APPRAISAL PRACTICES APPRAISAL PRACTICES BOARD (APB) VALUATION BOARD (APB) VALUATION ADVISORIES ADVISORIES SEVEN (7.0) CE Hours SEVEN (7.0) CE Hours
Transcript
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APPRAISAL PRACTICES BOARD (APB) VALUATION ADVISORIES SEVEN
(7.0) CE Hours
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2 PURPOSE AND DESCRIPTION This seminar is designed to assist
real property appraisers in understanding and applying voluntary
guidance in recognized valuation methods and techniques as set
forth by the Appraisal Practices Board of the Appraisal Foundation.
The seminar focuses primarily on advisories directed to real
property valuation issues.This seminar is designed to assist real
property appraisers in understanding and applying voluntary
guidance in recognized valuation methods and techniques as set
forth by the Appraisal Practices Board of the Appraisal Foundation.
The seminar focuses primarily on advisories directed to real
property valuation issues.
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3 PURPOSE AND DESCRIPTION (Cont.) The Appraisal Practices Board
(APB) was created to complement the work of the Appraisal Standards
Board and the Appraiser Qualifications Board. The Uniform Standards
of Professional Appraisal Practice requires appraisers to:The
Appraisal Practices Board (APB) was created to complement the work
of the Appraisal Standards Board and the Appraiser Qualifications
Board. The Uniform Standards of Professional Appraisal Practice
requires appraisers to: be aware of, understand, and correctly
employ those recognized methods and techniques that are necessary
to produce a credible appraisal (SR 1-1 (a) and othersbe aware of,
understand, and correctly employ those recognized methods and
techniques that are necessary to produce a credible appraisal (SR
1-1 (a) and others
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4 PURPOSE AND DESCRIPTION (Cont.) The APB was officially formed
by The Appraisal Foundation Board of Trustees on July 1, 2010.The
APB was officially formed by The Appraisal Foundation Board of
Trustees on July 1, 2010. The APB is charged with the
responsibility of identifying and issuing opinions on recognized
valuation methods and techniques which may apply to all disciplines
within the appraisal profession.The APB is charged with the
responsibility of identifying and issuing opinions on recognized
valuation methods and techniques which may apply to all disciplines
within the appraisal profession. The APB offers voluntary guidance
in topic areas which appraisers and users of appraisal services
feel are the most pressingThe APB offers voluntary guidance in
topic areas which appraisers and users of appraisal services feel
are the most pressing
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5 PURPOSE AND DESCRIPTION (Cont.) The Board utilizes panels of
Subject Matter Experts (SMEs), who are widely recognized
individuals with expertise in the specific topic being considered,
to research and detail all pertinent sources of existing
information on the given topic.The Board utilizes panels of Subject
Matter Experts (SMEs), who are widely recognized individuals with
expertise in the specific topic being considered, to research and
detail all pertinent sources of existing information on the given
topic. The APB vets the issue through a public exposure process and
ultimately adopts guidance that may include more than one
recognized method or technique that addresses the specific
topic.The APB vets the issue through a public exposure process and
ultimately adopts guidance that may include more than one
recognized method or technique that addresses the specific topic.
From the APB perspective, compliance with all guidance issued by
the APB is entirely voluntary.From the APB perspective, compliance
with all guidance issued by the APB is entirely voluntary.
