Appraisal Scoop

The 1004MC-71 Industry Update Part 4; Making Market Condition Adjustments and Determining When Values Are Declining

This is the forth article in a five-part series dealing with the new 1004MC form (MCF) by David Braun, MAI, SRA.  In Part 1 of this series, David began with a discussion of where appraisers are NOW . . .and gave some direction on where we're headed.  In Part 2, David looks at appraiser's frustration with the 1004MC and in Part 3, he gave us a "What Goes Where and Why" look at the 1004MC.

I am enthusiastic about appraisers gathering large amounts of data onto a spreadsheet for analysis. The power gained from the appraiser being enlightened through this process is staggering. I am on record for supporting Fannie Mae in the over-all process, and condemning the appraisal profession for not beating Fannie to the punch. I believe strongly that the form (not the process) is far too limited.

The Total Solution program that I developed is an example of adding to and expanding a standardized form. Performing a market condition analysis is a lot like sky diving in the sense that you either do it or you do not.

Many critics are correct when they say, “Appraisers are providing misleading market condition analysis.”

I agree that many appraisers are limiting their data and scope of work to such a degree that the results and conclusions are just not reliable. Appraisers are much more like the Wright Brothers at Kitty Hawk, than the modern-day jet pilot . . .but we have to start somewhere.

In this part of “The 1004MC-71 INDUSTRY UPDATE” the process of extracting the appropriate market conditions (time) adjustment for the direct comparison grid and determining the value trend’s direction (stable, increasing, declining) will be addressed.

This method is appropriate for vacant land, apartments, and various commercial properties. Microsoft Excel is the canvas used in the following adjustment extraction process.

The examples are taken from AVT’s Market Conditions Adjustment Extractor. You can view it and other automated appraiser tools at http://www.scoopgear.com/automated-valuation-techn.html

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ERC's Unique Property Database - BETA!

Appraisers and brokers often are challenged with determining an appropriate value/price estimate for properties that are so unique that there are few if any other similar properties to compare them to. This approach is especially challenging when there are simply either no or few similar sales to analyze.

The ERC Unique Property Database is not intended to replace the appraiser’s or broker’s research and analysis but, rather, to supplement it—to act as a sanity check, especially in those instances in which the appraiser/broker had so little market information on which they could base their analysis of the market reaction to the unique feature.

Click Here to search by physical features, functional, locational, and/or historical anomalies. You can search on more than one category

The database includes case studies with the following:

• High-tension wires near or on the subject site
• an adjacent landfill causing odors
• a historical feature such as a home built by an "important architect"

The goal is to have as many quality case studies as possible in the system to aid relocation professionals in their jobs. Currently, data is being contributed on an ongoing basis by relocation management companies and appraisers.

If you have a property that would be a good addition to the Unique Property Database please submit your information here and the ERC will contact you with further instructions.

FAQ – Unique Property Database

Special Thanks! to Danny Bordas - Senior Appraiser - http://www.smithrealtyadvisors.biz/ - Smith Realty Advisors

Market Modeling and the Real Property Appraiser - Part III

Author: David A. Braun, MAI, SRA (President, Braun & Associates, Inc.) has been actively engaged in real estate appraisal, review, and consulting since 1976. In this period, assignments have been performed throughout East Tennessee for numerous clients

This is the final part of a three part article on "market modeling". The purpose of this series of articles is to introduce real property appraisers to the concept of market modeling in a way that helps remove the mysterious cloak surrounding it.

In Part I we discussed that market modeling covers AVMs, matched pairs, regression, artificial intelligence, and expert systems. The article pointed out that appraisers perform market modeling every time they fill out a sales grid when performing the Direct Comparison Approach. In theory, even the most complex AVM program can be duplicated by hand calculations.

The climax of Part I was that all of the methods represent one science; as their purpose and nature are all similar. In fact, appraisers know a lot more about market modeling than they think. A regression application that I programmed in Excel was provided (Excel utility) so that appraisers could get some hands on experience with automated modeling.

The video tutorial was designed to give the appraiser enough information to use the application; but was not intended to be a "how-to" for regression analysis. Based on feedback from many of you, the application that I provided was very functional and much easier to use than many other programs available to the appraiser. My goal was for appraisers to see that applying a proper regression analysis intended to extract adjustments was much more labor and time intensive than we had been told.

In Part II we focused on regression analysis and laid out some requirements and goals that would be necessary for any market modeling system to be used in everyday appraising. These were:

1. Produce a more reliable (accurate) value opinion without adding too much time.
2. Shorten the time to perform an appraisal of equal quality.

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Declining Markets - LandAmerica Provides Guidance

LandAmerica, in their latest "Reminder" memo, provides declining market guidance to real estate appraisers:  Download Declining_Markets_LandAmerica.pdf

Declining Markets

With declining values being more and more of a concern throughout the country, this [LandAmerica] notice is a reminder that all appraisers are required to report an accurate and objective analysis of the subject neighborhood for each assignment, and report these conclusions on each appraisal report.

