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

Click Here To Continue Reading . . .

Real Estate Statistics - Not Always What They Seem

Read enough about the Phoenix (or elsewhere) real estate market, and someone will start spouting statistics. And while market stats are important to understand, one must exercise extreme caution in interpreting them, or listening to others interpretations.

Let's take a look at "Days on Market" (DOM), or "inventory", or "months supply".  Whatever you prefer to call it, it is an oft-cited indicator of overall market conditions. And generally speaking, it's not a bad indicator. The supply of homes available for sale is a key component in understanding the overall real estate market conditions.

It is important to understand a few things though:

Our current market really consists of three major categories of inventory: 

1. Bank/lender owned homes (also known as REOs);
2. pre-foreclosure/ short sale properties; and 
3. "normal" properties (homes that are owner/investor owned and not in a pre-foreclosure status).

Real estate is local. And the Phoenix metro area is a BIG place. Any time statistics or price indexes are quoted for the entire Phoenix area, you have to understand that conditions across the Valley can vary dramatically. Even within a suburb, conditions can vary from subdivision to subdivision. Within a single large Master Planned Community, conditions can vary from neighborhood to neighborhood.

The supply of homes is a perfect example. The general consensus in the real estate industry is that a six-month supply of homes is considered a "balanced market". Less than a six month supply means we are in a seller's market and more than a six-month supply is an indicator that we are in a buyer's market.

At this moment in time, if you look at all the available inventory of homes across the Phoenix metro area, there is a 5.2 month supply of homes.

If you're a seller, you may be thinking, "Hallelujah! Phoenix is a seller's market!" and if you're a buyer you may be thinking, "Crap. I should have bought a home a couple of months ago when it was a buyer's market and I would have had more negotiating power."

Let's look at the categories of inventory that make up this number...

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The 1004MC-71 Industry Update Part 2; Frustration Turns To Panic

This is the second in a four-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's looks at appraiser's frustration with the 1004MC and in Part 3, he gives us a "What Goes Where and Why" look at the 1004MC.

I have been talking to a lot of appraisers who are getting a little uptight.  Consider that for most residential appraisers their personal financial position has been deteriorating the past couple of years because of a decreased demand for appraisals during the height of the housing crisis. Now, throw in the new requirement to perform a market condition analysis (MCA) on the 1004mc-71 form, while the work load is increasing.

The typical residential appraiser is in no position to turn down work.This scenario has left a good number of appraisers in a state of frustration and panic as they attempt, but fail, to produce a credible MCA in a reasonable time period. Some have reached the point that they say the heck with a credible MCA, I would be happy if I could just get the blanks filled in on the 1004MC-71 form (MCF). What should appraisers do to get over this hump?

My suggestion is to begin to think positively. Most appraisers (90% plus) can meet the challenges of performing a credible MCA on the new MCF. So, most all appraisers are stating a fact when they say, “I can do it!” However, there is a set of skills that has to be developed, each fitting together like the pieces of a puzzle.

Let’s talk about a few of these necessary skills.

1. The first and most important skill is being able to recognize what data should be gathered in the analysis.
2. The second is how to perform the database searches that are necessary to gather all of the meaningful information.
3. The third step is assembling that information on a spreadsheet for analysis.

The appropriate data to gather is any property that was exposed to the market (listing, pending, expired, withdrawn, sold etc.) that potential purchasers of the subject property would deem competitive to the subject property. Appraisers typically think of pertinent data (comps) in the forms of closed sales and active listings. However, would a property that is very similar to the subject that was actively listed on the market at $220,000 for over a year and was recently withdrawn by the owners be meaningful information for the appraiser? Of course it would. A MCA that is based on a lot of types of data has some real potential to aid the appraiser in the valuation process. The data-basing term for these different types of comparable properties is a “Record”.

What search parameters should be used when gathering these comparable property records?   This is best answered by considering what the appraiser is going to do with the data. The MCF is basically a trending analysis; but what are we trending? Many appraisers search for comparables by a sales or listing price range; which is an incorrect method. We are not so much interested in how many properties are offered and how long they have been on the market in a specific price range. The appraiser is not trying to trend a price, he/she is trying to trend a specific property type in a specific location by price over time.

Click here to continue reading . . . .

The 1004MC-71 Industry Update Part 1; And They're OFF!

