Paired Sales Adjustments – A Bunch of Crap!

calculatorI just finished reading a blog on your typical adjustment methodologies. Typical information I’ve read a dozen times, from more than a dozen sources. I’ve always hated the paired-sales analysis, but it’s how we learn to determine an adjustment. The real interesting and revealing aspect of this article was in the comments.

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 adjustments?



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7 responses to “Paired Sales Adjustments – A Bunch of Crap!

  1. eValueLogic

    Actually, paired sales analysis is a useful tool if you know how to use it. Most, if not all, appraisers use it on every job without realizing it. Most call it something else but at the end of the day it is what it is.

    How else do we know the market reaction for features? Market reaction is paired sales analysis.

    And that’s why we get the big bucks to do the analysis and report it.

  2. I alway play the Devil’s advocate and it gets me into some great conversations. People don’t always get it, and may consider me a flip-flopper.

    Yes, yes. For sure we start with a basic paired sales. That tidy little number we determined from our “Real Estate 101″ class. We then modify it with every appraisal we do based on a infinite number of variations depending on the specific property (value range, location, functionality, use, etc.).

    I hate it because of the infinite number of variables in appraising real estate. It’s flawed, it’s that grey area! I love my numbers…so black and white. I agree with the comments above ” in practice it fails pretty miserably”.

    Thank you for your post Robert!

  3. P Stach

    It works. It is the “only” concrete basis for an adjustment without being subjective. I agree eValueLogic that we use it on almost every appraisal whether we realize it or not.
    It doesn’t appear 3Gordon has a full understanding of the methodology, otherwise he wouldn’t have gone on a rant about a bathroom adjustment. If 12k doesn’t seem appropriate for a bath adjustment in your subject’s market you need to look further. What else is different? Time, view, GLA, condition??
    It has to work. It is economics 101. It works for everything we buy. New car, same exact car sells for $2,000 less, a month later… time adjustment. Pepperoni pizza costs $2 more per pie? Amenity adjustment. Same gas is more expensive on the highway than on your local corner? Location adjustment.
    I think the only difficult part of this concept is to find 2 identical houses. The most obvious is doing a new construction, the sales office will usually break it down for you and show you exactly where the price difference lies.
    T Shannon has a point that there are far fewer similar dwellings. But the data is there. Yes, the higher priced homes are more volatile, because there are a lot more factors involved. There are many nuances that an appraiser needs to pick-up on. Oak paneled room versus Mahogany paneled room, 10 zone baseboard heating plus radiant heat in baths versus 3 zone forced warm air. It’s not just the GLA, kitchen, baths and patios. In areas buyers will pay considerably to have the number 8 (also the sign of positive infinity if positioned horizontally) in their address. There are also a lot less financial products currently available to buy the high priced houses.

    I would be pretty sure that the girl that T Shannon claims to have made cry – didn’t fully grasp the methodology either. Because if she did, T Shannon wouldn’t have been able to have poked so many holes in her adjustments as she states.

  4. Jennifer,
    I agree with you “I hate it because of the infinite number of variables in appraising real estate.” My market is extremely slow with very few sales. This combination of a slow market and a mix of sales makes the paired sales analysis even harder to perform. Paired sales analysis might be a useful tool if you can find the data for it.
    By the way, your blog is looking good!

  5. Bill

    I have never seen a “paired sales” analysis I could not discredit. It works in theory only. I have never seen two identical houses excepting one item of difference. There is the flaw in the practice.

  6. Michele

    I agree with Bill. They teach this in a class with perfect comps and nice and tidy little numbers in the end. I have a really hard time trying to figure out how to truly do this in reality. If I ask anyone I get the typical response of “how do you do your job if you don’t know how to do this?” instead of anything that is helpful to me in learning how to do it. If it is so easy then why can’t anyone explain it to me without being nasty?

  7. Taft

    Paired sales is typically much more accurate if multiple sales can be looked at to determine a true trend in the market. There is a range in sale prices and typically for this reason one paired sale will often render a misleading amount. Although not exact, I typically find that paired sales give some pretty accurate figures. If you run eight paired sales and five are in a tight cluster around $10,000, that is a pretty good indication that the number you are getting is accurate. The technique has been around for many decades and has stood the test of time because it is sound methodology and leads to accurate figures. Time and time again I find that paired sales produce accurate results. Sensitivity analysis provides further confirmation to me that the results I am getting are accurate. The alternative is to not make adjustments. This is a big mistake in my opinion. Additional features beyond square footage, like the bathroom you mentioned in your article for instance, typically measurably increase the utility and enjoyment of a given property and buyers do see value in them. For this reason buyers tend to pay more for a property as a result. Adjusting for these items may sometimes make the gross, net, and single line higher, however they make the appraised value more accurate.

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