Making Case for an Appraiser's Judgment


Volume 41
> How to Support and Prove Your Adjustments
(7 Hours CE)    


Editor’s Note: According to author Tim Andersen, “judgment is at the core of what we do and who we are as appraisers.”

Making Case for an Appraiser’s Judgment
By Tim Andersen, MAI

It is common for USPAP instructors to hear this question: “I know my adjustments are supposed to have market-support. However, what should I do if there just is not any market support for a particular adjustment? Should I not make it even though an adjustment for difference-X really needs to be made?”

Since the imposition of collateral underwriter (CU), it is clear that an adjustment in an appraisal report must have market support. For those of you who have taken the 2016-2017 7-hour USPAP update class, you know that the idea of support for adjustments is woven throughout the class. It is also clear that The Appraisal Foundation (TAF), as well as all of the national appraisal societies, have bought in to this conclusion. The problem is that term “market-support” has no structured definition. Therefore, neither boots-on-the-ground appraisers nor state appraisal boards have any definition for the term “market-support.”

Yet, despite this lack of a standard definition, state appraisal boards charge their appraisers with failure to support their adjustments routinely. Those boards then discipline their appraisers for failure to comply with a non-defined standard. To be clear, that appraisers need to support their adjustments is beyond question. That states need to discipline appraisers when they do not properly support their adjustments is also clear. Unfortunately, what is not clear is when an adjustment is necessary or what constitutes market-support.

Case in Point
An appraiser contacted me recently relative to making a floor height adjustment in an appraisal of a mid-rise garden-type golf course-front condominium. The subject was on the fifth floor, while an excellent comparable, with the same east/golf course view had a second floor location. So, for three floors difference, was an adjustment even necessary?

Part of the problem is the subject’s fifth floor location. Because these units also have pitched ceilings (the same units on lower floors do not), in addition to great views, their owners tend to hold on to them since they are unique. Because of this, while there were sales of units with the same floor plans on lower floors, there were no other fifth floor sales to use as comparables.

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So, we went back in time. That last sale equivalent to the subject was three years ago (which was the market support for the conclusion that owners tend to hold on to them), so it did us no good. We looked in other buildings in the same general area. However, individual condo projects are generally too dissimilar to one another to use as comps. Eventually, we were able to pair-out an adjustment of about $2,500 per floor. Those data, however, came from a far superior high-rise building, with a far superior ocean-front location.

So, while it was possible to pair-out an adjustment from comparable sales data (which is both the strength and basis of market support) both the applicability and the reliability of the results of this process/adjustment were rightly open to question, since the data sources were not really comparable.

So, what to do?

Competence and Judgement
Eventually and ultimately, the question came down to a matter of the appraiser’s judgment. Use the $2,500 per floor adjustment? Use something else? Guess? Not use an adjustment at all but round the final value conclusion to account for whatever influence floor height differences might cause?

In such an instance, an appraiser must be able to use his/her judgment in making and applying adjustments. Yet, for various reasons this is a slippery slope. Why? Let’s face it, the judgment of some appraisers is superior to that of others (as a function of experience, training, and education). Yet, USPAP teaches us that competency is a function of judgment and execution. State appraisal boards assume appraisers are competent (i.e., understand the proper uses of judgment and execution) until they are proved otherwise.

Thus, to deny that an appraiser’s judgment should be part of how much of an adjustment to use in any given situation is to deny that appraisers can be competent. A competent appraiser promotes and maintains a high level of public trust in appraisal practice in part via the exercise of his/her judgment. Therefore, judgment is at the core of what we do and who we are as appraisers.

CU and USPAP must accept that, when on rare occasions and under unique market conditions it is clear that an adjustment is necessary, it may also be clear that the market does not speak loudly enough as to the contributory value of a unique item. Reviewers will need to develop the intestinal fortitude to understand that an appraiser’s judgment is a function of countless analyses of the components of various markets over many years. In other words, unless the reviewer has some killer data to which the appraiser was not privy (or which the appraiser blatantly ignored), the reviewer has no reason to second-guess the appraiser’s judgment. Again, judgment is part of competency. Once a state certifies an appraiser, that state assumes the appraiser is competent (with all that word implies).

