Tag: real estate

Appraising the right way – Part 1 Requiem for a Dream

http://3approaches.wordpress.com/2014/03/23/appraising-the-right-way-part-1-requiem-for-a-dream/

Reposted with permission from the 3Approaches blog post  from Woody Fincham, SRA and Rachel Massey, SRA, AI-RRS

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We are two appraisers separated by a three- hour flight or a nine-hour car ride.  We have never met in person, but have come to know one another through social media.  We are designated and recognized experts in residential valuation in our respective regions; both have had successful careers working in various positions within the profession; we are separated by enough distance that we experience completely different market stimuli.  We subscribe to doing valuation work the right way.  The way it should be done: defensible and well supported. Yet, we (and many others in the profession) are watching it being dismantled by the lenders, appraisal management companies (AMCs) and even from within the profession itself.  This is not the way that it should be, yet we still stick to our guns and we dream about how it should be regardless of the present reality.

We share a dream:

Like any great dream, it is lofty, challenging and worthwhile. We dream that we can make a living as fee appraisers, doing our jobs the proper way. The dream is to take the time to analyze the problem to be solved; research the market thoroughly including market trends; interview the market participants; analyze the sales and extract market adjustments; and then report  the opinion of value  in a way that the client can understand the  thought processes. Within this, there will be good support for conclusions and the appraisal will make complete sense to the reader. It will not leave gaping holes or questions. The opinion of value will be well supported by sales that are both inferior to the subject as well as those that are superior (and ideally equal). The appraisal will address the current market conditions and the active competition as well as the closed and pending sales.

Analysis is what we do, refined by the appraisal process, tempered by ethics and integrity all rounded out by participation in a profession that is carried out by like-mined and well-intentioned practitioners.

The dream continues:

Our clients  will truly care about the analysis and it will be meaningful to them. They need something of substance, and not simply paper for a loan closing package, or simply a report for a divorce or bankruptcy proceeding. The client understands that the valuation is based on fact, but in the end is an educated and well-supported opinion. The client understands that each report is a unique and extensive research project that is custom designed. The client is comfortable with the opinion of value because they reached out to a well-qualified and experienced appraiser; one that is rewarded the report because they are respected professionals, not just another step in a loan closing process or the cheapest one they could find.

Prologue:

We realize this is getting into the lofty and idealist side of things, hence the title of the blog.  What this series is going to focus on is some of the challenges appraisers face, and how we should handle them.  There is constant pressure on appraisers to adhere to scope of work enhancements from clients.  While we may mention customary and reasonable fees and the dynamic that the cost of business plays in the appraisal process in the course of this series, this is about what appraisers should be doing after they accept an assignment.

Rachel has years of experience reviewing appraisal reports working within the lending world as a staff reviewer and manager, and in the fee world through her private practice. Rachel has recently earned the new residential review designation with the Appraisal Institute.  Woody has been doing private fee review work for years and also has to review reports for tax assessment appeal as part of his position within the assessor’s office in Albemarle County, VA.  Between our combined experiences, we will focus on some issues that we see pop up repeatedly throughout various reports that have made their way across our respective desks over the years.

Ann Arbor snapshot

So many ways to measure

Markets are rarely identical and what happens as a nation isn’t necessarily what happens in a county, or what happens in an area, or even a submarket.

We hear a lot about the improving market conditions that are occurring nationally, but as in all things real estate, the market really is fundamentally local. I live and work in the Ann Arbor market. Not all markets within this area are moving in the same direction, or at the same pace. Even within Ann Arbor there are differences, and the data below represents current information comparing the Ann Arbor school district as a whole to one area within Ann Arbor, area 82, which encompasses a wide market but is the west side of town as well as into the western suburbs and rural area within the Ann Arbor school district.

How can you go about measuring the market? There are a number of different ways, but what I am doing now (and I do change things up as I learn of new techniques) is taking one years’ worth of data at a time, run on a monthly basis and compare and measure how markets change. The data is run as one year periods because it neutralizes the seasonality that you see happening in this area. It is almost clock-work to see our local market start to slow after Labor Day, and to start to pick up in February or March, depending on the weather. In addition to measuring year to year, I have also eliminated from the data below distress sales and “to-be-built” properties because including them skews data. This is addressed in a previous blog post. Depending on the market, it might make sense to include the distress sales but Ann Arbor hasn’t had a lot in general (Thank You University of Michigan) and if they are included the market actually looks like it is picked up more steam than it truly has. Apples-to-Apples with the data below.

My findings are in graphic formats below with a small explanation underneath the graph.

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Number of sales

We are seeing an increasing number of sales in both the entire market and area 82. For instance, the one year period of 2011 showed 805 arm’s length sales, and in 2012 there were 939 sales, 2013 had 1,054 sales for the year. Clearly the numbers of sales are increasing. In area 82 our market jumped from 210 sales in 2011 to 260 in 2012 and 299 in 2012. Based on this information the expectation is around 88 sales per month for the entire market and 25 per month for area 82. As there are 139 available properties in the MLS for the entire school district today (2/9/14) and 36 in area 82, there is about a 1.6-month supply for the overall market and 1.45-month supply for area 82. Looks like an undersupply of properties, doesn’t it?

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Days on market

The chart above shows the differences in days on the market in both the wider Ann Arbor market and area 82. Area 82 consistently has had quicker absorption than Ann Arbor as a whole, but take a look at how the market dipped in both segments to a low point in June/July 2013 and has been increasing steadily since that time. My take on this is that as inventory has increased (as evidenced by the number of sales above) that there are more options and therefore houses are not selling quite as quickly as they were at the peak in 2013. At this time days on market is still very short with the most recent reading showing 43 as a whole and 35 in area 82. Surprisingly close to the expected absorption rate addressed in the graph above.

There are more graphs and charts that I will examine, but I am going to save that for the next blog post, so as to keep you interested and coming back J. These other indicators include the list price to sales price ratios, median price over time, and median price per square foot. They also include my favorite, the contract-to-listing ratio which some of you are aware of from previous blog posts.

Hope you enjoy this information and find it useful. As always, if you have questions about the market from the perspective of the local appraisal expert, call or write. I am always happy to field whatever calls or emails that I can.

Data above is culled from the Ann Arbor Board of Realtors MLS

Rachel Massey, SRA, AI-RRS www.annarborappraisal.com