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6 PURPOSE AND DESCRIPTION (Cont.) The primary sources for this
seminar are pertinent USPAP guidelines and requirements, and
valuation advisories and exposure drafts from the Appraisal
Practices Board, including the following : Real Property Valuation
Advisories Adjusting Comparable Sales for Seller
ConcessionsAdjusting Comparable Sales for Seller Concessions
Residential Appraising in a Declining MarketResidential Appraising
in a Declining Market Second Exposure Draft Identifying Comparable
PropertiesSecond Exposure Draft Identifying Comparable
PropertiesSecond Exposure Draft Identifying Comparable
PropertiesSecond Exposure Draft Identifying Comparable Properties
Second Exposure Draft Identifying Comparable Properties in
Automated Valuation Models and Mass Appraisal ModelsSecond Exposure
Draft Identifying Comparable Properties in Automated Valuation
Models and Mass Appraisal ModelsSecond Exposure Draft Identifying
Comparable Properties in Automated Valuation Models and Mass
Appraisal ModelsSecond Exposure Draft Identifying Comparable
Properties in Automated Valuation Models and Mass Appraisal Models
First Exposure Draft - Valuation of Green Buildings: Background and
Core CompetencyFirst Exposure Draft - Valuation of Green Buildings:
Background and Core CompetencyFirst Exposure Draft - Valuation of
Green Buildings: Background and Core CompetencyFirst Exposure Draft
- Valuation of Green Buildings: Background and Core Competency
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7 PURPOSE AND DESCRIPTION (Cont.) Current solicitations for APB
SMEs Current solicitations for APB SMEs Solicitation for Appraising
Newly Constructed Residential PropertiesSolicitation for Appraising
Newly Constructed Residential PropertiesSolicitation for Appraising
Newly Constructed Residential PropertiesSolicitation for Appraising
Newly Constructed Residential Properties Solicitation for
Collection and Verification of Sales DataSolicitation for
Collection and Verification of Sales DataSolicitation for
Collection and Verification of Sales DataSolicitation for
Collection and Verification of Sales Data
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8 PURPOSE AND DESCRIPTION (Cont.) Business Valuation Advisories
Identification of Contributory Assets and Calculation of Economic
RentsIdentification of Contributory Assets and Calculation of
Economic Rents Discussion Draft - The Measurement and Application
of Market Participant Acquisition PremiumDiscussion Draft - The
Measurement and Application of Market Participant Acquisition
PremiumDiscussion Draft - The Measurement and Application of Market
Participant Acquisition PremiumDiscussion Draft - The Measurement
and Application of Market Participant Acquisition Premium
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9 OBJECTIVES The objectives of the seminar are to provide
learners with information and skills that: are transferable to the
work environment;are transferable to the work environment; are
relevant to increasing earning power;are relevant to increasing
earning power; increase awareness and understanding of Appraisal
Practices Board voluntary guidance;increase awareness and
understanding of Appraisal Practices Board voluntary guidance;
increase competence and confidence in applying APB voluntary
guidance;increase competence and confidence in applying APB
voluntary guidance; provide satisfaction that continuing education
money was well spent.provide satisfaction that continuing education
money was well spent.
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10 OBJECTIVES (Cont.) The seminar will: Assess learner
understanding of APB real property valuation advisories;Assess
learner understanding of APB real property valuation advisories;
Compare and contrast APB advisories to other sources of valuation
guidance;Compare and contrast APB advisories to other sources of
valuation guidance; Justify the use of strategies for documenting
and supporting compliance with APB advisories;Justify the use of
strategies for documenting and supporting compliance with APB
advisories; Evaluate whether a more in-depth understanding of APB
advisories will improve appraiser competence and appraisal
quality;Evaluate whether a more in-depth understanding of APB
advisories will improve appraiser competence and appraisal quality;
Assess personal competency level for applying this knowledge in
appraisal assignments.Assess personal competency level for applying
this knowledge in appraisal assignments.
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11 APB Valuation Advisory #2: Adjusting Comparable Sales For
Seller Concessions Date Issued: March 7, 2012 Application:
Residential and Non-residential Real Property Issue: As part of its
ongoing responsibilities, the APB is tasked with identifying where
appraisers and appraisal users believe additional guidance is
required. Once such issue identified by the APB is adjusting
comparable sales for seller concessions. A common tool used to help
facilitate a real property transaction is to have the seller
provide financial assistance or incentives to the buyer. Such
assistance may be considered a seller concession or financing
concession and this is important because it may have an influence
on the contract price. The purpose of this guidance is how to
identify, verify, analyze and adjust sale comparables for both
seller and financing concessions.
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12 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions The purpose of this document is to provide
additional guidance on generally accepted methods and techniques.
The methods and techniques discussed herein may not be the only way
to solve this problem as there may be other equally acceptable
methods and techniques. The practitioner that uses these other
techniques should be able to present and support their use of an
alternative technique and support the logic of their analysis.
Practitioners that use the guidance contained in this publication
must understand and be able to utilize these techniques to provide
credible results.
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13 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Definitions Sales Concessions A cash or
noncash contribution that is provided by the seller or other party
to the transaction and reduces the purchasers cost to acquire the
real property. A sales concession may include, but is not limited
to, the seller paying all or some portion of the purchaser's
closing costs (such as prepaid expenses or discount points) or the
seller conveying to the purchaser personal property which is
typically not conveyed with the real property. Sales concessions do
not include fees that a seller is customarily required to pay under
state or local laws. In developing an opinion of market value, an
appraiser must take into consideration the effect of any sales
concessions on the market value of the real property.4 4 2010
Interagency Appraisal and Evaluation and Guidelines, Dec., 2010, P.