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In other words, the appraiser must be able to put in a report language such as this without fear of reprisal or penalty:

It is clear the subject is on the top floor of a mid-rise building, whereas the comparable sales are not. An analysis of the subject’s market going back three years did not indicate the arm’s-length sale and purchase of a property such as the subject. It was possible to pair-out a floor height adjustment from other sales, in other buildings, in other projects. However, the appraiser concluded these data were insufficiently similar to the subject to use them reliably to conclude a floor height adjustment in the subject building.

Therefore, the conclusion not to adjust the comparables for their floor height differences with the subject had its basis primarily in the appraiser’s experience and judgment, rather than clear and convincing sales data from the purchase and sale of other, similar units in the subject’s building. The appraiser’s conclusion to make a -$0- floor height adjustment is also the result of an analysis of the market, which currently is silent as to this adjustment. It is the appraiser’s judgment that such a silence indicated a -$0- adjustment is one the market currently justifies.

Please understand this is not to advocate appraisers should be free to make adjustments willy-nilly. They must justify their adjustments and then support them from the market. That step will serve to promote and maintain the Public Trust in what it is we do.

Nevertheless, TAF, Fannie Mae, and appraisal reviewers must understand that there are rare circumstances when there is no market support for an adjustment, yet that adjustment still needs to be made. In those cases, these parties must recognize the appraiser’s judgment will have to suffice (accompanied by a detailed explanation of what the appraiser did to discover there were no applicable data from which to deduce an adjustment).

Otherwise, not only are so many appraisers mere form-fillers but are merely filling the form with the data the client is willing to approve. That is not appraising- this is something else that is often called the world’s oldest profession.


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About the Author
Timothy C. Andersen, MAI is the author of the Expert’s Guide to a Defensible Workfile and has been in real estate and consulting since 1975. He is a commercial real estate appraiser, AQB-certified USPAP instructor, USPAP consultant, Special Magistrate for the Palm Beach County Value Adjustment Board, author, instructor and expert witness. Andersen now offers a new report and workfile peer review service to help you sharpen your report-writing skills and workfile preparation. By uncovering and correcting common mistakes and inconsistencies, Andersen puts his experience and expertise to work for you. Ensure a better future by improving your skills. One workfile review order includes a free copy of Andersen’s e-book Expert’s Guide to a Defensible Workfile ($49 value). OREP insureds enjoy 50 percent off this valuable review service, normally $250 and up for a residential appraisal report. Isn’t it time for a professional checkup from someone who’s on your side? For more on this valuable service you may contact Tim directly:

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Comments (18)

  1. the avm people will tell you that after the avm is done adjusting there is always a left over general number that it cannot account for which is categorized as “who the h.ll knows where these dollars belong”. and this is considered a better technical, adjustment proven model. no uspap, or state board to question, i wish i was an avm. sensitivity seems to me like a human avm. are adjustments that represent a very small percentage of the value meaningful, or worth the aggravation of proving i do some just to show that maybe/maybe not they have value. having sold real estate long ago i never met a buyer who broke out the things we break out in an a appraisal.
    i’m also agreeing that if you don’t know then don’t adjust, just explain.

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  2. If 50, 60 or 80% of the appraisers go through the motions and guess, select, pick off a chart an adjustment amount, then they are setting the bar and standards that I will initially be judged on (Collateral Underwriter). Those that follow the rules and have extensive written dialog within the report to explain their adjustments, will be flagged by the CU platform as it does not have the ability to read our comments. Lenders and AMC’s are adding and keeping those appraisers that hit the low risk scores (1 – 5) (agreeing with there peers 50, 60, or 80%) while those that follow USPAP (read the comments Mr. Underwriter), often get flagged as having materially different findings. What is an appraiser to do?

