550,000 and just resold for $ 550, 000.
How would you address that issue, if at all?
Victoria victoria28@cox.net
Dear Victoria,
Over-improvements are always a problem. I would not make an adjustment for the over improvements unless I had some basis to make the adjustment like you seem to have had for the pool adjustment.
The neighborhood value trend should be based on more than one resale. In many places the best evidence about value trends can be found in the MLS system that covers the market area.
H2
192) Sold By Owner
12/23/07
Dear H2,
What adjustment should be made if I use a sale that sold as a "For Sale by Owner" listing, in order to adjust for the commission that was paid to agents on the other sales? Also, what if the subject sold when listed as "for sale by owner" and all of the comps were sold through agents?
Betty Powers powersappraisals@verizon.net
Dear Betty,
I would not automatically make an adjustment for the difference in sale price between a house sold by a Realtor and a house sold by an owner unless you have some evidence in your market area that this situation really exists. The best way to prove this would be with matched pairs. Just taking a guess is not an option, and simply adjusting for the broker's fee is not acceptable either.
H2
What adjustment should be made if I use a sale that sold as a "For Sale by Owner" listing, in order to adjust for the commission that was paid to agents on the other sales? Also, what if the subject sold when listed as "for sale by owner" and all of the comps were sold through agents?
Betty Powers powersappraisals@verizon.net
Dear Betty,
I would not automatically make an adjustment for the difference in sale price between a house sold by a Realtor and a house sold by an owner unless you have some evidence in your market area that this situation really exists. The best way to prove this would be with matched pairs. Just taking a guess is not an option, and simply adjusting for the broker's fee is not acceptable either.
H2
191) Matched Pairs
12/22/07
Dear Henry,
I know this is totally wrong, but I was taught in school to make square foot adjustments on comparables we use either $35, $50 or up to $125.00 per sq. ft for adjustment.
I am asked to defend why I chose $75 and cannot do this, except to say what I was taught. Can you please tell me how to choose a correct figure to use regarding the square footage adjustment for the comparables when compared to the subject?
Susan Winters scirew@yahoo.com
Dear Susan,
Using three benchmark adjustments for size in my opinion is at best a poor appraisal practice. You many feel free to tell whoever taught you this that I do not agree with what they are teaching.
The best method is to find some matched pairs in your area, and try to extract the adjustments from them. When push comes to shove, this is always the best way to determine what any adjustment should be.
It has been a disappointment to me how few appraisers take the time to develop matched pairs in their market area to support the adjustments they make.
H2
I know this is totally wrong, but I was taught in school to make square foot adjustments on comparables we use either $35, $50 or up to $125.00 per sq. ft for adjustment.
I am asked to defend why I chose $75 and cannot do this, except to say what I was taught. Can you please tell me how to choose a correct figure to use regarding the square footage adjustment for the comparables when compared to the subject?
Susan Winters scirew@yahoo.com
Dear Susan,
Using three benchmark adjustments for size in my opinion is at best a poor appraisal practice. You many feel free to tell whoever taught you this that I do not agree with what they are teaching.
The best method is to find some matched pairs in your area, and try to extract the adjustments from them. When push comes to shove, this is always the best way to determine what any adjustment should be.
It has been a disappointment to me how few appraisers take the time to develop matched pairs in their market area to support the adjustments they make.
H2
129) GLA Adjustments
10/11/07
Dear Henry,
Thanks for the notice letter you sent out about the Summer 2007 issue of Rev. I appreciate knowing when an old issue is about to be archived.
In looking at Henry's book, "Uniform Residential Appraisal Report," I don't see any +/- calculation information for the differences in gross living area, p. 6-13. In fact, I don't see any mention of it any where. Why is this? And, how is this calculation performed? There are varying figures on the many appraisal reports I have seen, but nobody really knows how they get the number. Please advise.
