Below you will find some useful tools to sharpen your appraisal skills. Feel free to use them; the more tools we know, the more efficient and credible we are.
How to support the Effective Age and Depreciation Rate?
How to extract Adjustments using Paired Sales Analysis?
How many comparable sales should you include in the grid?
How important is the Highest and Best Use analysis?
How to consider any current agreement of sale, listing, or prior sale of a property?
How to extract the site value from a sale?
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How to support the Effective Age and Depreciation Rate?
When describing the subject property, comparing its age to that of the comparable sales in your Direct Sales comparison grid, and calculating the physical depreciation in your Cost Approach to value, how do you determine the effective age or calculate the amount of depreciation?
Many appraisers will sort of "pick a number", which is based on some kind of mathematical reasoning I'm sure;) however, every tool you use to derive your opinion of market value should be supported by the market.
You can download the excel file below and feel free to use it or modify it to suit your needs. This file is a tool to help you support your opinion regarding the Effective Age and Accrued Depreciation of a property. It is just a tool, and is based on several assumptions, such as all accrued depreciation being physical, with no functional or external obsolescence. This is not always true, and you would have to extract these from the market as well.
Without using the grid, you can determine effective age and depreciation as follow: |
Sale Price of the property: SP |
Sale Year: SY |
Year Built: BY |
Actual Age: A = SY - BY |
Site Value: SV |
Present Value of the Improvements: PVI = SP - SV |
Total Economic Life: TEL |
Cost New of the Improvements: CNI (no land value included) |
Total Accrued Depreciation of the Improvements: AD = CNI - PVI |
% of Accrued Depreciation of the Improvements from Cost New: %AD = AD/CNI |
Depreciation Rate per year: %AD/yr = %AD/A |
Effective Age: E = %AD x TEL |
How to extract Adjustments using Paired Sales Analysis?
Any adjustments that you make on your comparable sales in the grid, to account for dissimilarities with the subject property, should be extracted from the market. Using paired sales analysis on several sets of properties, existing and of new construction, will ensure that you gather sufficient data to accurately develop an adjustment for a specific component.
The idea is to take two properties alike with the least number of dissimilarities, and isolate the difference(s). Several things you should consider:
1- It is better to extract a percent value of a component, rather than a $ amount; this way you can apply it to all types of properties. In the downloable excel file below, I extracted the value of an alarm system. The $ amount is $1,400. However, it is unlikely that an alarm system would be worth the same $1,400 in a $50,000 house and in a $2,000,000 house. Use the % instead.
2- As mentioned in 1-, you want to obtain a percent value (for a component), rather than a $ amount. BUT, this component value should be based on the overall value of the improvements ONLY, which means that you must subtract the site value from the sale price. Why? because if you do not subtract the site value, you're implying that a house, cloned and placed on two different lots, having a different value, will indicate 2 different % values for the same component. Still confused? here is an example: Take a house on lot A, and the exact same house on lot B, which is larger than lot A:
House on lot A |
House on lot B |
Overall Value: $180,000 |
Overall Value: $200,000 |
Lot Value: $80,000 |
Lot Value: $100,000 |
Using Paired sales analysis, you have determined that the alarm is worth $1,400, and now, you want to obtain a % value for this component:
If you do not subtract the site value, and determine the value of the alarm system based on the overall value of the property, the % value for the alarm system is:
Value of the alarm system: $1,400 |
Value of the alarm system: $1,400 |
Overall Value: $180,000 |
Overall Value: $200,000 |
% value of the alarm system: 0.8% |
% value of the alarm system: 0.7% |
Which one is it? 0.8% or 0.7%. Neither one.
If you do subtract the site value, and determine the value of the alarm system based on the value of the improvements only, the % value for the alarm system is:
Value of the alarm system: $1,400
|
Value of the alarm system: $1,400
|
|
|
minus Lot Value: $80,000 |
minus Lot Value: $100,000 |
Value of the Improvements Only: $100,000 |
Value of the Improvements Only: $100,000 |
% value of the alarm system: 1.4%
|
% value of the alarm system: 1.4%
|
That's more consistent, isn't it? Remember, this is not an exact science. Buyers don't walk into a house with a checklist and say "oh, no alarm, minus 1.4%". It takes a buyer 30 seconds to decide that he wants to purchase a specific property; however, subconsciously, the lack of alarm system influenced his decision. All we're doing as appraisers is trying to put numbers on subconscious feelings.
You can download the file below. It contains 4 sheets that you can duplicate at will and use to extract all of your adjustments. Have fun.
How many comparable sales should you include in the grid?
In an active market, the Direct Sales Comparison Approach is the most reliable method when appraising single-family residences, since it best defines the motivations of buyers and sellers.
Fannie Mae wants a minimum of 3 comparable sales; however, you really need to use as many comparable sales as it takes to feel comfortable with your estimate of the value, 3 being a minimum.
What you really want to do is put yourself in the shoes of the underwriter; if you were top read your own report without having inspected the subject property, would you be 100% convinced of your value estimate with the 3 comparable sales used in the report. Maybe. These 3 sales may very well be the only and best comparable sales available, and you need to mention it in your report. But, if there are 1 or 2 other sales that would without a doubt prove your point, just add them to your grid.
If you think about it, how much longer does it take you to add 1 or 2 more comparable sales in the grid, in comparison to the time it will take in a week when the underwriter calls you and ask for 1 or 2 more comparables, because he's not convinced; first you'll get mad, at him, and at yourself, then you'll have to stop what you're doing, reopen the file, look for new comparables, make the changes, resign, re-pdf, and resend. What a waste of time and productivity, furthermore, you look like you did a sloppy job in the first place.