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  3. Some markets like ours in a resort area of Northwest Michigan have a statistical population of sales that are very small and geographically great. I have been doing Stats research since Grad B School in 1982, developing it in Condemnation commercial work and my own rentals over the decades and teaching it since 1992. But “up north” here, the hold time is atypically long/turnover low, with many lake front properties passed generation to generation, notoriety and growth have created a shortage and every home is a one-of-a-kind custom/semi-custom. Only recent attached condos are model to model. Even paired sets are rare. Lake front properties are driven by lake identity, location on the lake, beach entry, water depth (deep enough to moor a boat, shallow enough for kids; lake bottom etc and number of front feet as well as proportion to the improvement (many smaller, older homes have atypically large frontage). Add in view (altitude, degrees of panorama and content). The degrees of freedom are low, correlation coefficients are low and ultimately it gets down to experience and judgment. Coupled with the fact very few appraisers and reviewers truly grasp regression and qualitative distribution as exemplified in the 1004MC and the tools do not usually develop statistically significant results in this market, it burdens the appraiser with reviewers and users who have no clue. But boy those statistics are seductive, aren’t they? Sensitivity Analysis seems to work best. More of the same review ignorance now migrated into the institutional people who either never understood appraising in this environment or are “ordained” quasi-public and public sector morons and shows me I’ve stayed too long in spite of my love of the Appraisal Process. I am counting down the next eight months to retirement and like my world class mentor, becoming a nice person again.

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  4. Tim,

    A well written opinion. Thanks.

    There is so much on so many levels to comment on, but to avoid the risk of rambling I’ll narrow it down to a couple of thoughts.

    The folks who measure our intellectual abilities pretty much agree that one develops judgment that is culture-centric, and that superior culture-centric judgment is directly proportional to intelligence. So, if you follow the experts, you need to add what your mother taught you and your IQ to the ingredients of judgment. Suffice it to say that measuring an appraiser’s ability to judge is as controversial, costly and problematic as appraising anything else. Therefore, any given individual appraiser’s judgement will continue to be metered similar to “common sense” and competence. Those who must judge the appraiser’s judgment will set their own culture-centric standard.

    I’ll end with a war story not unlike your condo illustration when it comes to “market support” and judgment. The house was unique and greatly depreciated in the opinion of the appraiser, buyers and lender. It was an obvious conclusion that the cost to cure was greater that the cost to demolish. But, could the house conceivably be converted to another use and still have some market value?

    The appraiser had no local data to analyze no matter how far back in time, so the appraiser went to a nearby, larger and more active market to explore the market response to the question. That market indicated that conversion to storage (automobiles, livestock feed, furniture, or just stuff one wanted to protect from the elements) maintained some market value. The appraiser deferred to the market and included the converted market value to the results. Neither the lender nor the borrowers accepted the scope of work and analysis the appraiser applied. Indeed, they thought it was ridiculous to conclude anything other than that the house was worthless and the cost to demolish should have been deducted from the vacant site value. The appraisal was rejected on that basis alone.

    Since the ASB has concluded that the client ultimately decides if the appraisal is credible, should an appraiser’s judgment include an assessment of what the client believes market support is, notwithstanding the specter of world’s oldest profession?

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  5. by Cortney B. Strother

    This is a FANTASTIC article that addresses the “800 lb. gorilla” in the room pertaining to adjustments and their subsequent support arguments. While some adjustments certainly can be verified and justified by market data, there are always a few that slip through the cracks that can not be bolstered by “new traditional” means and/or new justification methods. The new “appraisal” methods in many cases neglect to realize the art that is intrinsic in this profession. The issue of judgment that the article brings up is one that has been argued for years by those of us in the field …. an argument that has sadly been disregarded by the Government and/or GSE entities in general. The author (Mr. Tim Anderson) states it best in the final comments of the article regarding this situation that we are all in … “Nevertheless, TAF, Fannie Mae, and appraisal reviewers must understand that there are rare circumstances when there is no market support for an adjustment, yet that adjustment still needs to be made. In those cases, these parties must recognize the appraiser’s JUDGEMENT will have to suffice (accompanied by a detailed explanation of what the appraiser did to discover there were no applicable data from which to deduce an adjustment). Otherwise, not only are so many appraisers mere form-fillers but are merely filling the form with the data the client is willing to approve. That is not appraising – this is something else that is often called the world’s oldest profession.” … WELL DONE AND WELL SAID MR. ANDERSON!