44
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14 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Definitions Financing Concessions A
financial payment, special benefit, or non-realty item included in
the sale contract as an incentive to the sale. Concessions occur
when the seller agrees to pay an inducement or to give some special
credit or property to a buyer who agrees to pay a higher price than
the buyer would normally pay in return for the inducement or
credit. Concessions usually result in artificially inflated sale
prices. Often concessions allow financing that would otherwise not
be possible. Concessions may be disclosed as part of the sale, but
often they are not. 5 5 Modified from The Dictionary of Real Estate
Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).
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15 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Appraisers are
required by the Uniform Standards of Professional Appraisal
Practice (USPAP) to collect, verify and analyze all information
necessary for credible assignment results. This is particularly
important with regard to sales and financing concessions. The
Comment to the definition of Market Value in USPAP states, in part,
that the conditions included in market value definitions generally
fall into three categories: 1. the relationship, knowledge, and
motivation of the parties (i.e., seller and buyer); 2. the terms of
sale (e.g., cash, cash equivalent, or other terms); and 3. the
conditions of sale (e.g., exposure in a competitive market for a
reasonable time prior to sale).6 6 USPAP 2012-13 Edition,
Definitions U-4 (The Appraisal Foundation)
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16 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Since concessions can
impact the sale price of a property, an appraiser must identify and
analyze the presence of concessions. Public records data rarely
report anything other than the actual sale price of a property and
do not disclose concessionary items included in the sale. Thus, an
appraiser must rely upon other sources to identify and confirm any
concessionary items.
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17 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Sources of information
that may be used for verification concessions include, but are not
limited to: Listing agent (or sellers agent) Selling agent (or
buyers agent) Buyer Seller Lender Title Company Appraisers own
records Published data Third party appraisal databases Public Deed
Records Other appraisers Tax affidavit
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18 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Listing agent The
listing agent can provide direct knowledge of market activity that
is important in understanding whether a sales concession was
necessary to entice a buyer to buy, if the price was influenced by
the concession, or if the concession was insignificant.
Selling/Buyers agent The selling or buyers agent may have knowledge
of special buyer motivations; such as any specifics with regard to
concessionary items and whether the buyer would have consummated
the sale without the concession and any impact the concession may
have had on the purchase price.
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19 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Buyer The buyer can be
a source of information about the comparable sale in terms of any
sales concessions granted, and how it affected the buying decision.
For instance, the buyer can disclose whether they would have paid a
different amount for the property were the concession not granted,
and whether receiving a concession was the deciding factor for
purchasing the property. Seller The seller can identify and confirm
concessions and may disclose any impact the concessions had on the
sale price, if any. If a property included $5,000 in concessions,
an appraiser may question the seller and verify what they would
have accepted had they not paid $5,000 in concessions.
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20 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Closing Department for
Real Estate Office, Lender or Title Company The staff in a real
estate office, lending institution or title company may provide an
appraiser with a settlement or closing statement. The statement
will show the itemized costs paid by the seller and those costs
paid by the buyer. Concessionary items paid by the seller could be
verified in this manner and be invaluable, especially when a party
to the transaction will not respond to an appraisers request for
information.
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21 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Appraisers Own Records
If an appraiser previously appraised the property they may have
information relating to any seller concessions and/or any creative
financing. Published Data (e.g. Multiple Listing Services)
Providers of published data generally offer basic information
regarding sale transactions. However, concessions are not likely to
be included in the details of such sales. Reference to this source
is thus likely to be a first step in the process, with further
investigation needed.
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22 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Third Party Appraisal
Databases and other Appraisers There are some regional and local
databases where appraisers submit information about properties they
have appraised. These can be sources of verification if these
databases are populated with information regarding seller and
financing concessions that have personally been verified by a
source deemed reliable.
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23 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Public Deed Records
Deed records may be a good verification source if a noted sale
price differs from the price reported by published data providers.
When there are questions regarding the accuracy of the information
that an appraiser has received from one of the parties to the
transaction, deeds can provide additional verification. However, in
most cases the deed does not reveal concessions, only the
transaction amount. Some states are non-disclosure and even the
price cannot be verified.