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

April first has come and gone; and the mandate to use the 1004MC-71 form (MCF) is firmly in place. Much like in a horse race appraisers are accelerating out of the blocks- with a few still stuck in the gate.  The form appears to have been primarily designed by Fannie Mae, with some input from Freddie Mac, and the Appraisal Institute.  The intent of this writing is to discuss the progress of appraisers to adapt to the form and to begin a converging of the various opinions of how the analysis should be completed.

The players in this scenario are the designers of the MCF, solution providers, appraisers, and reviewers. My personal expertise is as one of the solution providers, but also as an appraiser and fee reviewer.  I have 30+ years of appraisal experience, am a certified USPAP instructor, the author of APPRAISING IN THE NEW MILLENNIUM, Due Diligence & Scope of Work, designed and developed the USL Documenter II software, and the Regression Plus; for Real Estate Professionals.  I did not help design the MCF, nor have I interviewed those that did.

I feel the MCF is too restrictive (perhaps to keep it one page), but otherwise I believe it is a positive progression in the evolution of the appraising industry.  Now that most appraisers have access to spreadsheets they can assemble and analyze hundreds of records at one time. This is a stock pile of raw resources that appraisers can no longer afford to ignore. In fact, appraisers like in every other industry in America must exploit every asset at their disposal and evolve their research and development to a higher degree of efficiency.

Appraisers should begin to grasp the MCF as a tool to help them and not a hurdle to jump over.  In this new millennium...”appraisers must evolve from form-fillers and template masters to problem solvers.”  At this time most appraisers are simply trying to fill out the form with little recognition of its potential role in the appraisal process.

Over time, this will change and appraisers will recognize that when a good market condition analysis is performed, the appraisal is half way complete.  In the mean time industry leaders such as instructors, writers, and reviewers should keep pounding the message that the MCF is a viable tool that can provide significant insight and lead to a credible appraisal.

I have found that many appraisers are hung up on how get their MLS search results exported to a spreadsheet and if necessary converting that data to a standard spread sheet format which will allow for organization of the data and analysis.  This is not to imply that every appraisal market will require the use of a spreadsheet. Many rural markets with few properties will simply be done by hand. 

Appraiser’s coming out of the gates are like the early stage of a race for a human sprinter; their heads are mostly down right now, but shortly their heads will look up and they will be searching for points of reference to guide them.

These points of reference include books, seminars, automated tools, and the designers of the form. The successful appraiser will have to expend the energies to absorb information from all of these sources. Those that ignore this wealth of information and are content to merely fill in each blank on the form will find that the users of appraisals will intentionally and systematically begin to remove them from their approved appraisal lists.

Once appraisers make the effort to learn and evolve they will need automated tools in order to meet the budget constraints that they operate under. Most of the commercial form providers have integrated the MCF into their software packages.  But, they have built in little automation. I have been offering automated solutions to appraisers for almost a decade. But, as an appraiser it is difficult to appraise and develop software.  I have been delighted to see appraisers besides myself offering commercial report writing software and MCF tools. Many appraisers have developed tools, but most never make it to market. These efforts represent a significant shift in how automated tools reach appraisers.

It is my hope that these appraiser/developers will unite and support one another to better provide appraisers with the automated tools they need to do their job.  

Watch for Part Two!  David gives us a "What Goes Where and Why?" look at the new 1004MC Form!

Author: David A. Braun, MAI, SRA (President, Braun & Associates, Inc.) has been actively engaged in real estate appraisal, review, and consulting since 1976. David is also the author of Appraising in the New Millennium - Due Diligence & Scope of Work, 3rd Ed.  All of his products can be found on http://www.ScoopGear.com

Software Review: Automate your 1004MC data research with Total Solution© 1004MC

The following excerpts are reprinted with the permission of Ann O'Rourke, MAI (Appraisal Today) and the author Douglas G. Smith.  - Download Total Solution 1004MC Software Review - Doug Smith

Appraisal Today [April 2009] - Editor's note: Before writing this article, Doug Smith researched the available MC form software. He decided that David Braun's software was the best. This review also includes comments on the two appraisal "camps" on market conditions analysis and other topics. The MC form does not require historical listing data analysis, but Smith reviewed this as it is an option.

