Explaining Your Adjustments

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Explaining Your Adjustments

By Tim Andersen, MAI

Question: An AMC is upset with me over my adjustments. I clearly stated in the report that I adjusted for the major differences between the subject and the comparables. In fact, this is exactly what I put in my report: “Major differences between the subject and the comps are adjusted for, as shown, based on the appraiser’s judgment and experience.” I don’t understand why the AMC is upset since I indicated I made the necessary adjustments! What’s the problem!?

Tim Andersen: the problem is not the statement you made in the report. More likely, the problem is the fact that, in that statement, there is no support for the adjustments; it is merely a declaration you made them. Given the reviewer’s reaction, it is also likely there is no explanation within the report itself of the derivation of the adjustments. While your final value conclusion is, indeed, an opinion, a valid opinion is one whose base is on facts, evidence, logic, reasoning, proof, and critical-thinking. Without these, an opinion carries no weight. An opinion is only as good as its provenance. If the opinion’s provenance is garbage, then the resulting opinion is garbage too.

For example, not too long ago, it was common practice for appraisers to adjust for size differences at approximately $30-$50 per square foot, the sales price of the house, its quality and/or condition at the time of sale notwithstanding. One of the reasons for this is that too many appraisers thought Fannie Mae limited individual adjustments to 10% of the purchase price, and never more than a sum of 25%. This was never true. Even before the current Fannie Mae Selling Guide, its writings on adjustments were always merely guidelines. Fannie Mae has no rule-setting abilities. It can merely make requests of appraisers in the form of its guidelines (and then refuse to employ those appraisers if they do not follow them). Appraisers are free to follow or not follow the guidelines. If they choose not to follow them, however, the appraiser must explain and support why this deviation was appropriate, proper, in conformance with USPAP, and led to a credible value opinion.

Appraisers have the ethical responsibility to explain the reasoning, rationale, and logic behind their adjustments. This ethical responsibility stems from the fact the Ethics Rule admonishes appraisers not to mislead the client and/or the intended users. If the appraiser fails to explain why it was necessary to make the adjustments, as well as their derivation, it is likely the appraiser misleads the clients, etc. True, they may not intend to mislead their clients. However, what USPAP and state appraisal boards look at is not the appraiser’s intent, but the results of the appraiser’s actions (or inactions). Therefore, if it is not clear both how and why the appraiser derived an adjustment, that opacity is misleading.

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The Fannie Mae selling guide at B4 – 1.3 – 09, Adjustments to Comparable Sales, makes it clear that a “statement only recognizing that an adjustment has been made is not acceptable. The appraiser must provide appropriate comments reflecting the logic and reasoning for the adjustments provided.” [ibid; emphases added]. Therefore, your client is likely not upset over the adjustments you made; rather, the client is upset over the fact that there is no explanation of the logic, reasoning, and rationale behind them. Again, it is possible to interpret this omission as misleading.

This does not mean the appraiser has the ethical responsibility to reproduce within the report the analyses through which the appraiser went to derive the size adjustment. Rather, it means the appraiser should summarize these processes as part of the report’s narrative, with their details in the workfile for future reference (if necessary). Consider the following statement as a summary example concerning adjustments and size differences:

“An analysis of these comparable sales (as well as others not included within this report) indicated that as the size of the house increased, the sales price per square foot tended to decrease on a curvilinear basis (at a rate of approximately [insert appropriate $ amount] per square foot). For simplicity’s sake, however, this analysis assumes a straight-line change. To make sure the comparison of the properties was truly apples-to-apples, the appraiser first removed the value of the underlying site so the remainder indicated merely the contributory value of the improvements. By removing the value of the underlying site, it was possible to remove the influences of site size, zoning, location, view, and so forth.