Appraisers must be familiar with both the Fannie Mae (Announcement 07-11 Selling Collateral Valuation Practices and Declining Markets) and Freddie Mac (Nov. 15, 2007 Declining Markets) bulletins that address appraiser responsibilities in this area.

To summarize LandAmerica’s expectations, for each report, at a minimum, the appraiser must, for ALL assignments, regardless of scope:

1)  Provide an accurate report on the primary indicators of market conditions in the subject’s neighborhood, whether increasing, stable, or declining. neighborhood, whether increasing, stable, or declining.

2)  If “declining” conditions are noted the appraiser must document:

• The reason for decline,
• The rate of decline, and
• The data source for this information.

When a sales comparison approach is developed, in addition to providing the most similar, proximate, current sales for comparison, additional listing and/or pending sales should also be provided, especially if the closed sales used are several months old. These listings should be provided on a sales grid, with the appropriate adjustments, particularly the proper “list to sale ratio” adjustments.

Note: If comparable listings are unavailable, this may suggest additional concerns, which obviously should be addressed.

3)  If “oversupply” or excessive marketing times are noted, the appraiser must detail the reasons for this, and the effect on the subject property’s marketability and/or value.

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Outside the Boxes: Part 12 - Over-looked & Under-reported (Age, GLA, Energy Efficiency, and Final Reconciliation) -

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 

The URAR poses a number of questions that seem to be straight-forward, when in fact they are anything but. Continuing from Part 11 - Overlooked & Under-Reported, let's look at other "over-looked and under-reported" areas of the URAR.

Adjustments

"Box on form does not equal required adjustment". The market simply isn't that perfect, therefore "judgment" is a critical component of the appraisal process. The "appraiser's judgment" however is not a license to arbitrarily make unsupported adjustments. Some differences can't be quantified or qualified. Instead of adjusting for a "minor difference", use the reconciliation process to weight the comparables and arrive at a single point valuation indicator for the subject property.

Actual Age

Often we see adjustments, without explanation, for minor differences in age between the subject and comparables. Actual age may or may not have a bearing on the sale price unless there is a substantial difference in the effective age.

Example 1: Two homes in a custom home area. The first was built in 1985 and the second in 1990. Both are similar in design, quality, features, etc. and effectively are identical ranch style homes. Would the market note a monetary difference?

Example 2: Using the homes in example 1, except the first sale (built in 1985) was remodeled to include an energy package with Low-E windows and an updated kitchen. Would the market recognize and favor this sale for its modern features, despite the other sale being a newer building? 

Example 3: Two row homes or Brownstones built in 1940 and 1955, each renovated multiple times over the years and now similar in most respects. Is there a market value difference for the 15 years of age variation?

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Outside the Boxes: Part 11 - Overlooked & Under-reported

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 

Like the magician's illusions, not everything is as simple as it may appear to be. While appraising isn't "magical: (although I've seen a few appraisals that were "beyond belief") the URAR does pose a number of questions that seem to be straight-forward, when in fact they are anything but.

Property Rights

If the subject is on a longer term lease (say a year or more) without a provision for the landlord to terminate it for reasons other than default and or no law invalidates the lease at foreclosure, what are the true rights being appraised, "fee simple" or "leased fee"? If the rent is below market, would an investor pay less for the leased fee rights? If appraised as "fee simple" (for valuation purposes, you must use a "hypothetical condition" and disclose.

Zoning Compliance

Over time, zoning ordinances are changed. Uses once permitted are no longer allowed and setbacks, building coverages and other requirements may be modified to more current standards. Don't assume that similar zoning designations have similar meaning or requirements in different jurisdictions. While R-1 may may indicate "residential single family" for most cities, the permitted accessory uses, set-backs and other provisions can be very different.

Illegal Uses

In many older areas, owners may have expanded a building to the property line or into the setback area. Assessor records my reflect the improvements, however inclusion by the assessor does not indicate code compliance.

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Declining Market: New LSI Policy — Two Pendings/Listings on all appraisal forms except REO reports

The following is from a notice sent from LSI's Chief Appraiser - Download LSI_Pending_Sales.pdf

As of January 7, LSI implemented a major policy change designed to help appraisers determine the direction (increasing, stable, declining) of the submarkets, by requiring two listings/pendings be added to every analysis.

Even in markets that have had no declines, there are submarkets that are deteriorating, and unless we provide some support for this, we run the risk of assuming the stability is still there, and only listings will tell you when the slide is beginning.