"The purpose of this addendum is to provide the lender/client with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood. This is a required addendum for all appraisal reports with an effective date on or after April 1, 2009."Fannie Mae 1004MC/Freddie Mac 71 March 2009

Although announced to the appraisal/lender world in November 2008, appraisers are only now scrambling to take steps to fully understand the new 1004 Market Conditions Addendum and devise a strategy to complete the form. Most agree completion of the Addendum will add to the work of preparing reports. Some lenders, in anticipation of the deadline, have asked that appraisers submit the completed form prior to the April 1, 2009 date.

While some lenders have stepped forward assuring appraisers they will be compensated for preparing the new Addendum; others have taken the stance that the Addendum only formalizes data that should already been gathered and analyzed and no increased fee should be expected.

 

That the information on the Market Condition Addendum is segregated into three distinct time periods refutes the contention that appraisers already gather the data required by the form in a similar fashion.

Whether an appraiser gathers and analyzes data on an annual basis or month-by-month, the current separation into one six month period and two three month periods requires re-working of any past methods of reporting trends.

It is clearly evident that preparation of the new MC Addendum will take more time. For appraisers, the challenge is two-fold.

First the appraiser must meet the competency standards of the scope of work necessary to complete the form and secondly the appraiser must consider the preparation time and productivity issues of meeting these requirements. To address both of these challenges,

David Braun MAI,SRA from Automated Valuation Technologies, Inc has developed Total Solutions©, a software program to assist appraisers with the process of preparing the 1004MC form. Total Solution© is both an elegant and practical time-savings means to competently fulfill the entire range of requirements of the new 1004MC Form.

Priced at $149.00, it is available at http://www.scoopgear.com and is available in two versions, one running on Excel 2007 and another geared for Excel 2003.  David's AVT Users Group is located on The Appraiser's Water Cooler social networking site.

Download Total Solution 1004MC Software Review - Doug Smith

Click here to continue reading . . . .

1004MC – The Real “April Fools” – Part One

How appropriate is it that the 1004MC addendum to the URAR was required for all valuation assignments for Fannie Mae, Freddie Mac, VA and FHA, on 1 2009 – "April Fools Day"?

The looming question on the 1004MC, who will be "the fools", those filling it out (without consideration to or analysis of the "four forces that influence value trends in the neighborhoods"), or those using the conclusions on the 1004MC that are absent (by design of the form itself) of the impact of those same forces during the time-periods specified and therefore have rendered the 1004MC Market Conditions form useless and misleading?

Introduced by Fannie Mae and Freddie Mac in November 2008 and now adopted by FHA and VA, the 1004MC has generated far more questions than answers.

Instructors have prepared courses, various individuals have offered free or low cost solutions using Excel, online programs and the MLSs are scrambling to provide 1004MC statistics via their systems, yet despite the efforts there still are disconnects and conflicting opinions vs. cut in stone answers and there is a reason for that. The instructions on the 1004MC are vague and pose a problem with respect to USPAP and Generally Accepted Appraisal Practice.

With that in mind, I'll try to cover some of the many of the issues raised in my 1004MC Workshop and provide you with my observations. At the very least, you get the idea of the tasks ahead and some suggestions on what you may have to do to meet the challenges posed by the 1004MC.

FAQ #1 – "Should we transfer the conclusions and trends on the 1004MC into the neighborhood section of the URAR"?

The instructions on the 1004MC state: "The appraiser must use the information required on this form as the basis for his/her conclusions and must provide support for those conclusions, regarding housing trends and overall market conditions as reported in the Neighborhood section of the appraisal report form".

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Sneak Peak - 1004MC 2009 Form - Fannie changes list/sale to sale/list ratio

Original Form - 2008 - Median List-to-Sale Price Ratio

 

New Form - 2009 - Median Sale Price as % of List Price & Dropped "Historical (4-6 & 7-12 month) Analysis for Listings

    

So exactly what did they change?

The first change was to gray out several areas on the form. These areas pertain to historic listing data, (prior 4 to 6 months and prior 7 to 12 months), and the overall trend rating boxes. Fannie Mae understands that this type of info may be difficult to acquire in some areas. However if you can get the data you must still include it on the form and check the appropriate trend rating box.

Fannie's new instructions on the form now state:

“It is recognized that not all data sources will be able provide data for the shaded areas below, if it is available, however, the appraiser must include the data in the analysis.”

