How to read an appraisal: Part 7
Today we look at how to read the top of page 2 of the appraisal report. I'll be using this sample that was produced by the SacrementoAppraisalBlog.com.
Note that within the URAR 1004, there is a kind of coded language that is used. A ranch home becomes a "DT1;Ranch" or a "Detached," "1-Story"; "Ranch". Likewise, a two-car attached garage with a two-car driveway becomes a 2ga2dw.
The appraiser reports the subject on the left and the comparables in the columns to the right. Adjustments are then made to the comparables. For example, the comparables above were adjusted up for the "Date of Sale/Time" due to the market appreciation. Comparable 2 was adjusted up for the condition because it was worse than that of the subject. Likewise, the Gross Living Area of comparable 2 was adjusted up because it is smaller than the subject.
All of this raises the question of "Where do these adjustments come from?" Why did the appraiser in this report adjust the square footage at $45 per square foot? Why didn't they adjust for the site size? Why didn't they adjust for the age difference?
The appraiser is required to have in their workfile the justification of the report and to explain in the report how adjustments were derived. I, therefore, can not speak for this sample report, but I can speak for my method.
On every report, I pull data with which to perform multi-linear regression for all quantifiable features in the market area over the last three year, power regression on land sales, linear regression of the market conditions, pivot charts to show market expectation, and further perform depreciated cost analysis, multi paired sales analysis in the grid as well as outside of my grid, and sensitivity analysis as the last step.
Multi-linear Regression - this is a statistical analysis tool that attempts to extract the impact of multiple variables on the dependant variable of price. This tool is complex to understand and use, but is increasingly being used by appraisers. Some markets have great success with it (namely areas with a large number of similar sales) and others can not use it at all (rural areas with wide variation).
Power regression of vacant land sales - vacant land is readily available in some areas, and when it is, power regression (land is not a linear relationship from acres to value) is performed to extract the relationship.
Linear regression of market conditions - I perform market analysis of the sales price trend over three years, as well as listing prices, and volume of sales and current inventory to understand long-term trends as well as up to the moment trends.
Pivot charts - Pivot charts show market expectations of certain amenities among certain classes of homes. In short - If the market does not expect an amenity, it is less likely to value that amenity. For example, the market expectation of a 5-car garage is very low in the $100,000 price range but higher in the $1,000,000 range.
Depreciated cost analysis - This attempts to take the cost new to build and apply depreciation to the feature based on age and wear and tear in order to arrive at a current value.
Paired sales analysis - dated paired sales analysis is also performed in cases of unique features that are not present in the current market in order to extract the appeal of these features. Homes that are identical in every way, but one feature, are sought to extract the value of that one feature.
Sensitivity or Multi-paired sales analysis - the gridded analysis is a form of paired sales analysis, in which all properties are equalized, and amenities that remain different after equalization have those differences represented in the price difference.
These are some of the tools in an appraiser's toolbox. However, the first tool is that of comparable selection. If you have good comparables, a hard property can make an easy report. However, if you have an easy property and pick the wrong comparables, arriving at a value could be impossible.