In five minutes or less, you will learn how to ensure a successful appraisal for your client by supporting your adjustments properly, and learn what is not considered adjustment support.
It is the Sales Comparison Approach
The Division of Real Estate ("the Division") routinely investigates complaints that result in improper adjustments when determining value in an appraisal. The Board of Real Estate Appraisers ("the Board") and the Division want to achieve better results by appraisers using this approach so that credible assignment results can be accomplished for the public.
The Sales Comparison Approach is the process of deriving a value indication for the subject property by comparing sales of similar properties to the property being appraised, identifying appropriate units of comparison, and making adjustments to the sale prices (or unit prices, as appropriate) of the comparable properties based on relevant, market-derived elements of comparison. The sales comparison approach may be used to value improved properties, vacant land, or land being considered as though vacant when an adequate supply of comparable sales is available (The Dictionary of Real Estate Appraisal, 6th Edition, Appraisal Institute).
USPAP Requirements
In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results (USPAP Standards Rule 1-4).
When a sales comparison approach is necessary for credible assignment results, an appraiser must analyze such comparable sales data as are available to indicate a value conclusion (USPAP Standards Rule 1-4(a)).
USPAP Standards Rule 2-2 states, in part, “The report content and level of information requirements in this Standards Rule are minimums for each type of report. An appraiser must supplement a report form, when necessary, to ensure that any intended user of the appraisal is not misled and that the report complies with the applicable content requirements.”
This includes summarizing the scope of work used to develop the appraisal, and disclosure of research and analyses both performed and not performed (USPAP Standards Rule 2-2(viii)).
Sufficient information must be provided to indicate that the appraiser complied with the requirements of Standard 1 by summarizing the information analyzed and the reasoning that supports the analyses, opinions, and conclusions, including reconciliation of the data and approaches (USPAP Standards Rule 2-2(x)(5)).
Scope of Work and Adjustment Support
The report must contain sufficient information to allow the client and other intended users to understand the scope of work performed. The information disclosed must be appropriate for the intended use of the assignment results.
Sufficient information includes disclosure of research and analysis performed and disclosure of relevant research and analysis not performed.
Common Techniques used to Support Adjustments Quantitative and Qualitative
The following techniques should have sufficient data for support.
- Paired Sales Analysis
- Group Sales Analysis
- Regression Analysis
- Cost Analysis - Consider all different type of depreciation.
- Income Analysis - Use of GRM may be useful.
- Bracketing
- Buyer Interviews - Include documentation of conversation(s).
- Sensitivity Analysis - Adjustments moving based on results. This is a form of qualitative analysis based on a quantitative result and typically requires an additional explanation.
- Ratio - Used most often for GLA adjustments, based on the portion of the sale price that represents the GLA. Must have support for the ratio used.
- Use of Regression or Other Software - Remember that appraisers are responsible for the inputs, understanding how the data is synthesized, the degree of accuracy, and relevance to the analysis.
Common Issues with Adjustment Support
Using generic boilerplate language to describe adjustment support. For example - “Adjustments were determined with paired sales analysis, regression, or discussions with market participants”. This results in a scope of work violation because the specific techniques were not discussed in the report. This could be more serious if none of this supporting documentation is located within the work file.
Using predetermined adjustments. Generic adjustments used over and over despite the contradictory market data are easy to spot.
Using cost data. Cost data may skew results since it isn’t a measure of market reaction. Some cost items may not contribute significantly to value. Remember: Cost does not always equal value! When cost data is used to support adjustments, but no cost approach is employed due to “insufficient cost data” or due to difficulty determining depreciation because the improvements are too old, the appraisal may appear to be inconsistent, resulting in the absence of the cost approach being unsupported.
Using average values instead of comparing sales to find the differences. Averaging a contributory value of an element of comparison and using that as an adjustment can cause skewed results. An adjustment is meant to measure the difference due to a difference between sales.
Adjusting within the direct sales comparison grid and then manipulating adjustments to make the range tighter can result in accusations of predetermined values.
One of the tests of acceptability is by judging the actions of an appraiser’s peers. However, it is important to use caution when using this as defense. A peer appraiser might use a $2,500 adjustment per bedroom which may not have been correct, which does not mean you should use the same adjustment within your analysis! “Actions of peers” pertains more to methodology than copying their conclusions. This also applies to percentages used to extract adjustments. Remember to always use market analysis and support for all appraisal conclusions.
Some appraisal software uses appraiser surveys as support for an adjustment. This type of information should be used with caution as the source of the data and sources of the survey may not be known. Such surveys may also be based on national surveys and may not apply to the local market.
Possible Violations/Outcomes
Failure to sufficiently support adjustments may result in discipline from violation of the Scope of Work Rule, Competency Rule, Standards 1, 2, and/or 3 and 4.
Violation of the Ethics Rule is also possible depending on the severity of the violations.
Ethics Rule violations are serious.
Conclusion
- Always provide sufficient adjustment support.
- Recognize your obligations - The scope of work carries with it the burden of proof to support conclusions. Appraisers cannot meet their obligations with a market value assignment without having competently identified and completed a scope of work that enables development of credible opinions and conclusions (USPAP Advisory Opinion 22).
- Perform with compliance in mind. The assignment elements necessary for problem identification in an appraisal assignment also serve as reference points in determining whether the scope of work performed was appropriate to provide credible assignment results.
Resources
The Division conducts a significant amount of work product reviews every year through investigations and licensure applications. As part of the Division’s effort to better achieve compliance with frequently violated rules and for more meaningful communication, a series regarding the most common appraisal issues seen by the Division has been developed for licensed appraisers.
This has been an advisory of the Division of Real Estate.
If you have questions please contact the Division at dora_realestate_website@state.co.us.
Credits:
Created with images by StartupStockPhotos - "desk laptop notebook" • 6689062 - "journal write blank" • paulbr75 - "new home construction site" • nattanan23 - "money home coin" • 6689062 - "business computer mobile" • geralt - "result balance sheet follow" • PhotoMIX-Company - "digital marketing seo google" • geralt - "problem solution help" • geralt - "matrix communication software" • geralt - "board empty rule" • PublicCo - "suburbs homes neighbors"