Dustin Harris, “The Appraiser Coach,” recently shared thoughts pertaining to the topic of appraisal adjustments. Harris, citing many examples, has questioned the need for such a step in the overall appraisal process.
He recalled in a blog post a recent incident in his office where he gave his associate an appraisal assignment that she completed in the traditional manner, which included adjustments. She had a copy of the purchase and sale agreement, as well as knew the contract price. Harris knew about the agreement, but for his purposes, he chose to ignore it until after he had reached his value opinion.
He did his own sales search for comps, proceeded to choose them, and then, just on instinct alone, came up with what he considered to be a credible value opinion.
“So you’ll know, the purchase and sale agreement had a contract price of $250,000 which, we both concluded, was under-market,” Harris wrote. “My associate, via the traditional appraisal methods, came in at $265,000. Without a ‘formal’ set of adjustments, just using qualitative analysis, I came in at $270,000. I did not see her appraisal until I had deduced my value conclusion.
“My choice of comps was different from hers, too. We had only one comp in common,” Harris added. “Again, I was not aware of the contract purchase price until after I deduced my value conclusion without the aid of a formal adjustment process.”
The independent appraiser said there is about a 6 percent difference between $250,000 and $265,000, a 7 percent difference between $250,000 and $270,000 and a 2 percent difference between $265,000 and $270,000.
Both Harris and his associate were very close to each other; and they were not that far away from the contract price. Again, they both agreed the contract price was low, with Harris concluding this range of difference is normal and acceptable.
“Now, I realize this is nothing more than an anecdote. There was nothing scientific about this experiment,” Harris said. “The same type of comparison on a really complicated property might have given different results. But, just so you’ll know, we did this again on another property and came up with a similar split between the appraisers.
“So, does this tell us that adjustments are bogus? That the adjustment process is artificial? If you carried out the same experiment (with the same unscientific approach), would you achieve the same results?” Harris said. “I don’t know, and will not speculate. These results, however, have led me to question if the adjustment process is all that necessary and, if it is not, why do the GSE lenders want us to go through it?”
Harris also spoke to the extracting of adjustments from the market results, at best, in a range of indicated adjustment quantities, but never a single dollar figure. This is because the real estate marketplace is not rational, and it participants generally do not follow the dicta of the definition of market value. Thus, ending up with dollar ranges when we try to determine how much say, a view, contributes to overall value.
Harris grabs hard onto that third rail, when he says that the adjustment process has a subjective component to it. He admits when it comes to a layman’s term, when it comes to adjustments, there is some guesswork involved.
Such a statement, Harris realizes, will draw some commentary that might not be all positive.
“It’s okay because if appraisals were nothing more than crunching the numbers, we would have no purpose, no value, and AVMs could do what we do a lot faster and a lot cheaper,” he said. “Nevertheless, since an appraisal is not merely about crunching numbers, but about deducing from the market data a unique market value, then we are necessary. We are important to the process. We are a necessity to our clients.
“Adjustments are not the end-all and be-all of market value. This is because comp selection is the key to a credible opinion of market value, not how elegantly or scientifically we choose adjustments, and remember, I am a rural appraiser,” Harris added. “This is simply because the best comps would merit no adjustments at all. Until such perfect comps come along, however, we still, somehow, have to account for the significant differences there are between a subject and the comps. And, when all is said and done, there is a subjective component to that accounting. I’d love to see the day when we no longer have to take comp photos, nor make quantitative adjustments.”
Click HERE to read Part I of this story