It's been a week since the announcement of the new 1004MC Market Conditions addendum. My first thoughts generated a lot of responses, so I thought I would take a closer look. The 1004MC is required for appraisals with an effective date of April 1 2009, however you can expect (and we have already heard of cases) that lenders will be requiring it long before that date. Download MCA_Appraisal_Report.pdf
The replies to my post pointed to some of the short-comings or conflicts and raised the possibilities of even more, depending on your location Multiple Listing Service, etc. While the form is only one-page, the appraiser "must also provide support for the conclusions". Considering the questions and the limited space provided, I would expect the final product will be several pages. New FAQ PDF from Fannie Mae regarding form 1004MC and other items.
After a trial run, even with the availability of a "statistics feature" in my MLS, the typical user will have to make multiple searches to provide the answers. If you share my view that "competitive to the subject" isn't always reflective of "neighborhood trends", you'll need to do the job twice to get both sets of answers. What about other issues?
Inventory Analysis
What caught my attention was the layout and time periods for the data. There are three time periods specified, the first a 6-month period, while the other two are 3-month periods. With one being twice the size of the others, logically the number of sales in the first column will be larger as compared to the others.
Imagine the "underwriter calls" you'll get when the first column shows 18 sales and the second and third columns show 9 sales and 10 sales. Do you think someone, somewhere, will want to know why sales have dropped from 18 to 9 and 10 and why you selected stable?
What defines a "comparable active listing"? Is it based on physical characteristics alone or should price also be considered? If there are 10 active listings and 5 are over-priced, are they really comparable? How do we explain this and which number do we put in the column? Seems like there will be some footnotes needed.
What constitutes "active listings" during the specified time period? When you retrieve your data-set, some of the "sold during the time period" will have also been "actively listed during the time period", yet they are now sold and the status is changed. Be careful with the search parameters as you need to define all that were listed during the time frame.
What determines "months of supply" (see the above)? If some of the listings are "over-priced" do they represent "competitive supply" or wishful thinking? I guess the assumption is that they are part of the supply, even if its misleading, however some explanation may be needed and you comments should address what is normal months of supply in the market.
What about "days on the market" for both sales and listings? Do we include prior listings (cumulative days on market) that may have been over-priced for market conditions or only the most recent listing days on market, when the property was appropriately priced and therefore the time on market reflects "knowledgeable seller" as required in the definition of market value?
To develop the "median listing to sale price ratio", should we use the original list price or most recent list price as the basis? If you only consider the most recent list price, why would you use the cumulative days on the market above, as this wouldn't be consistent? Of course the opposite is true as well, if you use the original price, is the drop over several listing periods reflective of the market or does it distort the median list to sale price ratio? If you apply a "cumulative list to sale price ratio" to a current listing in your report (that happens to be priced at market), will this be misleading?
Seller-(developer, builder, etc.) paid financial assistance prevalent?
This is a "yes or no" question, but I would think some explanation is needed in your comments since you have to determine a trend. Whichever method you decide on for any of these answers, I suggest you consider how you will communicate it to the reader, perhaps in the form of an addendum to "the addendum".
With the new form comes more confusion (at least on my part) than the transparency that it promised. The key, be proactive and start working through a few samples. Find out where the data can be misleading or confusing to a reader and take steps to clarify what you did, why you did it and what it means with respect to the subject property.
Some of you might even want to take the 1004MC's position on this and assume that "all ships rise and fall with the tide" and as such, the subject property trends reflect the trends for the neighborhood. If so, you might want to add a clarifying statement to that effect in your report. Would this be an extra-ordinary assumption?
The Devils' in the Details
Explain in detail, seller concessions trends for the past 12 months.
Once again, this is for "competitive to the subject". If larger homes in the neighborhood are "giving away the house" so to speak and you are appraising a smaller home, you may have different trends. This is one reason market segmentation plays a key role in valuation.
Are foreclosure sales (REO sales) a factor in the market? Yes or No If yes explain (including the trends in listings and sales of foreclosed properties).
It's a "Yes or No" question and yes requires explanation in the form of "trends in listings and sales of REO and foreclosures". One might assume they meant the neighborhood as opposed to the market. You may want to point out trends in the overall market area and discuss if any are apparent in the subject's neighborhood.
Cite data sources for above information
State your sources such as the MLS, other reports on REO, etc. Be specific and keep a copy of data downloads and printed REO reports, newspaper accounts, etc. in your work file.
Summarize the above information as support for your conclusions in the Neighborhood section of the appraisal report form If you used any additional information such as an analysis of pending sales and/or expired and withdrawn listings to formulate your conclusions provide both an explanation and support for your conclusions
I said "the Devils' in the details" and here he pops up again. First, we have the conflict on neighborhood vs. competitive with the subject. Now we have to summarize all of the above, providing "any additional analysis" we used to formulate our conclusions and provide explanation and support (I would assume documented support) for our conclusions.
Once again, Excel to the rescue along with your Clarification of Scope of Work addendum (COSOW). You can use the COSOW to state "what you did" and "why you did it that way" and then reference the COSOW in this section. Next, you can use Excel to graph the data, providing "visual evidence" of the trends.
If the subject is a unit in a condominium or cooperative project complete the following.
The 1004MC addendum calls for "project level analysis" of Condominiums and Cooperatives. So aside from the neighborhood or subject property level analysis above, you will need to provide specifics (as before) at the individual project level.
One good aspect of the 1004MC, the signature block will be automated by your software forms provider. Most of them will have the form available over the next few weeks. Let me see, "do I sign as appraiser or supervisory appraiser"? Well at least there's no controversy on "did or did not inspect" on the 1004MC. Well leave that discussion for another date.
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AUTHOR: Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at lvreqa@cox.net Look for the new Outside The Boxes category for a collection of Patrick's articles on Appraisal Scoop!
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