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  6. Thank you for bringing up the issue of judgment. I have long wondered where that idea had gone. If lenders, Fannie Mae, and other “entities” don’t trust our judgment and are making us jump through hoops to prove our work is reliable, then why do they even bother hiring an appraiser? if they don’t think they can trust us, why bother? they can just use an AVM or broker opinion. They want an appraiser with experience, training and the education but they still question our trust worthiness and competence at every turn. I have even had AMC’s challenge my inspection results. I know that there have been some bad apples out there giving the rest of us a bad name, but it has gone too far. This industry has become ridiculous and I am glad to be retiring in a few years.

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  7. Well AMEN to recognizing JUDGEMENT! Lenders/FANNIE MAE seem to forget all about that important aspect of the entire process of which there are many working parts. They have tried to reduce us to STATS, Numbers, Regression Analysis without any judgement coming into play. To me it is Judgement applied correctly, due to long term experience in the markets in which we appraise, that is what separates the “Men from the Boys” or in my case the Women from the Girls. Thanks for writing this. Now if anyone in control will listen and take heed, that is the 1 million dollar question.

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  8. by Albert Mattheis

    I was loving this article until they got to the indented part representing what the appraiser actually wrote in the addendum.
    It seems to contradict the overall point of the article. They say that our judgment is valuable, indicate that
    there is very good reason to believe a floor height adjustment is necessary, provide evidence from another complex that shows which direction
    the adjustment should go, then say we are making no adjustment based on judgment, experience and market data. Huh?

    It is pretty clear that an upward adjustment is warranted, both for floor height and because the top floor has the vaulted ceilings.
    The only thing not clear is exactly how much, but we do know the direction and can use any number of means of analysis to produce a
    credible number (a lot more credible than 0). First of all, go back farther in time (however far you have to) and see how much more the top floor units sell for, percentage wise, compared to the similar lower
    floor units that sold at about the same time. Or compare to other garden condos with vaulted top floor ceilings, not to a high rise. Or use the high rise numbers
    but reduce the adjustment by the percentage difference in median value of the sales in each project.

    After basically saying, an upward adjustment should probably be made (vaulted ceilings, owners hold them longer because they are unique, other condos show higher prices for higher floors),
    it then says: but since the market does not show recent compelling evidence (for or against as the limited analysis produced ZERO data points within the project) I am going to cop out
    and make no adjustment, because I am more afraid of the army of nameless faceless bureaucrats, underwriters, review appraisers, UAD and other automated review systems and appraisal boards
    that can potentially make my life hell over a small issue, that I would rather go against my better judgment regarding the appraisal adjustments and value, than stick my neck out on the line.

    By the way, there is definitely something to be said for that. The article should be pointing out more directly, that this “copping out and making no adjustment even though one is warranted” is exactly what will happen
    with more and more appraisers if the witch hunt mentality on appraisers continues.

    Then, after the indented part representing the addendum comment, the article resumes with:

    ‘’Please understand this is not to advocate appraisers should be free to make adjustments willy-nilly.”

    Of course not, it advocates exactly the opposite. It advocates that appraiser’s should feel justified in making no adjustments willy-nilly, even when one is

    I guess there are multiple ways to view this, but that’s how it looks from here.

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  9. Good job Tim! Point is that the appraiser still needs to go through the motions of trying to arrive at an adjustment, and then explain how they got to it even if there isn’t market driven support. In your case of the property with different floor levels, the appraiser still did the analysis and it was not plucked from the sky. While not everything can be quantified, there is still the need for analysis and reason, as well as explanation as to why. In the end, appraisers are technical communicators and we need to write a compelling case for why we arrived at what we did.

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    • I fear your suggestion of “going through the motions” will morph into “keeping up appearances”. After all this is real estate appraisal in the year 2016 we are talking about here.

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  10. by Kenneth Parsons

    I read this quick but were there other sales 3 years ago where you could make a percentage adjustment back then which could be used today? Also, perhaps using the current sales on a cubic foot could have given an adjustment for ceiling height.