Thanks,
Ken Hope Indy007@bellsouth.net
Dear Ken,
How to make GLA adjustments is covered in my book "Harrison Illustrated Guide: How to Fill Out the URAR" 39th Printing February 2006, pages 6-30 to 6-33. [$39.95 Available online from: www.formsandworms.com ]
As to the amount of the adjustment, like all adjustments it should be extracted from the market. Matched pairs are the best technique. If the difference is small and you cannot develop a matched pair, in my opinion you should not make any adjustment. Some appraisers take the price of the comparable sale, deduct the value of the site, and get a sale price per square foot of the comparable sale. They then use this figure as the basis of the adjustment.
H2
Thanks for the notice letter you sent out about the Summer 2007 issue of Rev. I appreciate knowing when an old issue is about to be archived.
In looking at Henry's book, "Uniform Residential Appraisal Report," I don't see any +/- calculation information for the differences in gross living area, p. 6-13. In fact, I don't see any mention of it any where. Why is this? And, how is this calculation performed? There are varying figures on the many appraisal reports I have seen, but nobody really knows how they get the number. Please advise.
Thanks,
Ken Hope Indy007@bellsouth.net
Dear Ken,
How to make GLA adjustments is covered in my book "Harrison Illustrated Guide: How to Fill Out the URAR" 39th Printing February 2006, pages 6-30 to 6-33. [$39.95 Available online from: www.formsandworms.com ]
As to the amount of the adjustment, like all adjustments it should be extracted from the market. Matched pairs are the best technique. If the difference is small and you cannot develop a matched pair, in my opinion you should not make any adjustment. Some appraisers take the price of the comparable sale, deduct the value of the site, and get a sale price per square foot of the comparable sale. They then use this figure as the basis of the adjustment.
H2
120) Adjusting for Sales Concessions
08/16/07
Dear Henry,
Do you make a dollar for dollar adjustment or do you make an adjustment for what that sales concessions or financing is worth?
I was reading your book on how to complete the URAR appraisal form [Harrison's Illustrated Guide to the URAR, $39.95 Item #300285 -- order from: www.formsandworms.com] and there is an excerpt from Fannie Mae that is not clear.
For example, the house sold for $200,000 but a sales concession was paid for closing costs of $10,000. Would you make a $10,000 negative adjustment in the grid? Fannie Mae states: "Adjustment based on mechanical dollar for dollar deductions that are equal to the cost of the concession to the seller are not appropriate."
What does that mean? Does that mean that we do not make a -$10,000 adjustment but somehow figure out what the value of that $10k adjustment is?
Thanks!
Mary califrs2003@yahoo.com
Dear Mary,
What Fannie Mae is trying to say is that the cost of an adjustment usually does not equal its value. In your example, the fact that the buyer will have to come up with $10,000 less at the closing is probably worth more than $10,000 to the buyer.
H2
Do you make a dollar for dollar adjustment or do you make an adjustment for what that sales concessions or financing is worth?
I was reading your book on how to complete the URAR appraisal form [Harrison's Illustrated Guide to the URAR, $39.95 Item #300285 -- order from: www.formsandworms.com] and there is an excerpt from Fannie Mae that is not clear.
For example, the house sold for $200,000 but a sales concession was paid for closing costs of $10,000. Would you make a $10,000 negative adjustment in the grid? Fannie Mae states: "Adjustment based on mechanical dollar for dollar deductions that are equal to the cost of the concession to the seller are not appropriate."
What does that mean? Does that mean that we do not make a -$10,000 adjustment but somehow figure out what the value of that $10k adjustment is?
Thanks!
Mary califrs2003@yahoo.com
Dear Mary,
What Fannie Mae is trying to say is that the cost of an adjustment usually does not equal its value. In your example, the fact that the buyer will have to come up with $10,000 less at the closing is probably worth more than $10,000 to the buyer.
H2
95) Adjustment for Sales Concessions
06/02/07
Dear Henry,
On the sales comparison grid for the comparables used in the report, is it proper to deduct for sales concessions or deduct only if it is not common in your market area?
Sincerely,
Jane
Dear Jane,
You really need to do two things when you have information that there were sales concessions.
If they were on the subject property, all you need to do is report them.