“Given the fact that the comparable sales in the subject’s neighborhood occurred within a range of [insert indicated $ amount here] per square foot, after deleting the value of the underlying site, the data indicated the contributory value of the improvements merit an adjustment of approximately [insert appropriately-derived $ adjustment here] per square foot, which is the adjustment rate this report uses. Charts, graphs, etc., supporting this adjustment are in the addendum, as well as here by reference.”

What this means is that the appraiser has engaged in an analysis of this depth in order to determine from the market what the size adjustment should be. It also indicates that, for brevity’s sake, the appraiser has summarized the processes behind the development of that adjustment, but leaves the details of those processes in the workfile for future reference (if necessary), or includes them in the addendum. To make the above statement, when the appraiser really has not engaged in those analyses, is not misleading—it is lying.

In sum then, it is both practically and ethically imperative the appraiser derive the adjustments from verified market data. In other words, a properly qualified reviewer could take the data in the appraiser’s workfile, go through the same processes as the appraiser, and thereby arrive at approximately the same adjustment. In the world of science, this ability for another to employ the same data, engage in the same analyses, and then achieve approximately the same results carries the adjective reliable. To compare the definition of credible with the definition of reliable, is to see clearly the latter is far superior to the former. It is far superior because mere beliefs can have their bases in superstition, tradition, bias, and/or lack of critical thinking.

Reliability, on the other hand, has its base in replicability, facts, evidence, rationale, proof, logic, and market support. The former is voodoo; the latter is science. On which should we base our value opinions? An appraiser’s judgment and experience, while beneficial to the appraiser, are utterly irrelevant to the formation of a credible value opinion if those qualifications fail to include market-support based on facts, evidence, reasoning, logic, and critical-thinking. The most educated guesses, by even the most renowned thinkers, are still guesses.

Our clients may not be sufficiently sophisticated, or possess the appropriate critical-thinking skills, to distinguish the difference between credible and reliable. However, we must be that sophisticated since clients pay us to interpret markets for them, something we must do reliably, not merely credibly. If we don’t do that, what good are we?

 

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About the Author
Timothy C. Andersen, MAI is a commercial real estate appraiser, AQB-certified USPAP instructor, USPAP consultant, and the instructor for a new online course, How to Raise Appraisal Quality and Minimize Risk (7 Hours CE), designed to help appraisers stay out of trouble with their state boards and avoid lawsuits. Visit OREPEducation.org to enroll today!

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Comments (4)

  1. So much here I agree with, it bothers me to quibble (a little).
    1. FNMA ‘guidelines’ were always taken as gospel by most reviewers and many if not most appraisers. It took a rare degree of self-confidence to refute them or to cite chapter and verse to an AMC that FNMA allowed deviation. To this day, I still see written evidence that reviewers and REGULATORS (incorrectly) think 10% line item; 15% net and 25% gross adjustments are ‘good appraisal practice”.
    2. My earliest AIREA courses didn’t stress science at all; except as a possible surrogate for pairing and evidence gathered directly from the field; and only nominally the ‘science’ of statistical math. Directly from the field, as in directly from local brokers, agents, and actual buyers and sellers. Valid evidence is not required to be ‘scientific’…merely accurately reflective of the real world market our property is bought and sold in. I suppose we can argue that a field survey is scientific though its questionable whether two separate surveyors will obtain the same specific answers in each instance (other than hypothetically).

    Your main point, that adjustments must be explained and supported is however critically important. A summary of WHY I adjusted something that goes beyond sales grid line item visible differences is required. Further how I derived that amount is also necessary information.

    IF a buyer tells me they paid $15,000 extra for a pool and ‘science based’ regression is telling me the pool adjustment for a 35-year-old pool is only $3,500, the correct adjustment is $15,000.

    This isn’t an anti-science or anti valid evidence post but rather a reminder that other ‘evidence’ exists which remains as valid or more so despite having fallen out of favor due to abuse (dishonest claims of “per area brokers”)…just as AVMs and CU should be out of favor for the same reasons.

    - Reply

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