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  11. May I offer a couple of thoughts? Too often we think we have to extract an adjustment from the data first, then apply it to the comparables. We should remember the method of Sensitivity Analysis which was taught to me in my first appraisal classes. In this method, the appraiser makes all the other adjustments possible, then plugs in possible values to a remaining adjustment (GLA, age, FLOOR HEIGHT, etc.) to see if it brings the adjusted sales prices closer together or farther apart.

    This appraiser could, using his judgment, could try $2000, or $4000, or another value for a possible floor-height adjustment, then fine-tune it up and down until finding the adjustment value that results in the closest range of adjusted sales prices. This is a supportable adjustment, even if there is no recent sales data for 5th-floor unit available.

    The second thought is that the appraiser could compare historical sales of fifth-floor units with sales of units on other floors, calculating a percentage difference between fifth-floor sales and, for example, concurrent second-floor sales. Even going back to the first-time sales of the units in the complex might be revelatory.

    If fifth-floor units sold for $105,000 and 2nd-floor units for $100,000–even if 20 years ago–the 5% premium for fifth-floor units could be applied to today’s second-floor sales prices, even if they are now $500,000. Ideally we would find several times in the past when a fifth-floor and a second-floor unit sold at about the same time, so that we would have several sales to base our adjustment on. Were there any lower-floor sales three years ago when the last fifth-floor unit sold?

    As a third option, the appraiser could download all the sales available in the complex into a spreadsheet such as Excel, then graph the historical sales of second-floor and fifth-floor units. If done using trendlines, this will give him a graph with one line showing the price trends of second-floor units over history and another line showing the price trends of fifth-floor units.

    If the appraisal gods are smiling, one line will be more-or-less consistently the same PERCENTAGE amount above the other, providing a percentage adjustment that can be applied to current sales.

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  12. by Ian Valenzuela, MAI

    This situation and others like it call for qualitative analysis. In general, I think appraisers are fooling themselves (and their clients) with super-precise, allegedly “market-derived” quantitative adjustments. Even the most trivial, universally accepted adjustments, like size or age or room count, are based on paired sales or regression that can vary wildly from case to case.

    The Advanced Sales Comparison class offered by the Appraisal Institute has (or it did when I took it) an eye-opening exercise. The people in class were asked to visit shopping centers, and compare them. Appraisers from all over the place, from residential, governmental, and commercial backgrounds, rated various components and qualities. The ratings differed tremendously – metropolitan appraisers considered one to be average quality, while rural people rated it good or very good. Effective age varied as well, with a property estimated from 10 years to 30 years by the class.

    But when the two different properties were placed side by side, the arrayed rankings were almost uniform. That is, every appraiser judged Property A superior in location, Property B superior in quality, etc. From this, we can gather common-sense analysis, guided by appraisal education, in determining value. With qualitative ranking, an appraiser can pull in largely disparate comparables, such as in this example, with drastically different locations, market conditions, and physical characteristics, and still come up with a defensible, logical conclusion.

    If you hold one quality superior to another, and can demonstrate it from the market, you can make a valid comparison. The minute you pull out a $2,500 per floor adjustment from thin air, you weaken your analysis. That being said, I certainly support the decision to NOT apply an adjustment in this example, if you can clearly state that there is no evidence from the market to support that adjustment.

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  13. by Austin M. Smith, Jr. MAI

    Tim, Thanks for this very accurate and informative article. I also teach trainee classes, CE and USPAP and am always happy to hear that others suffer from the same issues. As I read the case I wondered if the appraiser attempted to pair the 3-year old sale on the 5th floor with a 3-year old sale on a lower floor. IF (it’s always a big IF) there had been a 3-yer old lower floor sale it could have been paired to determine a percentage adjustment. Thanks again,

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  14. by Joyce J. Potts, SRA, AI-RRS

    Tim, this is totally contrary to what Richard Hagar advocates, more specifically that every adjustment MUST be supported, you simply don’t make one. He cites Fannie Mae as his source.

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