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24 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Tax Affidavit When a
property transfers, most states require the buyer to fill out a
true accounting of the cost of the property purchase. These
transfer tax affidavits can be useful in determining the true cost
of a property and whether the buyer considered a concession to
reduce the effective sales price of the property or not. If the
buyer considered it a reduction in price, it may be disclosed in
this affidavit. Verification of concessions and the impact of
concessions on the consideration of a comparable can be done
through personal phone calls, text messaging, email or
questionnaires and should be documented in the workfile.
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25 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Verifying Concessions Examples of what an
appraiser may consider: Would the buyer have paid the same amount
for the property without the sales or financing concession? What
are the details of the reported concession? What impact did the
seller/purchaser believe the concession had on the contract price?
Was the impact equal to, less than, or more than the actual amount
of the concession?
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26 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? If an appraiser identifies and confirms that
concessionary items were included in a transaction and if the
normal consideration or contract price was impacted by the
concession, an appraiser should make an adjustment to approximate
the markets reaction to the concessions impact on the comparable
sales contract price.
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27 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? If an appraiser identifies and confirms that
concessionary items were included in a transaction and if the
normal consideration or contract price was impacted by the
concession, an appraiser should make an adjustment to approximate
the markets reaction to the concessions impact on the comparable
sales contract price. Illustration: If an appraiser has determined
and verified that the seller paid $5,000 in concessionary items,
the appraiser would measure the impact of this concession on the
sale price and make an appropriate adjustment to the comparable
sales contract price to reflect a price unaffected by the
concessions. The adjustment may be more than, less than, or the
same amount as the actual dollar amount of the concession.
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28 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? The existence of concessions will be dictated by the
type and definition of value used in the appraisal assignment.
USPAP defines Value as: the monetary relationship between
properties and those who buy, sell, or use those properties.7 7
USPAP 2012-13 Edition, Definitions U-5 (The Appraisal
Foundation)
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29 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? According to USPAP, value is an economic concept that
is an opinion, based on a specific given time, and must be
qualified. In some definitions of value the following conditions
are prevalent: Payment will be made in cash in U.S. dollars or in
terms of financial arrangements comparable thereto. The price
represents the normal consideration for the property sold,
unaffected by special or creative financing concessions granted by
anyone associated with the sale. The first requirement is the basis
for cash equivalency, while the second condition stipulates that
the value should reflect a price unaffected by concessions.
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30 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? The Government Sponsored Enterprises (GSEs) included
the following additional comment in their definition of market
value: *Adjustments to the comparables must be made for special or
creative financing or sales concessions. No adjustments are
necessary for those costs which are normally paid by sellers as a
result of tradition or law in the market area; these costs are
readily identifiable since sellers pay these costs on virtually all
sales transactions. Special or creative financing adjustments can
be made to the comparable property by comparison to financing terms
offered by a third party institutional lender that is not already
involved in the property or transaction. Any adjustment should not
be calculated on a mechanical dollar-for-dollar cost of the
financing or concession but the dollar amount of any adjustment
should approximate the markets reaction to the financing or
concessions based on the appraisers judgment.
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31 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? The above statement: 1. 1.Requires an appraiser to
make adjustments for concessions when warranted. 2. Defines which
costs to the seller are considered concessionary and which costs
would not be considered concessionary. 3. Stipulates that the
adjustment for any financing concession should be made to reflect
the markets reaction to the financing concession rather than a
mechanical dollar-for-dollar cost.
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32 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? In the simplest terms, once an appraiser has
identified that a comparable sale sold with a concession, he or she
must measure and develop a dollar equivalent of the noted
concession, then deduct the dollar amount from the comparables sale
price. The net result is a sale price of the comparable which
represents the normal consideration for the property sold,
unaffected by the concession.
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33 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? In the simplest terms, once an appraiser has
identified that a comparable sale sold with a concession, he or she
must measure and develop a dollar equivalent of the noted
concession, then deduct the dollar amount from the comparables sale
price. The net result is a sale price of the comparable which
represents the normal consideration for the property sold,
unaffected by the concession. An appraiser must be able to
recognize and verify what constitutes a seller concession. Costs or
fees that are generally paid by a seller as a result of tradition
or law and are found on virtually all sale transactions are not
considered to be seller concessions. Conversely, other costs or
fees paid by the seller would be defined as seller
concessions.
