Where Do Appraisal-Related Adjustments Come From?

Appraisal:

appraisal adjustmentsAppraisal-related adjustments are not just guesses by the appraiser or “rules of thumb.” Nor are they calculated numbers used to mathematically force a preconceived adjusted market value estimate in support of a value conclusion for the subject property. We tend to think of appraisal-related adjustments, as they pertain to residential appraisal assignments, as usually having to do with the sales comparison approach. However, it may become necessary to also provide cost approach adjustments and/or income approach rental adjustments that are not only necessary, but also appropriate, defensible, and reasonable.

Keep reading to learn about specific guidelines for adjustments, where appraisal adjustments actually come from, and a real-life example of adjustments in action.

Common adjustment factors

Adjustment factors that frequently occur with residential properties include:

  • Real property rights conveyed
  • Financing terms
  • Conditions of sale, such as motivation
  • Market conditions affecting the subject property
  • Location
  • Physical characteristics for both the land and improvements
  • Various types of depreciation
  • Use considerations, such as zoning, water and riparian rights, environmental issues, building codes, and flood zones
  • And other factors that may affect the market value of the subject property

What adjustments are not supposed to be used?

The July 26, 2016 Fannie Mae Selling Guide provides some guidance pertaining to what Fannie Mae expects an adjustment not to be. Fannie Mae’s position is summarized as follows:

Fannie Mae does not have specific limitations or guidelines associated with net or gross adjustments. The number and/or amount of the dollar adjustments must not be the sole determinant in the acceptability of a comparable. Adjustments must reflect the market’s reaction to the difference in the properties. Appraisers should analyze the market for competitive comparable sales and apply adjustments with no arbitrary limits on adjustment sizes.

Freddie Mac has stated that adjustments must be sufficiently discussed by the appraiser. Also, without statistical or paired sales analysis, adjustments tend to be subjective and imprecise. If appraisers make precise adjustments to a comparable sale or rent—1, 2, or 7 percent, for instance—sufficient data or discussion should be provided to support their analysis.

So, just where do appraisal-related adjustments come from?

Most, if not all, adjustments should come directly from the real estate market affecting the subject property. The Uniform Standards of Professional Appraisal Practice (USPAP) require appraiser familiarity with the market area where the subject property is located and competence to complete the required appraisal process as stipulated in USPAP. However, there are those occasional unique properties that require the calculation and/or extraction of reasonable adjustments through extraordinary means.

A real-life example

Several years ago, I and another appraiser had taken very separate approaches to determine the actual market value adjustment caused by the removal of 30 beautiful, mature fir trees (50–80 feet in height) bordering an entrance driveway into a 10-acre home site with a high-end, 5,000-square-foot, 3-year-old, excellent-quality residence located thereon.

The trees on the east side of the entrance driveway were thought to be located on the 10-acre tract by the 10-acre tract’s owner. The property owner of the contiguous 50-acre tract argued that the line of trees were on his property. Two independent surveyors were hired to survey the 10-acre property and agreed that the trees were actually on the 10-acre site.

One day, upset, and not believing the surveyors’ findings, the owner of the 50-acre property decided to fell all of the trees in dispute while his neighbor was at work, leaving the stumps, but having the felled trees hauled away the same day to a lumber mill.

The adjustment problem here was that, according to professional tree growers, the only trees that could be used as replacement trees could not be greater than 20–30 feet in height. Trees of greater height could not be safely transported or successfully transplanted.

The question for me and the other appraiser was how could we support the market value adjustment for the now missing trees when it was impossible to replace the removed trees with equal-in-size-and-value trees?

Further complicating the appraisal process was the reality that no comparable sales existed within the subject property’s market area that could be used to extract an adjustment using paired sales analysis.

As stated earlier, two separate adjustment calculation approaches were used. The other appraiser had concluded that the trees should be treated just like the forestry industry considered similar trees being harvested from a stand of similar-in-height-and-quality trees. He stated that the adjustment should be equal to the stumpage value of the trees that were hauled off to the mill and nothing more.

By contrast, I had concluded that the trees lining the entrance driveway had contributed substantially greater value to the property as mature, growing, beautiful fir trees lining the entrance to a very nice property. But I couldn’t prove that opinion using paired sales that did not exist in that market, or some sort of statistical data which might prove up my position. Unfortunately, such documented statistical data didn’t exist either.

What did exist were six very experienced real estate brokers within the subject market area who agreed to provide me with their independent broker’s price opinions of the 10-acre property hypothetically being sold with the previously tree-lined entrance contrasted with the value of the property as a stump-lined entrance. To that statistical average price difference, I added the cost of the removal of the stumps plus the cost of the planting of the much smaller replacement trees that several local horticultural arborists had agreed with the maximum height that could be transplanted being 20–30 feet in height.

The difference between the two approaches to calculating the necessary adjustment for each appraisal report was substantial. The matter was finally resolved by a civil court judge over one year later, with the decision being in favor of my non-textbook adjustment methodology.

Many years earlier, as a new appraiser, I was taught that generally it is better to remove thorny thistles from your garden bed using a dull hoe instead of your bare hands—when that is all that is available. This adjustment example reminds me of that sage advice.

Even with very creative approaches to extracting adjustments from the market, it is a best practice to always carefully study and then extract the necessary adjustments from the current real estate market affecting the subject property. It is time to set any left-over adjustment “rules-of-thumb” or “guesses” aside—forever!

Article by Robert Grafe.

 Robert Grafe is a Texas Certified General Real Estate Appraiser. Robert began his appraisal career on Kodiak Island Alaska in 1971 while the Owner/Broker of R.E. Grafe & Company Real Estate. He has served as a deputy county assessor/appraiser, as the chief appraiser for two national banks, and as the managing appraiser for Valuation Service Company. Robert has an extensive background in arguing both sides of county and state property tax appraisal appeals. He specializes in real property litigation support, valuing commercial properties in transition, and real property tax assessment consultation, with over 40 years of experience. Visit his website at valuationservicecompany.com or email reg@valuationservicecompany.com.

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