Another thing to consider is the amount of adjustments you make to your comparable sales. The more adjustments you make, the higher the % of Gross Adjustment on the grid, and the more scrutiny you'll generate from the reviewer. Fannie Mae's maximum Gross Adjustment is 25%, 15% Net, and 10% for a single line item; beyond that, and that happens often when appraising unusual properties, you need to provide an explanation.
There is a way to reduce that amount. Nobody is requiring you to make any adjustments in the first place (read the Fannie Mae Selling Guide and your USPAP book if you don't believe me). What you can do is try to find comparable sales that bracket the subject property in size, age, condition and amenities, and then reconcile using the sales, or sale that present(s) the most similar characteristics with the subject. Bracketing the subject is helpful to avoid making adjustments, since the subject property is by default already in the range.
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How important is the Highest and Best Use analysis?
When appraising a single-family residence, and reporting on a Fannie Mae 1004 form, the Highest and Best Use analysis is resumed to one ligne: "is the highest and best use of the subject property as improved the present use?...yes or no"
The Highest and Best Use analysis is the key, or base of your entire valuation, so you should really think about it.
If you are appraising an older single-family residence on a professionnally zoned site, in the vicinity of the Cape Fear Valley Medical Center in Fayetteville, NC, you should really consider the Highest and Best Use of that property. Over the years, the Cape Fear Valley Medical Center has expanded by converting some of the older surrounding houses, which were once part of the Bordeaux neighborhood, into small scale professional/medical offices on now professionnally zoned lots. In more recent years, the land around the Cape Fear Valley Medical Center has become so valuable that the highest and best use of some of these older residential properties is now "as though" vacant. That was the case of one of my assignments, where the value of the subject property under its current residential use was considerably less than its value according to the "highest and best use" consideration "as though vacant", plus the cost to demolish the dwelling. It was concluded that the residential dwelling should be demolished, and the property was valued as a vacant, professionnally zoned site.
Another one of my assignments, a condemnation project, was the valuation of the damages due to the placement of an overhead power line easement on a large vacant tract along a major thoroughfare, in an urban area of the City of Fayetteville. The subject parcel was split into four sections by several roads, and a railroad. The current zoning was A1-Agricultural. Based on the analysis of the size of each portion of this tract, their individual road frontage, access, topography, surrounding uses, soils characteristics, and the exposure from the main thoroughfares, I concluded that the maximally productive and Highest and Best Use of the tract was not for agricultural purposes, but was different for each portion; one large tract with limited visibility was concluded to be for low-density residential development, a smaller portion was concluded to be for high-density residential development, and the other two sections with frontage on the main thoroughfare were concluded to be for commercial development. Since the subject property should be valued according to its highest and best use, I found 3 sets of sales, single-family, multi-family and commercial land sales and valued each section accordingly. Once the "before the taking" value was estimated, the impact of the placement of the power line easement was calculated; danger tree rights and guying rights areas were considered, and I used a paired sales analysis to derive the (percentage) loss in development rights that the owner would substantiate. The "after the taking" value was calculated, and consequently the difference between the "before" and the "after", i.e. the amount of damages for which the owner should be compensated, was derived. This was a complex problem requiring assumptions, hypothetical conditions, and an important analysis of the Highest and Best Use of the property, which was the key of the problem.
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How to consider any current agreement of sale, listing, or prior sale of a property?
According to the Uniform Standards of Professional Appraisal Practice, the appraiser must consider any current agreement of sale, option, or listing of the subject property and the prior sales of the subject property and the comparable sales.
If the subject property is currently under contract, i.e. the buyer and the seller came to an agreement, and the purchase price falls within the adjusted range of the comparable sales, it is in my opinion the "market value" of the subject property as well. Agreeing to the contrary would imply a level of reasoning on the appraiser’s behalf that I believe is unfounded.
Sometimes, if it occured within a reasonable time (past 12 months), you may use the prior sale of the subject as a fourth comparable sale. In its Selling Guide, Fannie Mae will allow it, even if the underwriter tries to convince you otherwise;) After all, it is the most similar sale to the subject.
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How to extract the site value from a sale?
When you appraise a property, do you indicate the effective age? do you make any location or site adjustments in the grid? do you make any adjustments based on the effective age or actual age difference with the subject property? do you do a cost approach? In all cases, you must estimate the site value for your subject and comparable sales.
There are many methods to estimate the site value. If lot sales (arm's length) are available near your subject property, you're lucky, use them. If not, you can use the extraction method.
In the extraction method, you basically subtract the "as is" value of the improvements (plus site improvements/driveway/landscaping) from the overall sale price to derive the value of the site. You must have some sort of cost handbook to "reconstruct" these properties. This method is useful when there are no lot sales available.
Use information from physical inspections or from your multiple listings service to gather sufficient data to rebuild a property, then depreciate the improvements, and subtract from the sale price to get the site value.
You can download the file below. It will help you do a quick cost approach on a property to obtain the site value. This is just a tool, using effective age and total economic life to estimate the accrued physical depreciation; this implies that all items depreciate at the same rate, which is not exactly true. The oven will most likely die before the shingles, or the house; To be more accurate, the short-lived items could be extracted from the depreciable basis. Feel free to tweak it as you wish.
