Analyzing and Reporting Market Trends in Residential Appraisals

Greg Stephens May 17, 2017

One of the first things we are taught when learning real estate appraisal is the age-old adage,

Location, Location, Location.

What should also immediately follow that statement is that real estate markets are dynamic,

seldom static and almost always in transition, with property values either increasing or

decreasing.

Numerous lenders are reporting that appraisers are identifying increasing prices and supply

shortages in the Neighbourhood One Unit Housing Trends section of appraisal reports but not

adjusting dated sales for differences in market levels from the contract date of the sales to the

market levels as of the effective date of the appraisal. This is problematic. It impacts everyone

involved in the transaction and in some instances, actually resulting in complaints being filed

against appraisers.

The reason I say this is because failing to adequately analyze and report market trends is one of

the most frequent deficiencies noted by several state appraisal boards and the GSEs. It is also

a USPAP violation.

USPAP, Standards Rule 1-3 states:

When necessary for credible assignment results in developing a market value opinion, an

appraiser must: (a) identify and analyze the effect on use and value of existing land use

regulations, reasonably probable modifications of such land use regulations, economic supply

and demand, the physical adaptability of the real estate, and market area trends
The intent of this article is to remind everyone the significant importance to ensure your Scope

of Work includes an in-depth analysis of your local supply/demand and market trends,

especially in markets experiencing rapid increases in sales prices, reductions in available

inventory, reductions in days on market (DOM) and sales prices at or above the initial list prices

(%SP/LP).

The Appraisal Practices Board (APB) of The Appraisal Foundation published APB Advisory #3 in

2012, Residential Appraising in Declining Markets, and providing guidance on how to appraise a

property in a declining market. The analysis process utilized in a declining market are also

applicable in an increasing market so I thought it appropriate to highlight some of the key

elements of that Advisory.

A Market vs. A Neighborhood

We start with the distinction between a Market and a Neighborhood.

A neighborhood is a grouping of complementary land uses. This is a geographically defined

term and therefore could include residential, commercial and even industrial uses within the

neighborhood.

A market study is focused on competing properties. Therefore, a market analysis need not have

the same geographic limits as the neighborhood. When defining a market, it is important to use

parameters that include competing properties and exclude noncompetitive properties. The

market area may be more important than the neighborhood. This might result in utilization of

comparable data located outside your defined neighborhood, and yes, it will require justification

and commentary in the Sales Comparison Approach comments but is acceptable within
appraisal practice when an insufficient population of competitive market data is not available

within the defined neighborhood.

Our analysis of competitive market data should be more focused on identifying the subject

market which might be encompassed within the identified neighborhood, but not necessarily.

Recognizing the characteristics of an appreciating market.

Most appraisers can identify the indicators of an appreciating market. However, many have

trouble interpreting the indicators and then deciding when the indicators lead to a conclusive

identification of an appreciating market. Some characteristics of an increasing market are as

follows:

Undersupply of competing properties (i.e., supply and demand are out of balance).

Reduced marketing times for active, pending and closed sales.

Prior listings of the subject that reflect list prices lower than the current contract, sale

price or value.

Prior sales of the subject and/or comparable sales that reflect lower prices than current

prices.

Increase in sale prices as a percent of list prices.

Decrease in REO and Short-Sale listings in neighborhood.

The presence of only one or two of the indicators from this list would not necessarily be enough

evidence to confirm an appreciating market, however, the presence of several or all of the

indicators would be a strong indication that the market is appreciating and appropriate analysis

and adjustments for date of sale/time to comparable sales becomes necessary to produce

credible assignment results.

Quantifying Market Adjustments in Appreciating Markets.

When a market has been identified as appreciating, appraisers are tasked with identifying and

supporting appropriate adjustments to any dated sales used in the appraisal. Analytics include:

1. Tracking over time the median sale prices in a defined market segment (e.g., 1004 MC

form).

2. Researching and calculation of rates of change from sales and resales of the same

properties.

3. Tracking over time the Days on Market (DOM) of comparable listings or comparable

sales.

4. Tracking over time the sale price to list price ratios (SP/LP). The assumption is that

diminishing discounts from list price to sales price are a reflection of motivated buyers willing

to pay prices higher than previous sales.

5. Tracking over time the number of REO/Short Sale properties. The assumption is that

REO/Short Sale properties adversely impact property values within their respective markets.

As the number of REO / Short Sale properties diminish, that negative impact diminishes,

thus improving the market appeal of the other properties in the market.

Sales Concessions and Property Condition

In addition to the traditional market trend indicators noted in the list above, other indicators that

help to distinguish whether the market being analyzed is a Buyers Market or a Sellers Market

include the existence or absence of seller concessions and whether property condition impacts

marketability.
In a sellers market where a high level of competition exists, seller concessions will either be

non-existent or very minimal. This is in contrast to a buyers market where an abundance of

competing properties exist and sellers are motivated to offer concessions to stimulate contracts.

Also in a sellers market where a high level of competition exists, buyers are less likely to write

contracts that include repair of deferred maintenance or replacement of older appliances/fixtures

for fear a competing buyer will not require the repairs and gain a competitive advantage in the

bidding process.

This is significant for appraisers to appropriately analyze and recognize such trends to prevent

making condition adjustments the market is not recognizing as of the transaction dates.

When appraising a sale, appraisers are reminded the subject is also a market transaction /

agreement that occurred between a willing buyer and a willing seller and has also just become a

pending sale comparable within that market. This is especially significant when it is the most

recent sale in an escalating market and as a result is the highest sale of directly competing

properties in that market.