If they were on one of the comparable sales, you also need to report them, of couse. Then you should decide if they are typical for your market. If they are, then no adjustment is needed. If they are not typical, then you need to make an adjustment to the comparable sale price to reflect how the market responds to such adjustments. It is not enough to just use the amount of the sales concession as the adjustment.
H2
On the sales comparison grid for the comparables used in the report, is it proper to deduct for sales concessions or deduct only if it is not common in your market area?
Sincerely,
Jane
Dear Jane,
You really need to do two things when you have information that there were sales concessions.
If they were on the subject property, all you need to do is report them.
If they were on one of the comparable sales, you also need to report them, of couse. Then you should decide if they are typical for your market. If they are, then no adjustment is needed. If they are not typical, then you need to make an adjustment to the comparable sale price to reflect how the market responds to such adjustments. It is not enough to just use the amount of the sales concession as the adjustment.
H2
92) Comparable Problem
05/24/07
Good morning Henry,
My trainee has posed an interesting question to me and I want to give him the right information. Here is an appraisal scenario:
Let’s say that the subject property is located in an average neighborhood in St. Petersburg, Fl. The subject is unique and has 3,000 square feet. The closest comparables of similar characteristics are located in Snell Isle, a much better neighborhood. Let’s say that I know that the home is worth no more than $250,000 yet the closest comparables sold within a year in a 10 mile range are located in Snell Isle. Now I know that Snell Isle properties are more desirable and these homes are selling for $500,000.
I could do a location adjustment and condition adjustments but they would exceed my allowance and my net/gross adjustments to be good comparables. What do we do? We use the sales comparison method to determine an estimated value but what if there are no sales in a 10 mile radius within 12 months? And the only sales are in a much better neighborhood with better quality homes?
I would typically turn this assignment away. However my trainee needs an answer. I wouldn’t feel comfortable using the Snell Isle comps because I know they are far better yet they are the only sales. What would you do?
Mary M. Sluda mary@sluda.com
Dear Mary,
In perfect world, we would always find perfect comps. In the real world, this is not usually possible. An appraiser must use the best comparable sales that are available or not use the sales comparison approach which will be unacceptable to many clients and probably to Fannie Mae too.
If the best comparables are in another neighborhood, you have to develop data that will enable you to make a supportable neighborhood adjustment. If there is a time difference as well, then you need data to back up a time adjustment. If there are significant physical characteristics differences then you need to develop support for those adjustment. The same is true for condition and any other significant difference between the subject property and the comparable sales.
The "allowance" you refer to I assume is the Fannie Mae guideline that says when adjustments exceed certain percentage figures, you must explain why you used those comparables. They do not say you can't use the comparables.
I suggest you explain to your trainee that part of growing up in the appraisal profession is learning to say "no" when you feel you cannot, for whatever reasons, make a credible appraisal as required by the USPAP. That is a decision you have to make every time you have the USPAP-required scope of work discussion with your client.
H2
My trainee has posed an interesting question to me and I want to give him the right information. Here is an appraisal scenario:
Let’s say that the subject property is located in an average neighborhood in St. Petersburg, Fl. The subject is unique and has 3,000 square feet. The closest comparables of similar characteristics are located in Snell Isle, a much better neighborhood. Let’s say that I know that the home is worth no more than $250,000 yet the closest comparables sold within a year in a 10 mile range are located in Snell Isle. Now I know that Snell Isle properties are more desirable and these homes are selling for $500,000.
I could do a location adjustment and condition adjustments but they would exceed my allowance and my net/gross adjustments to be good comparables. What do we do? We use the sales comparison method to determine an estimated value but what if there are no sales in a 10 mile radius within 12 months? And the only sales are in a much better neighborhood with better quality homes?
I would typically turn this assignment away. However my trainee needs an answer. I wouldn’t feel comfortable using the Snell Isle comps because I know they are far better yet they are the only sales. What would you do?
Mary M. Sluda mary@sluda.com
Dear Mary,
In perfect world, we would always find perfect comps. In the real world, this is not usually possible. An appraiser must use the best comparable sales that are available or not use the sales comparison approach which will be unacceptable to many clients and probably to Fannie Mae too.
