I meant to comment on this a while ago, just reread it and it really bothers me.  So I need to comment.  It’s not the lenders, nor appraisers that need to “appreciate the value,” it’s the consumer who drives the market.  If everybody was willing to pay for the green improvement at what it costs, than it would be an open and shut case, because the market would reflect the value at 100% of the market.

There are special loans that allow for the energy savings to be applied to the appraised value.  I blogged on this last month: ““Buyers: Why Green is Worth It” and the Energy Efficient Mortgage Program.”   Lets be real…when somebody builds a house and customizes it with all these great upgrades (granite, high-end cabinets, exotic wood floors, etc.) the overall cost to construct/reproduce does not typically bear out on the market. Many of these items are taste specific and the amenity adjustments given to the comparable sales are derived by the depreciated cost method or reflect the anticipated market response.  Adjustments are not typically supported by the cost to construct.

Not all appraisers are knowledgeable about appraising green features, which is huge problem.  There are different ways to come up with a value.  I blogged about this too: “Appraising Green/Energy Efficient Housing” .   Choosing an Appraiser that is knowledgeable in appraising green features is not even possible anymore…due to new regulations, aka HVCC, lenders can no longer choose the appraiser.   So somebody with no experience with green appraising may be doing the appraisal.

So builders and remodelers need to explain this to their clients. A top builder in my area even has it written in their contract…that the buyer is responsible even if the appraised value comes in low.  I know this creates tension with the buyer because they need to come up with extra funds, this wasn’t too much of a problem in an UP market, but it is now!  Explain it up front so they are at least aware that all those custom upgrades may not appraise out.

So my answer is: IT DEPENDS!

-Just my thoughts.

www.TopNHhomes.com

www.JACoteAppraisals.com

T Shannon // Apr 14, 2010

I have long been skeptical of paired sales analysis. On paper, in the classroom it works flawlessly. However, in the real world it is, more often than not, a fools mission. There is far less homogeneity amongst homes, even in the same sub-divisions than in years past. That is especially true in higher priced areas. There are far too many differences for which one must account to render any meaningful, usable data.

Likewise, I believe that most of the other approaches Beverly outlines run into much the same problem. The “assumption” of there being essentially identical homes excepting one significant factor (like a view amenity,) and for which relevant market data is available is also more often than not, a pipe dream.

I witnessed an appraiser get summarily dressed down in court who used “paired sales analysis” as her justification for most of her adjustments. As I was representing the opposition, it was I who did the dressing down. I punched numerable holes in what I established were far too many and too large adjustments. Sad to say, I made her cry. She complained that she had done just what she had learned in her classes. How could it be wrong?

3 Gordon // Apr 15, 2010

I appreciate the sentiment and effort of the article, it is fairly similar to much of the text that has been written and to the one or two classes I’ve taken on the subject of “adjustments”. I have to side with Terry though. In the classroom and through the use of examples the paired sales technique looks pretty good but in practice it fails pretty miserably. My unicorn count is only slightly lower than the number of text book paired sales examples I’ve run into in the last decade.

I suppose we’re doomed to being forced to sign off on these mandated and precise adjustments by reviewers and underwriters on the Fannie forms as the movement away from quantitative analysis and towards a more reasonable and reality based qualitative analysis is stuck at the pace of molasses in a Minnesota winter. It does not surprise me that someone was sued over applying precise adjustments for attributes as Terry indicated. Maybe someday we’ll be able to complete an appraisal report without being forced to make ridiculous un-provable claims. Don’t even get me started on “effective age” or its cousin with crystal ball “remaining economic life”. How about we just report the condition of the home based on the readily observable features noted during the walk thru and stop pretending we did a thorough home inspection and engineering survey and can predict when the house is going to fall down.

But back to the adjustment issue – I’m working on one now – just “calculated” my bathroom adjustment based on the relevant data and I’m signing off on a 12K adjustment. The other variables involved include living area, proximity to heavy traffic flow, pool or no pool, garage capacity, date of sale ranging from one week to 5 months, double lot vs single lot, and condition of the home. It does not appear that the patio situation has any effect on the market value however I will need to address it one way or the other as it is a mandatory field in the 1004 form. With the 25 or so total sales in the neighborhood in the last six months, some of which are not even remotely comparable to my subject, I wish I could answer that the 12K adjustment I am going to apply and sign my name to is really what an informed buyer will pay for that extra bathroom. If someone decides to challenge it I’m sure they could devise a means of “calculating” that number that would have a different result and under the right circumstances make me look like a fool and have a jury find me liable.

Frankly, I find it ridiculous that anyone really thinks that buyers walk thru a house and in their mind say “a third bathroom, I’m going to offer 12K more for this house”. I find it even more ridiculous that thousands of appraisers sign their names to such twaddle every day. Unfortunately, in order to not get 17 calls from underwriting on the issue, get paid for this appraisal, and not get blacklisted I will once again join the crowd, apply the ridiculous precise bathroom adjustment, and sign my name to it.

So I’m not the only one. Sometimes the comments are far more interesting than the article itself.

So how do you, my appraiser friend, determine your adjustements?