AUTHOR: Lee Ovington, SRA is a Certified General Appraiser in the State of Illinois and Owner/ President of Ovington Appraisal Services. Lee has over 20 years of residential and commercial appraisal experience in the Chicago market. The following is re-posted, with permission, from Lee's blog Valuation411.
Appraising is not as easy as finding three comps that look like the subject, making several “rule-of-thumb” adjustments, waving the magic clipboard and saying Whala! Miraculously, the correct value does NOT just appear before your eyes.
The appraisal form is not a magical tool that gives you the right value. Actually, the adjustment process can deceive you into thinking you have found the right value, especially if you start your analysis with the wrong comps.
The job of the residential appraiser, which has become overly focused on “filling out of the form” has caused many appraisers to adopt a form-driven approach to determining value. This is concerning to me because it is limiting the appraiser’s ability to think like the typical buyer in the market. The appraiser’s thought process is becoming too far removed from actual market participant’s. I have never seen a buyer in the market “gridding” comps before making an offer. Why should the appraiser need to “grid” comps to determine roughly what the subject is worth?
Appraisers should refrain from jumping into the analysis section of the report (gridding comparables) prior to having a good “ballpark” ideal of the subject’s value. If an appraiser does not have a “rough” ideal of the subject’s value, then he/she should not be gridding comps or making final decisions on the comparables to include in the report. Residential appraisers can sometimes fall into the trap of choosing and analyzing comparables based on solely Underwriting guidelines. This approach to the appraisal process can result in completely erroneous value conclusions.
Often, the primary cause for an incorrect value conclusion is not realizing the impact of location, which we all know has a major influence on value. Perhaps this is overlooked (especially by newer, less experienced appraisers) because location is somewhat more elusive than a factor like style, age, or bedroom count. The later are easily identifiable from the data. Merely choosing comps that “look” like the subject without adequate consideration of the subject’s location could leave the appraiser completely blindsided. It is quite dangerous to make comparable selections based mainly on overall style similarity without adequate consideration of the subject’s location.
Analysis of the wrong comps with “rule-of-thumb” adjustments and failing to recognize and account for location differences will cause the appraiser to conclude the WRONG value.
- You should develop a ballpark ideal of the subject’s value using a qualitative approach before employing a quantitative analysis (gridding comps).
- Start your search for data with a broad range of criteria and then narrow the data down… like you’re zeroing in on the value.
- Be cognizant of the potential high and low value for the subject as you work towards the middle of the range.
- Look at all activity (Sales, Listings, Expired) in the subject’s immediate vicinity (i.e. block or two). Often, active and expired listings will help you establish an upper end of the feasible range.
- Find several sales, not just 3, that represent the likely range of value for the subject and array this data from low to high. Placing the subject within this array will help you get a better understanding of how the subject relates to both inferior and superior properties in the market. Qualitatively consider comps on the basis of either overall inferior or overall superior. If you can’t determine either because of equal offsets, then it is probably overall “equal”.
Determine a narrow value range for the subject property based on this qualitative analysis. At this point in the process, you should have a fairly good “ballpark” ideal of the subject’s value.
Gridding comps should be thought of as more like a fine tuning of the data through detailed analysis. The presentation of comparables in the appraisal report grid is a formal, analytical, presentation of the subject value… not the primary tool for determining the subject’s value.
These tips may aid an appraiser in breaking out of the mental block caused by a form-driven approach and allow the appraiser to think outside the grid.
AUTHOR: Lee Ovington, SRA is a Certified General Appraiser in the State of Illinois and Owner/ President of Ovington Appraisal Services. Lee has over 20 years of experience in the Chicago market. 2090 Larkin Ave, Suite 6, Elgin, IL 60123-5849 - Phone: 847-931-5004 - Fax: 847-931-5194
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