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34 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? Fees or costs that are generally paid by the seller as
a result of tradition or law and found on virtually all
transactions could include, but are not be limited to: sellers
title policy, transfer tax, escrow fee, deed preparation, and
recording fee. These items are most often thought of as anticipated
or expected costs to be paid by the seller. Fees not generally paid
by the seller may include, but are not limited to: loan origination
fees, appraisal fees, attorney fees, loan application fees, credit
report fees, loan document preparation fees, photocopying fees for
easements and restrictions, mortgage title policy and loan- related
inspection fees, discount fees, etc. For all practical purposes,
any fees or costs associated with the buyers loan would generally
be considered seller concessions if paid by the seller.
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35 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions When Does an Appraiser Adjust For
Concessions? The prevalence of seller concessions does not
eliminate the need to measure the monetary impact of the concession
on the sale price, or negate the need for an adjustment. An
appraiser must evaluate the impact of said concessions, regardless
of the frequency, prevalence, or how typical concessions may be
within a specific market segment or market conditions.
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36 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Methodology Special or Creative Financing
Special or Creative Financing may include owner carried notes or
purchase money mortgages. Concessions will generally fall into two
categories: sales concessions and financing concessions. Sales
concessions would be the inclusion of personal property, settlement
assistance or seller contributions and cash incentives. Financing
concessions are special or creative financing and seller discount
points or buy-down programs.
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37 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Methodology Seller financing may or may not
constitute a seller concession, depending on the terms and
availability of third-party alternatives. The appraiser should
compare the terms of seller financing with those available from
traditional lending sources. If the former is more favorable from
the borrowers perspective, the present worth of the differential
should be quantified. If the latter is more favorable (an unlikely
occurrence), there is no seller concession to be considered.
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38 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Methodology Illustration A:
Dollar-for-dollar (cash equivalent) analysis An appraiser completes
a discounted cash flow analysis of seller financing terms based on
market financing terms available at the time the contract was
negotiated. The present value of the seller-financed mortgage is
the sum of two components: 1. The present value of the favorable or
below market mortgage payment at the market interest rate for the
expected life of the mortgage (10 years Balloon Payment) or the
anticipated life of the loan based on the average life of a loan in
a particular market; and 2. The present value of the future
mortgage balance discounted at the market interest rate for the
anticipated life of the mortgage. Assumptions: Sale price was
$103,000 with a seller-financed note of $95,000 at 6.0% on a
10-year balloon and 30-year amortization. Market terms at the time
the contract was written were 6.5% for 30 years.
40 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Given the sale price of $103,000 and market
equivalent price of $99,737.44, the impact of the favorable
financing on this sale appears to be $3,262.56. Therefore, $99,700
(rounded) would represent the cash equivalent price. This technique
is likely to be less reliable than a matched paired sales analysis.
To the extent possible, it may be best to simply avoid the use of
owner carried notes altogether. This method also may not be as
reliable as it does not account for limited closing costs and other
fees associated with typical third party financing. Important Note:
Although the math suggests a specific dollar amount adjustment, the
appraiser should verify with a party to the transaction the impact
of the dollar amount; a participant may indicate a dollar amount
different than that calculated using the mathematical
analysis.
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41 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Illustration B: Paired Sales Analysis Two
recently sold homes were identical in all aspects, with one
exception: Sale 1 sold 10/2010 for $103,000 with seller-financing.
The note was for $95,000, amortized over 30 years at 6.0%, with a
10-year balloon. Sale 2 sold 10/2010 for $100,000 on third-party
financing. The note was for $95,000, amortized over 30 years with a
fixed interest rate at 6.5%.
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42 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Given that the two homes are identical in
all other aspects, one can measure the impact of the seller
financing by comparing the sale prices. The $3,000 difference can
logically be attributed to the seller financing. Thus, Sale 1 would
require a -$3,000 adjustment. This method accounts for any and all
market-perceived effects of the concession: lower interest rate,
term, less-than typical closing costs, etc. However, such highly
similar comparables may be unavailable for analysis. As such, the
appraiser must extract market supported adjustments for any
physical differences and adjust the comparables for noted physical
differences prior to extraction of any impact the concession may
have had on the price.
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43 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Illustration C: Paired Sale Analysis Suppose
you found three recently sold homes that 212 had the same
bedroom-bath count and were of equal age, condition, amenities and
lot appeal. The only noted difference would be Gross Living Area
(GLA). Sale 1 sold 10/2010 for $103,000 with seller-financing. The
note was for $95,000, amortized over 30 years at 6.0%, with a
10-year balloon. This home had GLA of 1500 sf. Sale 2 sold 10/2010
for $104,500 on third-party financing. The note was for $95,000,
amortized over 30 years with a fixed interest rate at 6.5%. This
home had GLA of 1650 sf. Sale 3 sold 10/2010 for $95,500 on
third-party financing. The note was for $90,000, amortized over 30
years with a fixed interest rate at 6.5%. This home had GLA of 1350
sf.