Also, the form now requires median sales price as % of list price instead of the median list to sales price ratio.

  Click Here to Download the "Official" Fannie Mae 1004 MC

1004MC TOTAL SOLUTION© IS coming!

[Editor's Note - David Braun, MAI, SRA has been working on the development of a new Market Conditions Analysis (MCA) form that runs in Excel and will be available from http://www.ScoopGear.com ]

UPDATE ON THE 1004MC TOTAL SOLUTION©

As this project is nearing completion, I want to provide an update and some information on this project. Those of you who have purchased and use the USL Documenter II and the Regression Plus for Real estate Professionals programs know that AVT strives for excellence. The success of these products goes beyond good programming to being timely to the appraiser. The foremost consideration in any project that AVT takes on is the resulting effectiveness, but more importantly it efficiency (simple & quick). These are the same parameters governing the 1004MC Total Solution© (Solution) project.

Can an appraiser meet the following three goals; better, faster, and cheaper? This is hard to do unless the work is highly automated. After all, automation can reduce errors and do the work faster. Faster means cheaper because cheaper is really the dollar per hour ratio that the appraiser is receiving.

Let’s talk about a couple of things that the Solution does to help the appraiser. First, it breaks the analysis into eight equal time periods over two years. Because of automation it takes no longer to trend eight periods than it does to trend the three periods on the 1004MC. See the sample below which depicts a portion of the appraiser’s worksheet.

The trend is reported for both, the first and the second year. Second, the computer automatically sets the trend as either “stable, increasing, or declining”, however, the appraiser can over-ride it. The worksheet information is automatically transferred to the official 1004mc form. However, this form would be omitted from a report where the secondary market is not involved and the worksheet would be included in the appraisal report.

This program will be quick, but being correct is also necessary. Let’s discuss how some appraisers may inadvertently use “bad” data in the analysis. The “Total Number of Comparable Active Listings” is a good example of how things could go wrong. First, many appraisers may state that the data is not available from their MLS system as they cannot search for past “active listings”. However, the MLS lists the number of days on market and the days on market for each listing. Therefore, a computer program can count the number of listings that were active for the time periods in question. It is my belief that many automated systems will go this far, but will still get the wrong answer.

Let’s consider an example. Over a 90 day period there were seven listings. However, two of them were actively listed over the entire 90 days, two were listed for 45 days during the period, and three were listed for 30 days each. On average, there were only four active listings during the period at any one time. Many automated systems will report that there were seven listings during the period, and there were; but this would not be the correct information needed to accurately calculate the “Months of Housing Supply”. The result would be to make the market conditions seem worse than they really are.

Click here to continue reading . . .

First Impressions of the 1004MC: Part 5 - "Closing Thoughts"

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.

Click here to continue reading . . .

Freeware - 1004MC Form in Excel - Available for download

George Hatch has developed a build of the 1004MC form in Excel that he's making available for download to anyone who wants to use it.  Download 1004MC   He figured, in these tough economic times, there might be a few appraisers that could use a tool like this in lieu of spending money to update or change their appraisal software.

George says, "This is a pretty basic version, but I have built the math functions into the grids. Several people have already downloaded it and worked with it a little and so far everything looks to be functional"

There are a couple appraisers who have already figured out how to export data dumps from their MLS systems and how to use the spreadsheet functions in Excel to automatically sort and analyze the data and populate the grid in the form.

If George can get ahold of one of those setups or otherwise figure how to do it himself, he'll be updating this form at some point in the future. Hopefully a little automation will eventually smooth the way for those people who choose to take advantage of it.

The download is a freebie, and is available at the email address listed at the top of the attached pdf. http://box.net/shared/3nx558czgn or Download 1004MC   Click here for a pdf preview: Download 1004MC

Now for the legal stuff:

Note: Password to unprotect the form portion of this page is "123"

This Excel file was built as a freeware application, but the user assumes all responsibility for content and use. Please check the contents of the form itself and the functionality of this Excel file before you use it.

Fannie/Freddie do not allow modifications to content of the form itself. Users of this Excel file are welcome to otherwise modify it to suit their own needs, but if/when you do, please don't attribute the modified version to me.

Version date is 01/14/2009; if you find errors or suggested modifications, please send them to me at ghatch760@gmail.com

Click on COMMENTS for additional information!