AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
In a lot of the suits against appraisers that we see, the allegations of negligence often make up a long list. Violations of good appraisals procedures are most often characterized as a competency issue.
Whether the licensed appraiser went to a cram course school, or took their course work through a major appraisal association or university; when the suits come, the allegations are almost always the same.
How can an individual appraiser manage their risks in soft of declining markets, which is when suits increase?
A key area that is attacked by lawyers is the Market Analysis and the Market Data Approach. Having a basis for the check boxes on the front of the report about Value Trends, Supply & Demand and Marketing Times is a good thing. Especially if based upon the appraisers own objective research and analysis. Those who understand housing markets and report them accurately, minimize their risk. However, housing market analysis is not the point of this writing.
There is not time or fee allocation for residential appraisers to prove their adjustments. On any given report, stopping to do so and spending the time to do it would substantially lengthen the preparation time and probably be financially ruinous.
A simple way to accomplish having proof or support for adjustments is to simply watch the sales as they are reported, when one pops up that is inordinately high or low for any reason, it might be worthy of checking on.
Most residential appraisers were given what to use as adjustments. Some have used the exact same adjustments for 20-30 years, in every neighborhood, price range and for every quality home. Counter intuitive if you think about it.
Those appraisers who have gone through the credentialing process have had to prove adjustments in their demonstration narrative report. Those who have not may never have even been shown or taught how to do them. In my SRA report, I used 57 Matched Pairs, proving lots of things. It was enlightening.
I had been trained that a pool is worth half its cost, a functional depreciation item. Not so in warm climates I learned. I also learned that there is seasonality to the value of a pool, summer verses winter. I also learned in my region that the pool or pool/spa package contributes a percentage to the total value of the property. Its contribution changes depending on several factors including Age, Size, Decking, Water Slides, Condition, and Location.
The same $45,000 pool/spa package in a $400,000 neighborhood will not bring the same as in a $900,000 or $2,000,000 area. It will not bring the same in a cold climate with a short season as it will in a warm one with a long season. In my area pools are often used from before Easter until after Thanksgiving.
The point of the pool story is simply to stimulate thought about adjustments. Market Data Adjustments may change with seasons and with Markets Cycles. Time adjustments are not constant; markets are less often stable than they are increasing or decreasing. The same might be true for Location, Lot Size, View, Quality, Condition, Size and yard Amenities, etc.
Appraisers with a forms template on auto-pilot making mechanical adjustments are setting themselves up for an indefensible situation if they get sued.
If we are measuring what the market is doing, then we need to test our adjustments, find support for them. This can be done easily if one simply is aware of and watches for the pairings when they pop up. A trained eye can spot pairings while looking for data to use in their current report. The pairing may not directly relate to the subject being appraised, but it is useful in a larger context.
Accumulating pairings as one stumbles into them, over time, results in having a basis for adjustments. Not a bad thing, easier to defend than doing things by rote.
Watching for or being alert to Adjustment factors in the database as we look for comps every day, does not take a lot of extra time. Sometimes the newspaper is a source of information as in this article: Download losfeliarticleforarchitectural_premium.doc
One of the things I have to deal with is Architectural Premiums. Last year I gave a presentation on the Value of Architecture after taking two seminars taught by AIA Architects turned Realtors.
Certain notable Architects are bringing huge premiums. A John Lautner designed home in Malibu with 4,400+-SF, sold last summer at a premium, a huge premium. (Click image to enlarge)
The Kaufman House in Palm Springs is being Listed for sale with Sotheby’s and auctioned as they do with Art, with an $18,000,000 Reserve price. It was designed by Richard Neutra for the Kauffman family. It was restored by the current owners. She is an Architectural Historian, a very interesting person, who sent me four notebooks on the property detailing its history and the renovation. I appraised it in 2006 using line item adjustments for the Name of the Architect as well as the Notability of the House itself. Three BPO’s came in 20% to 100% higher, now they are marketing it at 260% higher. Was I wrong, will the Market tell a different story of value? Or, has the Market for this type of Architecturally special property changed?
Architectural Premiums are on my current agenda as I watch for them, network to find them, etc. I translate Adjustments into a Percentage adjustment, not a Dollar adjustment. Example, a Pool is not worth $5,000 or $50,000; it is worth a Percentage of the whole, 5%, 10%, 15%, etc.
In the current Market, proving time might be the first thing to concentrate on, followed by concessions or terms, or motivations. If one has to leave the Location of the subject to find adequate current Sales, making the appropriate adjustment requires research and analysis.
Sometimes this can be done by Pairing up Land Sales in the two areas. In fully developed areas with older homes, Statistical Analysis might be better than Pairings as there maybe huge variances in the individual homes. Tract homes are easier to prove up Location adjustments.
Adjustments may change with the Season, as with the pool, but also with the market. In hot markets, all adjustment factors from the basics to the amenities and extra’s, bring larger premiums. Deficiencies are compressed.
In a soft or declining market, the good factors get compressed and the bad factors exaggerated. A Fixer-upper in a bad market is a real drag. Any problem with a property can cause huge losses.
Neighborhood factors that are good, help bring premiums when the Market is hot. They also help support the value when the Market goes soft. We have seen 25% value losses in the best areas during the depth of a bad market.
Bad Location factors get compressed when the market is hot also. They become exaggerated downward factors when the market turns soft.
Adjustments that were right on in 2005 are probably wrong now, regardless of where we are working.
AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
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