FAQ for New Policy of adding 2 Pendings and Listings to your analysis;

1. Fees: While LSl does not dictate fees, we do not expect this policy change to impact our costs. The scope of work in a declining market would dictate the prudent appraiser performs an analysis of listings and pendings, so we expected this research has been performed all along. Gridding of these offerings is to assure our clients of the direction of the submarkets in every region of the country.
2. Maps/photos: As with any gridded item, we expect the appraiser to include a comp photo of the listing or pending sale and its location noted or, the sales location map.
3. Duration of Policy; Until further notice. This policy is to be applied to all residential appraisals with one exception: REO reports that already have a page adder for consideration of competing listings need not add still more listings We expect to maintain this policy until the murky national picture clears and it becomes apparent that most markets are turning from a threat of decline to a likelihood of increases. At that point, we expect to suspend this blanket general policy for all but the known remaining areas in decline.
4. Granularity: Several have written to argue that you track and report the supply and demand, price changes, etc. based upon a broader database. This might be regular MLS statistics, or an online database that breaks it down to single family or condo. Use of average LP to SP ratios offered by MLS statistics may tend to mislead. They are incorporating properties of different types, locations, pride ranges, and attractive to different buying groups. This averaging process is not granular enough. To better support the estimate LP to SP ratio, build your adjustments from the data you find which is similar, proximate, and most current in your subject's locale, in other words, from your closed comparable sales.

Download LSI_Pending_Sales.pdf

Wachovia Mortgage Issues "Market Analysis" Requirements

Wachovia Mortgage, FSB's Appraisal Department has issued an Important Information on Market Analysis Requirements memo to all of their Wachovia Independent Contractors (WIC's). Download wachovia_mortgage_market_analysis_requirements.pdf

Here are a few excerpts from their memo:

Now, more than ever, with all the press about the “mortgage crisis” and declining markets throughout much of the nation, market analysis has achieved a new level of visibility. In fact, as you may know, Fannie Mae announced an amendment to their selling guide on December 5, 2007 regarding declining markets. Fannie, Freddie, (VA) and other secondary market purchasers are using the state of the market to help establish loan level acceptability.

We believe that property values, demand/supply models, and marketing time are all related. Therefore, when discussing a market, we want you to analyze the market based on sales, listings, pending sales, withdrawn, expired listings, etc.

The tables below are examples of how Wachovia Staff Appraisers must report market statistics on their appraisals. We recommend that you adapt these for your use or provide similar, clearly stated, and easily understandable statistics for the appraisals you complete for Wachovia.  This will save you and us time in not having to contact you to discuss your reporting of the markets.

Click here for more . . .

LSI Memo: Documenting Declining Markets With Listings/Pendings

MEMO FROM CHIEF APPRAISER - LSI

Subject: Policy Change 

Date: 12/18/2007

DOCUMENTING DECLINING MARKETS WITH LISTINGS/PENDINGS

LSI Quality Assurance has been aware for some time that appraisers are often mistaken or confused about the correct handling of the market direction (increasing, stable or declining) of the neighborhood. It is critical that appraisers not mischaracterize the submarket direction. The best possible way to ascertain the direction is with analyzed data from the neighborhood within your report.

Please remember that in a declining market, the listings, adjusted for negotiations, will be a strong indicator of value because the Principle of Substitution suggests that the competing listings create a "ceiling" above which the value cannot go. Thus, in such a market, when listings are lower than recent historical sales, reconciling toward listings, supported by negative time adjustments in the closed sales is appropriate and correct.

This step has already been required in most markets known to be in decline for some time now by several national clients. However, in other markets, while market's driving forces have deteriorated (supply/demand, DOM, interest rates, and job market), it is not clear that the market has actually begun to decline.

One of the surest ways to know whether a market is declining is the use of listings or pending sales which (as has been suggested by many experts) the listing is the "canary in the mineshaft", or "early warning signal", that a market direction reversal has happened.

In questionable markets, appraisers have been lax about employing listings or pending sales, not employing the very technique that demonstrates the market has indeed turned.

They may mischaracterize the neighborhood as stable, a USPAP Standard Rule 1-1 error of omission.

Given this gap in the analysis, LSI has decided that until further notice, to assure appraisers are correctly gauging the market direction, it will require the analysis of a current offerings and pendings on all appraisals. This analysis is vital to proving the market direction statements are correct and consistent.

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Source: Download LSI_Documenting_Declining_Markets_With_Listings_Pendings.pdf

Fannie Mae Announcement 07-22: Maximum Financing in Declining Markets

Marianne E. Sullivan, Sr. VP of Fannie Mae's Single-Family Credit Polity and Risk Management division, issued a Selling Guide Announcement 07-22 on December 5, 2007. 

"Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product."

"The reinstatement of the maximum financing policy and the other changes outlined in this Announcement are necessary in light of current market conditions. These policies are effective for all loans delivered with application dates on or after January 15, 2008."

This Announcement:

• Establishes restrictions on the maximum financing for properties located in declining markets;
• Encourages lenders to employ additional tools and processes to validate housing trends; and
• Establishes criteria for exceptions to the maximum financing policy.

Fannie Mae says:

Fannie Mae strongly encourages lenders to use supplemental sources and tools to independently assess current housing trends, unless the appraisal indicates that the subject property is located within a declining market.

When the appraisal notes that the subject property is in a declining market, the maximum financing policy must be applied. 

Fannie Mae strongly urges lenders to implement processes and apply supplemental sources and tools to validate current housing trends and not rely solely on the information reflected in the appraisal.

Download 07_22_FNMA_Max_Financing_Declining_Market.pdf

Click here for additional excerpts . . .