Having completed several "1004MC Workshops", read numerous forum posts and talked to many appraisers, one thing is clear, confusion reigns! Most do not see the merits of the 1004MC. They see the problems, including opposing opinions, various interpretations, and few immediate solutions given the limitations of their MLS data services.
At question is not the concept, but rather the execution. While many believe this to be a step in the right direction of mandating a standard for measuring trends, the format is a "time-consuming problem" versus a "problem solving solution". The unintended consequences over-shadow any potential benefit.
The 1004MC is not about medians, totals, percentages, and ratios, no more than it is about the neighborhood. The form is about "the collateral" and "the trends related to the collateral". While market conditions and neighborhood trends are important, the trends of properties similar to the subject are critical.
Lenders are not making a loan to the market area or the neighborhood; they are making a loan on the subject property, the collateral. As goes the trend for properties similar to the subject, as goes the value of the collateral securing their loan.
Highs and lows
The 1004MC gets an "A" for effort and the focus on the subject verses the neighborhood, "C" for layout and "F" for format and function. I understand the need to "standardize trend analysis", however, the format is such that the numbers may mislead more than "make transparent".
It does get a high mark for two factors, first for attempting to replace opinion with statistical fact, limiting subjectivity and secondly, it requires the analysis to focus on "competitive to the subject from the buyer's perspective", removing the influence of lesser or better properties in the neighborhood that do not compete with the subject.
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This has always been a problem with the Neighborhood Section of the URAR, "all ships do not rise and fall with the tide ...equally", and therefore neighborhood trends may or may not represent trends for the subject property. This is especially true in heterogeneous areas.
The low grades come from a variety of issues (many identified in prior parts of this series) and a few that I will revisit here.
- Trends are only valuable when placed in perspective as to the events (employment, credit, migration, consumer confidence, etc.) that influenced the trend. Without tying the catalyst to the data, there is no basis for what caused the trend or its future direction. Who cares about what happened last year, if it will not be repeated this year? The 1004MC does not address current "market forces" that may influence the trend.
- "Overall trends" would seem to imply that the "selected trend" requires comparison of the results from the "prior 7-12 months column" to the "current to 3 months column". The market may be stabilizing (as indicated by a combination of similar results in two consecutive periods and improving employment, migration, and credit conditions); however, the indicated "overall trend" will be declining on the 1004MC.
- The influence of "seasonality" is a required observation, but the 1004MC does not seem to consider that most markets (let alone resort or college towns) are seasonal in nature, with the housing market more active during the spring and summer (March - August) and fewer sales in the fall and winter (September - February), generally attributed to buyers with "school-age children". Higher or lower sales numbers will be posted in some periods, not as a result of positive or negative shifts, but rather family needs.
The 1004MC - Things to consider
"It's not over until it's over" and I for one do not think, "the fat lady has sung yet" on this one. You can expect amendments to the form or instructions. In the meantime (and until we hear a voice in the rafters), there are several factors to consider.
- The 1004MC compliments the trends in the URAR Neighborhood section. It does not replace them. The trends for "competitive to the subject", are "a basis" (point of beginning) for the URAR to compare and contrast the subject to the neighborhood.
- The focus of the 1004MC is to "document the trend", not doing the math. Do not read too much into DOM vs. CDOM, original list date vs. current list date, original price vs. current price, etc. Stay consistent and the trends will likely be the same.
- The phrase "overall trend" implies beginning to end and does not seem to allow for a shift over to consecutive periods. How many months, quarters, periods determine a "shift in the trend" in your market? If "overall" is the only consideration, it could take up to three periods of improving activity before you can report a shift in the trend. Would this be accurate or misleading?
- USPAP requires you to observe and to communicate to the client in a way that is "not misleading" and that is "credible". While the 1004MC documents "statistics and observations", do not let it replace "good appraisal practices". Trends are, "reflected in the numbers", however the numbers "are influenced" by economic factors (employment, credit, migration, consumer confidence) not considered in the 1004MC.
- Revisit the differences between market areas and neighborhoods, homogeneous and heterogeneous, because those differences affect the statistics. Consider how buyers define the neighborhood and competitive to the subject. Go beyond :street boundaries" to reflect on the many factors that shape a neighborhood, such as school zones, economics and physical characteristics of the housing.
- Virtually all markets are seasonal. Chart 5 to 6 years of "monthly sales data" in your market to observe and document seasonality and be prepared to explain it.
- The 1004MC is an "underwriting tool" completed by the appraiser, not an appraisal form. USPAP requires you to know the difference and supplement your report to make it meaningful and to avoid being misleading. Sometimes, you will not have enough data to complete the 1004MC.
You will need to develop and addendum to this "addendum" and a "clarification of your scope of work" to communicate what you considered and how you addressed the elements of the 1004MC, including any explanations on the limitations of the data, etc.
"Just the facts ma'am"
Mark Twain said it best, "gather the facts first and distort them as you like". The absence of clear directions for the 1004MC and standards for measuring various elements of the form and its parent, the URAR, remain the primary impediment to producing something credible, the underlying purpose of any appraisal.
The statistics reported in the 1004MC may work well in "balanced market conditions", however, the "reality of realty" is such that the market is rarely in balance/ Real estate is highly dependent on the influence of market forces, especially employment, migration, credit availability and consumer confidence, none of which are factored into the "overall trends".
What you determine as "the neighborhood" will set the stage for the "trends". When the numbers are subject to "selective interpretation" (based on how you define the neighborhood and competitive to the subject), the results can be a function of GIGO - "garbage in, garbage out".
Take the time to segment the data. "If it wouldn't be on your market grid", is it competitive to the subject and should it be in your statistics on the 1004MC?
Author's Note: This is the final installment in the series "First Impressions of the 1004MC", but not likely my final words on the new form. I expect changes and I will have more thoughts and feedback as I present workshops for a la mode, Inc. in 25 cities over the next two months.
For anyone interested, I will be creating a 1004MC Group on The Appraiser's Water Cooler, where we can post questions, raise issues and share ideas. If you are interested in attending one of the 1004MC Workshops, e-mail Kaitlin.Dove@alamode.com or Adam@alamode.com for cities and dates.
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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