The tendency might be to appraise a sale at a value that is no higher than the highest previous

comparable sale. However, that might result in a deficient analysis and reconciliation and even

be misleading if the sale price is consistent with the market trend,.

Example:

Subject was listed for $305,000, is in contract for $300,000 after 12 Days on the market.

Sale 1 was listed for $300,000 and sold for $295,000 three months ago after 15 DOM;

Sale 2 was listed for $289,000, sold for $285,000 five months ago after 20 DOM;
 Sale 3 was listed for $280,000, sold for $270,000 seven months ago after 25 DOM.

There is a pending sale that listed for $300,000 and sold for an undisclosed price after 5

DOM.

The highest previous sales price is $295,000. However, based upon the sales price trend,

reduction in DOM and increase in SP as a % of LP, the $300,000 appears to be consistent with

the upward market trend and could be supported in an appraisal (all other things being equal).

The point of the demonstration is to remind everyone to not get boxed in and let the data tell

you where the market is at and reconcile accordingly.

Taking Advantage of Technology

Most multiple listing services have programs that an appraiser can use to conduct a market

search then transfer the results to an Excel file to develop the analysis of market trends on a

monthly or quarterly basis.

Within the past few years several software programs have been developed to assist appraisers

by electronically analyzing several months of historic sales data, producing the results in

significantly less time than using Excel spread sheets or other manual processes. The

acceptability and use of such programs has increased as their ease of use and user-friendly

functionality continues to improve.

Analyze The Market! Qualitative vs. Quantitative

Appraisers have had blinders on for way too long. It is

time to open our eyes wide, keep an open mind and to truly think outside the check
box.
Most of us learned this crazy business by filling out a form.For me, it was actually
preparing forms on the good old typewriter, and since clients didnt accept White-out, if
you made one mistake, you retyped the whole thing . in my case, normally after
almost completing the entire report. My education truly began when I started actually
thinking, securing meaningful education and not merely form-filling thanks somewhat to
George K. Cox, MAI, SRA.
Its time for all of us to step back, re-evaluate and employ a little common sense. Most
preprinted forms utilize a Quantitative Appraisal Method while a Qualitative Method is
more is line with how buyers really act.
QUANTITATIVE METHOD
Paired Data Analysis: A quantitative technique is normally used to identify and
measure adjustments to the sale prices or rents of comparable properties. To apply this
technique, sales or rental data on nearly identical properties are analyzed to isolate a
single characteristics effect on value or rent.
Where do you get these so called adjustments? I know, I know. Paired sales, right? Let
me see them. Better yet, the next time you are in the hot seat be prepared to show your
paired sales analysis to the court or your state regulatory board. I do believe it is
possible to have a proper paired sales analysis and with regression analysis becoming
more and more popular there is oftentimes support for your adjustments. However, I
would bet that most appraisers do not have this data in their offices to support their
adjustments.
Think about it! How many home buyers have you ever seen pull out a legal pad or a
1004 form and make line item adjustments for every little difference. Wait! A bathroom is
worth $2,000, a garage $5,000, a deck is $2,000, etc. By the way, why dont these
numbers ever change? Buyers dont act this way. Has anyone ever seen a buyer
operate in this manner? Then why do we? Dont buyers really analyze differences in the
aggregate and make a decision in a lump sum?
At the 3rd annual Association of Texas Appraisers (ATA) conference in Austin, I asked a
group of 72 appraisers how many of them had ever seen buyers act this way. The
answer was none!
I have interviewed numerous appraisers/brokers nationwide, representing hundreds of
years of experience in selling real estate and not one has seen a buyer act this way! If
we are charged with analyzing the market, and market participants dont act that way,
why do we?
QUALITATIVE METHOD
Relative Comparison Analysis: A qualitative technique for analyzing comparable
sales; used to determine whether the characteristics of a comparable property are
inferior, superior, or equal to those of the subject property. Relative comparison analysis
is similar to paired data analysis, but quantitative adjustments are not derived.
Most appraisers are probably already doing a qualitative method to develop their
opinion of site value. Most appraisers dont grid land sales and make adjustments. You
can do the same thing for improved sales. To demonstrate my point, below is an
exercise in The Columbia Institutes course Survey of the Cost Approach, which is an
excellent course for those of you who like the cost approach for a land sales analysis
utilizing a quantitative method. Look at the results using this same data set performing a
qualitative method
Both methods provide support of $43,400 for the subject property. The
qualitative/relative comparison analysis provides the same results without guessing for
an amount of single line item adjustments.
In the book Down to Earth, Sanders A. Kahn, Ph.D., SREA makes the following
statement about Comparative Sales Grids:
it became fashionable for some appraisers, with the encouragement of some public
agencies, to rate the degree of variation between the subject property and comparative
sales. Quantification of the variations, usually by the use of a plus or minus percentage
(or dollar amount) from the comp to the subject, became the vogue.
Actually this method is replete with danger. It looks so scientific, but in realty is only
pseudo-scientific and converts subjective judgment into what pretends to be objective
mathematical absoluteness.
Consider analyzing property the way the market does: in a Qualitative manner.

Bryan S. Reynolds is a Certified General Real Property Appraiser

and an AQB Certified USPAP Instructor. Mr. Reynolds serves as an adjunct faculty
member of The Columbia Institute, and is an approved appraisal instructor in 31 states.
Reynolds is the owner of Reynolds Appraisal Service in Owensboro, KY, providing
various residential and commercial valuation services, consulting and litigation support
services throughout the area. He can be contacted at (270) 929-3088 or by email
at [email protected]