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Incorrect Reporting of Sales & Listing Data
in Appraisal Reports
By Dave Towne
The impetus for this article comes from my observations (not formal reviews) of actual reports submitted to underwriting and written by appraisers unknown to each other, in different states and at different times. Despite all these differences, from a data standpoint, what is reported in the various case studies cited below is nearly identical. The information, however, while similar, is unfortunately not accurate for reporting purposes in my opinion. My goal is to encourage appraisers to reconsider their property analysis and report-writing process.
Too many properties are reported as “comparables” even though they probably are not. The case studies below show why.
To understand why I believe these reports are inaccurate, we need to examine the Market Conditions Addendum Form (the 1004MC), coupled with the primary report form. This 1004MC form (from the GSEs) did not exist prior to March 2009. It was mandated then as a reaction to the financial meltdown across the globe, beginning in 2007-2008, allegedly caused by “faulty” residential appraisals in the U.S.- even though the real root cause was lax underwriting and poor regulating of mortgage loans. Be that as it may, we appraisers are now compelled to utilize this “new” form in virtually all “federally-related” appraisals (i.e., sold to the GSE’s), even though the form is poorly designed, in terms of statistical reporting, and has instructions that are somewhat confusing.
The intent of the 1004MC is to augment the market statistics of the subject property and its competitive properties– something not easily done with the 1004 Form without additional addendum information (the same applies for the 2055, 1073/1075 and 1025 Forms). Market statistics are not something most residential appraisers were reporting prior to 2009.
With the mandated use of the 1004MC, the primary appraisal form is linked to the 1004MC. But the instructions on the MC form, and the entry fields on the main appraisal form (top of page 2), appear to be misunderstood by many appraisers. This may be leading to incorrect data being reported.
The key requirement on the 1004MC form is the second to last sentence in the Instructions section at the top of the page. It reads: “Sales and listings must be properties that compete with the subject property, determined by applying the criteria that would be used by a prospective buyer of the subject property.” The operative words are “compete with.”
From what I have observed in several appraisals completed by different appraisers, it appears that there is a misunderstanding and therefore a misapplication of reported properties, which can lead to improper comparables selected for use in the report. Let’s examine two case studies.
Case Study #1 is for a home appraised for $835,000. It’s in an urban subdivision of similar upscale homes, but also has other lower-priced subdivisions and other developments of higher value luxury homes in close proximity, which is common in that high-density metro area.
This is another situation where, in this appraiser’s opinion, the appraiser has overstated the number of “comparable” properties. According to the report, in the past year there were 55 sales of “comparable” properties. Really? Thirteen of these are within the past three months. But note the range of sales or listed prices: $65,000 on the low end to $203,000 on the high end. Or $73,000 lower to $65,000 higher than the appraised value. Is this excessive? Yes it is.
In this report, there is no Addendum with additional information. The only information is on the pre-printed form pages. Nothing on those describes why there is a very wide value range of sales and listings reported. (There are missing required USPAP reporting items also, which should be of concern to all appraisers. But that’s a topic for another day.)
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My final case study demonstrates the principles and suggestions in this article. This home is in a small urban city of approximately 28,000 people about 40 miles from a major metropolitan area. Appraised value was $361,500. See figures 5 and 6.
This appraiser reports only four sales considered to “compete” with the subject. Three of those are on the grid page in the report, along with the single listing.
This appraiser has been doing this in all reports since this form became a requirement. Doing so corrects the improper six-month data report the form stipulates (when compared to the two three-month columns), enabling the trend checkboxes to be more accurate. In all these years no one has commented about that modification. Unfortunately, this must be done manually; the pseudo MC form generating Excel spreadsheets are not designed to correct the actual 1004MC.
There seems to be a mentality among appraisers to believe that more is better. As two of these case studies show, that’s not correct. If you’re reporting properties that actually are not comparable or competitive, it can be said that your report is not credible.
Appraisers are not supposed to pick “comps” on price alone. However, when there is a wide range of sale prices in the neighborhood, it should trigger further examination to determine what part of the range is most appropriate for the appraised property. Amenities, design, overall condition and quality elements also should be considered. But price is still important, as noted in the first case study, a “comp” selling for $1.1 million probably is not comparable or competitive to the $835,000 subject. Likewise, a “comp” selling for only $65,000 – shown in the second case study, has significant differences to a property valued at $138,000.
In summary, it’s my view that many appraisers are combining all properties within a neighborhood (as the GSE report form page 1 implies) on the MC form and report page 2, regardless of their comparability, rather than isolating the reported sales and listings to those properties that would actually “compete” with the appraised property, as is required on the MC form.
Don’t be afraid to report reality. Often, there are very few properties that are actually similar to the subject. Be proactive and report real market evidence of the competitive/comparable properties.
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About the Author
Dave Towne is a Certified Residential Appraiser with 14.5 years’ experience in small urban, suburban and rural areas. Dave is a noted writer, blogger, and educator on appraisal topics since 2005. He can be reached at firstname.lastname@example.org.