The author is the owner of Acorn Appraisal Associates, a 20 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA
Appraisal businesses interested in survival in today's highly competitive world must constantly search for new ways to conduct their daily activities to improve efficiency. One area to consider is how one approaches the desk research function for each assignment.There are two ways to approach desk research: basic research performed by scientists, or applied research as performed by.....well, the rest of us in our day to day lives.
A good basic research scientist makes no assumptions, starts only with a hypothesis. He gathers all data relevant to his subject, and then methodically steps through the analysis of that universe of data It is a time consuming, but proven and accepted methodology, and it generally gets results. Often not the results expected, but results. Basic research is not results oriented. It's truth oriented. Seekers of truth aren't held accountable for anything but the truth.
Basic research methodology in the practice of appraisal would mean receiving an assignment, say for a single family residence and assembling all of the data in our universe...the market area we serve...and looking at each house, each sale and then narrowing our efforts as we slowly eliminate individual records as not representative of the subject. It would mean visiting the subject, gathering data on it from the ground up, then returning to our office to search for comparable sales, then return to the field to look at those sales as possible comparables to include in our analysis. A slow methodical process that would ultimately yield the answer our client sought, but likely well outside the time frame it was needed.
Clearly we can't afford to apply basic research methods to our appraisal assignments, and we don't.
Click below to read on . . . .
Instead we use an applied research approach. We make certain initial assumptions about the property we are analyzing to reduce the applicable universe of data that we must study. If the subject is in a subdivision, we try to confine our data gathered to that neighborhood. We try to focus on properties that are within a certain size range of the assumed size of the subject, that size taken from tax records and assumed correct.
We note the assessed value of the property from the tax records. We note the contract price on a sale. We call the owner and ask about the property...size, age, pool, when purchased and for what price...things like that. We take all of that "hearsay" data, assume it is correct, then gather a working list of possible comparable sales to consider and physically observe when we visit the subject property.
We then begin gathering the facts. We observe the house and it's overall condition. We measure it. We observe the surrounding area for external influences. And we look at all those possible comparable sales and decide if they are truly comparable to the subject and the best ones available.
Here's the kicker. If we picked the wrong set of comparables to take with us to the field, we have just lost money on this assignment, and further impacted our work in process and other deadlines. We must return to our office, perform another search of sold data, and revisit the field to observe the new sales. The average drive time in our market is about one hour round trip. We've just added another hour to the assignment. Our pricing didn't include that extra time. Hence, we lost money.
The single most important time saver in selecting comparable sales within a neighborhood is to look at those sales in terms of sold price per square foot. I convert the subject into a hypothetical value per square foot using the CAD value, the last know sale price of the subject, even the owner estimate of the value of the subject and using the CAD or owner estimate of the size of the house. I then compare that range of values per square foot to the sale prices per square foot of the houses sold in that market. I'll quickly limit my desk research to those that are within those reasonable ranges. I'll select 6 to 10 that form a reasonable range encompassing the various values per square foot I developed for the subject to take with me to the field.
The most efficient appraisers are the ones who can consistently select the best set of comparables to take to the field, eliminating those second trips to the field. Nothing but experience teaches one how to make that selection, but price per square foot is absolutely the most critical measure for me.
The first objection I usually hear when proposing the use of applied research rather than basic research in an appraisal problem is that I am biasing the result. Not so! Not so! The initial assumptions are just assumptions. They are there to help focus the effort, but they must be discarded in the face of facts to the contrary.
Assumed the house was 2,500 square feet in size, but your measurement say 2,100? Forget the 2,500 and accept 2,100! Sales contract says the price is $200,000 but your comparable sales suggest $175,000? Review your data, then accept what it is telling you.
Those initial assumptions are a working hypothesis. With each piece of data you collect, test and challenge the initial hypothesis. Replace an initial assumption when the data proves it incorrect.
One huge benefit we have in Houston is the number of sales that we have recorded each month. The chart below shows the number of sales recorded in Texas for the first nine months of 2006. Houston, our market is the bar on the far left, Dallas next.
Even dummies like me can spot outliers quickly when looking at sales on a per square foot basis.
Subject is selling for $120/sf when the neighborhood sales range from $90-100/sf? Hmmm.
Now if I were in Fort Worth, the sixth bar from the left, it is a much more challenging problem. The more data you have in your available sample the easier it is to spot outliers.
Don't look at sales price only when doing desk research preparing for a field inspection. And don't ever talk in terms of sales price when discussing an appraisal. Look at price per square foot, and talk in terms of price per square foot!!! Otherwise your listener has little knowledge of the subject and the comparables and can't make any judgments or decisions. And neither can you. But if you talk in terms of /sf, you establish for you and your listener a knowledge of the relationships and both can at least judge if the subject and the comparables are true substitutes.
I still have trouble getting my coworkers to frame our appraisal discussions in terms of price/sf. They still talk sales price or adjusted sales price. And I still make them restate the problem in the proper terms, terms that communicate relationships.
I do reviews of our appraisal reports on a random basis. The first thing, the very first thing I do is look at the graphs in per square foot terms. If I don't see a neat bracketing of the subject in the price per square foot range it is a major red flag...the appraisal is either badly researched or is a non typical property which required more complex analysis and therefore will require more detailed review.
Applied research and price per square foot: the most efficient tools we can use in our business.
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