If the best comparables are in another neighborhood, you have to develop data that will enable you to make a supportable neighborhood adjustment. If there is a time difference as well, then you need data to back up a time adjustment. If there are significant physical characteristics differences then you need to develop support for those adjustment. The same is true for condition and any other significant difference between the subject property and the comparable sales.
The "allowance" you refer to I assume is the Fannie Mae guideline that says when adjustments exceed certain percentage figures, you must explain why you used those comparables. They do not say you can't use the comparables.
I suggest you explain to your trainee that part of growing up in the appraisal profession is learning to say "no" when you feel you cannot, for whatever reasons, make a credible appraisal as required by the USPAP. That is a decision you have to make every time you have the USPAP-required scope of work discussion with your client.
H2
64) $21,000 Price Concession
03/09/07
Hi Henry,
We have an appraisal with a 3% concession ($21,000). Do we adjust for this in the market grid? Does this affect the report in any other way? Sale price of the subject is $700,000 and it looks overpriced for the area. Value in the same building for a model match that recently sold is $645,000. That's what we're coming in at.
Thanks in advance for your response.
Chas CalKiva@aol.com
P.S. Great website!
Dear Chas,
I am not sure I know what a $21,000 concession is. Is this some kickback that shows in the Sales Contract? In any event, you do not adjust the subject property, you adjust the comparable sales.
The price shown in a listing or sales contract is not necessarily market value. If your comparable sales indicate a value of $645,000. then that is what the estimated value in the appraisal should be.
H2
P.S. Glad to know that you enjoy ASK HENRY HARRISON.com
We have an appraisal with a 3% concession ($21,000). Do we adjust for this in the market grid? Does this affect the report in any other way? Sale price of the subject is $700,000 and it looks overpriced for the area. Value in the same building for a model match that recently sold is $645,000. That's what we're coming in at.
Thanks in advance for your response.
Chas CalKiva@aol.com
P.S. Great website!
Dear Chas,
I am not sure I know what a $21,000 concession is. Is this some kickback that shows in the Sales Contract? In any event, you do not adjust the subject property, you adjust the comparable sales.
The price shown in a listing or sales contract is not necessarily market value. If your comparable sales indicate a value of $645,000. then that is what the estimated value in the appraisal should be.
H2
P.S. Glad to know that you enjoy ASK HENRY HARRISON.com
53) Adjustment by Educated Guess
02/20/07
Dear Henry,
You recently answered a question regarding cost to cure and a deteriorated roof. You mentioned that the adjustment should take into account the market response to the condition as well as the cost to cure. The cost to cure is no problem, but calculating an adjustment for market response confounds me. It makes perfect sense, but I don't know how to extract that figure from the market/sales data. I've talked with other appraisers, agents, etc., and seem to be just getting everyone's best guess.
Many Thanks!
Ben Mize Bmize@comcast.net
Dear Ben,
I agree this is a hard adjustment to extract from the market. As a last resort, an educated guess is better than nothing at all.
Suggested Comment: "I have been unable to obtain specific proof for this adjustment from the market. However, based on my experience and judgment, I have estimated the amount of the adjustment to be $_______."
H2
You recently answered a question regarding cost to cure and a deteriorated roof. You mentioned that the adjustment should take into account the market response to the condition as well as the cost to cure. The cost to cure is no problem, but calculating an adjustment for market response confounds me. It makes perfect sense, but I don't know how to extract that figure from the market/sales data. I've talked with other appraisers, agents, etc., and seem to be just getting everyone's best guess.
Many Thanks!
Ben Mize Bmize@comcast.net
Dear Ben,
I agree this is a hard adjustment to extract from the market. As a last resort, an educated guess is better than nothing at all.
Suggested Comment: "I have been unable to obtain specific proof for this adjustment from the market. However, based on my experience and judgment, I have estimated the amount of the adjustment to be $_______."
