The Ripple Effect!

This is Diana with ABC-The Appraiser’s Business Companion.  Have you ever watched how water ripples when a rock is tossed into water?  I was reminded today about the “ripple effect” and instantly associated it with the practice of appraisal.  I’m going to give ABC a plug, they are what I would call “rock skippers” in the appraisal business.

The durability of any appraisal business is dependent on cultivating sources of business which from the lending perspective has become complicated with the advent of Appraisal Management Companies, as well as a high-risk business when at anytime any one of our appraisal assignments can turn into a source of a complaint.  Can we afford not to document what we do, both quantitively and qualitatively?

Today I looked over a residential Appraisal Report that was the subject of a Quality Management random review.  The letter asked six questions and made it clear they thought the value was high therefore they wanted the evidence that supported the decision about the adjustments.

One in particular asked why there was a time adjustment on 4 of the 7 comparable sales all of which were dated greater than 6 months.  Another question asked why there was no commentary on 5 of the 7 comparable sales being located in two other municipalities.  Now before you jump to conclusions let me also convey other relevant details.  There was no comparable sale that was distanced greater than 1.6 miles.  The demographics by census tract numbers did show different indicators of affordability because there were two counties involved.

In response, the appraiser ran a second MLS market analysis and made it an attachment to the response.  Here’s the problem, the report was run two weeks after the effective date of the appraisal and two months after the appraisal report was submitted.

What makes a transaction comparable?  It seems like a simple question but when the assignment is complex, when data is lacking and we have to venture out, what safeguards do we put into action that give evidence the transaction is a viable alternative?

One of the bigger misunderstandings by both agents and appraisers is that their conversations are taboo.  They are not taboo.  We need to have those conversations.  Its not about “making value”, its about doing the research to support the opinions and conclusions of the appraisal.  For example, when there are few if any sales near the property you’re appraising think about what the Principle of Substitution is really saying.  If you were the real estate agent, what other houses would you show the prospective buyer and why?  That piece of information is golden.  It sets the foundation for other research to be compared.  If the alternative is in another town or another part of town did you look at the tax data?  Are the tax rates the same?  Is the land valued at the same rate per unit?  What would create the difference in the two unit prices for similar lot sizes? Finding those answers builds a stronger critical reasoning that supports your assignment results.

A simple tact to take when writing your Appraisal Report is to mirror your own difficulty throughout the assignment and the steps you took to solve the problem, even if that means certain specific assumptions have to be made.   If you have difficulty in identifying transactions that are comparable, say so, and say it clearly in the body of your appraisal report.  When you find a transaction that is a viable alternative document why and say so, say it clearly.

Last week a question came about a property that was difficult to identify in the gross living area, not because there was no ANSI (American National Standard of Industry).  It was difficult because agents, buyers and sellers in that area called houses built in the comparable neighborhood gross living area when the lower, below grade level was finished completely in the same manner, quality of work, materials, etc., as above grade.

When recognized sources of definitions contravene the actions of the market what is an appraiser to do when their job is to form an opinion of the market value?  Keep in mind what our document USPAP (Uniform Standards of Professional Appraisal Practice) requires.  Do you swim upstream, sail your boat against the wind?  The USPAP document says there must be support for your decisions.  When the market contravenes what is expected in the practice, detail the prevailing behavior and cite an authority that recognizes this dilemma.  For example, did you realize in Fannie Mae Selling Guide B4-1.3 which is the header for Gross Living Area states in part, “For consistency in the sales comparison analysis, the appraiser should compare above-grade areas to above-grade areas and below-grade areas to below-grade areas. The appraiser may need to deviate from this approach if the style of the subject property or any of the comparables does not lend itself to such comparisons. For example, a property built into the side of a hill where the lower level is significantly out of ground, the interior finish is equal throughout the house, and the flow and function of the layout is accepted by the local market, may require the gross living area to include both levels. However, in such instances, the appraiser must be consistent throughout the appraisal in his or her analysis and explain the reason for the deviation, clearly describing the comparisons that were made.

It’s been my experience and my practice that when I learn something unknown to me before that I should share the news with others.  When I share that wisdom, I am like the rock that is dropped into the water.  The information ripples and those that are in the area of the circles also learn.  This brings me back to the beginning.  ABC-The Companion makes every effort to share new information as well as methodologies and regulation changes with ABC members.  They are the rock skippers, because their members represent several locations in several states.  By providing this service they do more than drop the pebble, they skip the rock and make several ripples in several locations with the same rock.   I’m going to challenge you who are reading this article to be a “rock skipper” and make a difference in your own arena.  Let others know what ABC does for you in keeping you current, in providing mathematical methodologies for support, giving you guidance through the maze of regulations and forms, a place to ask questions and a source for comments that assist in making your Appraisal Report understandable.


This is Diana Jacob, the daughter of a “rock skipper”, and you’ve just had a tip of the week from ABC-The Appraiser’s Business Companion.