H2
23) Net & Gross Adjustments Per Fannie Mae
12/12/06
Dear Henry,
Just wanted to know what the current Fannie Mae standards were for Net and Gross Adjustments. Someone told me 13% Gross is the max and 15% percent Net is the max to comply with Fannie Mae Guidelines.
Mike junks@socal.rr.com
Dear Mike,
Fannie Mae does have Guidelines that say that when the net adjustments exceed 15% or the gross adjustments exceed 25% (with the plus and minus signs removed) "the appraiser must comment on the reasons for not using a more similar comparable." They have never said they could not be used.
H2
Just wanted to know what the current Fannie Mae standards were for Net and Gross Adjustments. Someone told me 13% Gross is the max and 15% percent Net is the max to comply with Fannie Mae Guidelines.
Mike junks@socal.rr.com
Dear Mike,
Fannie Mae does have Guidelines that say that when the net adjustments exceed 15% or the gross adjustments exceed 25% (with the plus and minus signs removed) "the appraiser must comment on the reasons for not using a more similar comparable." They have never said they could not be used.
H2
6) Ground Rent Adjustment?
10/31/06
Hi Henry,
I have been told by HUD different ways to do a ground rent adjustment on the appraisal. It really depends on whom you speak with. I am also told there is no written formula anywhere to confirm their opinions.
One person there told me that if the subject is fee simple and there is a ground rent, you would adjust the comparable with a +. If the subject is a leasehold and the comparable is a fee simple, you would minus the fee simple. Then there is someone who tells me that the above is incorrect. You are to bring all the comparables to fee simple by adjustment.
So does that mean if the subject is a leasehold and the comparables are all leaseholds I am suppose to bring all the comparables to fee simple?? (Then I minus the subject for the market value.) This way makes more sense to me. However, when I have tried this way, the underwriters will not accept the appraisal.
What is the real way to do Fee Simple versus Leasehold adjustments?
Thanks,
Julie Schilling jschillappr@msn.com
Dear Julie,
There is no one way to determine this adjustment. My recommendation is not to use comparables that have different ground rental arrangements than the subject.
If you must make an adjustment, due to a lack of sufficient similar comparables in the market, the best way is to find a matched pair to base it on. I know of no other way that is reliable.
The answer to your question about the adjustment direction is that you always adjust the comparable, never the subject. If the subject pays no ground rent and the comparable pays ground rent, then the comparable is less valuable (because it pays ground rent) and therefore a plus adjustment is made. If the subject property pays ground rent and the comparable sale is in fee simple (without ground rent) then the comparable sale is more valuable and you make a minus adjustment.
H2
I have been told by HUD different ways to do a ground rent adjustment on the appraisal. It really depends on whom you speak with. I am also told there is no written formula anywhere to confirm their opinions.
One person there told me that if the subject is fee simple and there is a ground rent, you would adjust the comparable with a +. If the subject is a leasehold and the comparable is a fee simple, you would minus the fee simple. Then there is someone who tells me that the above is incorrect. You are to bring all the comparables to fee simple by adjustment.
So does that mean if the subject is a leasehold and the comparables are all leaseholds I am suppose to bring all the comparables to fee simple?? (Then I minus the subject for the market value.) This way makes more sense to me. However, when I have tried this way, the underwriters will not accept the appraisal.
What is the real way to do Fee Simple versus Leasehold adjustments?
Thanks,
Julie Schilling jschillappr@msn.com
Dear Julie,
There is no one way to determine this adjustment. My recommendation is not to use comparables that have different ground rental arrangements than the subject.
If you must make an adjustment, due to a lack of sufficient similar comparables in the market, the best way is to find a matched pair to base it on. I know of no other way that is reliable.
The answer to your question about the adjustment direction is that you always adjust the comparable, never the subject. If the subject pays no ground rent and the comparable pays ground rent, then the comparable is less valuable (because it pays ground rent) and therefore a plus adjustment is made. If the subject property pays ground rent and the comparable sale is in fee simple (without ground rent) then the comparable sale is more valuable and you make a minus adjustment.
H2