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44 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Illustration C: Paired Sale Analysis To
determine the impact of the concession (noted on Sale 1) the
appraiser may compare Sale 1 to either Sale 2 or Sale 3. However,
these two sales differed with regard to GLA as compared to Sale 1.
As such, the appraiser must first adjust these sales for GLA. Once,
these two sales are adjusted to Sale 1 for size differential, the
appraiser will then measure the impact of the noted concession.
Step 1; Determine adjustment for GLA Sales 2 and 3 were not
impacted by concessions and are nearly identical with exception to
size. As such, the appraiser can complete a paired sale of these
two sales to extract the adjustment for size. Sale 2 sold for $
104,500 and was 1650 sf while Sale 3 Sold for $ 95,500 and was 1350
sf. There was a $ 9,000 difference in price and 300 sf difference
in size. $ 9,000 divided by 300 sf would indicate that the market
supported adjustment for size would be $ 30/sf.
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45 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Illustration C: Paired Sale Analysis Step 2:
Compare Sale 1 to either Sale 2 or 3. Sale 3 was 150 sf smaller
than Sale 1 and sold for $ 95,500. Given the market supported
adjustment for GLA of $ 30/sf, Sale 3 would require an adjustment
of $ 4,500 and would have an adjusted price $ 100,000. Step 3: Sale
3 has an adjusted price of $ 100,000 and sold on typical third
party financing while Sale 1 sold for $ 103,000 on a seller
financed note. The $3,000 difference would be attributed to the
seller financing, thus the impact of seller concessions was $ 3,000
and the market supported adjustment for this concession would be -
$ 3,000.
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46 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Seller Paid Loan Discount Points or Buy-Down
Programs In some cases, the seller may be asked to pay discount
points to buy down the buyers interest rate to qualify for a loan.
Discount points are based on a percentage of the mortgage loan and
are the dollar amount paid to the lender by the seller to lower the
mortgage rate. As the cost of obtaining financing is generally
incurred by the buyer rather that seller, it would be considered a
concession if the seller pays a fee to buy-down the buyers mortgage
rate. The amount of the buy-down is typically sum-certain and
established during contract negotiations.
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47 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Seller Paid Loan Discount Points or Buy-Down
Programs Illustration: An adjustment for seller-paid points is one
cash equivalency adjustment that is relatively easy to calculate.
The points are applied to the mortgage amount and the result is
deducted from the total sale price. For example, consider a
comparable property that sold for $130,000. The buyer made a
$30,000 cash down payment and financed the balance of the sale
price with a $100,000 FHA-insured mortgage. The seller paid the
lender 251 three points, which is 3% of the mortgage amount of
$100,000 or $3,000. The cash equivalent price of the comparable
sale is therefore $127,000 ($100,000 - $3,000 +$ 30,000). 8
Important Note: Although the math suggests a specific dollar amount
adjustment, the appraiser should verify with a party to the
transaction the impact of the dollar amount; a participant may
indicate a dollar amount different than that calculated using the
mathematical analysis. 8 Appraising Residential Property, 4th
ed.(Chicago); Appraisal Institute, 2007, Page 327-328
Slide 48
48 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Inclusion of Personal Property and Cash
Incentives In some market areas the seller will include personal
property or other incentives to entice the buyer to purchase the
property. Personal property may be in the form of items such as
home furnishings, automobiles, boats or golf carts. In an
assignment appraising real property only, an appraiser needs to
account for personal property and cash incentives included in the
sale and adjust accordingly. An appraiser must use caution when
estimating the value of personal property. If the appraiser does
not have the experience and knowledge to value personal property,
he or she may rely on recognized sources, a personal property
appraiser, or possibly conversations with parties to the sale. The
appraiser may not be able to rely on any values stipulated in the
contract as often times this number is minimized to allow for
maximum financing. USPAP Standards 7 and 8 provide further guidance
on the valuation of personal property.
Slide 49
49 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Inclusion of Personal Property and Cash
Incentives Illustration: If 123 Main Street sold for $200,000 and
included a golf cart in the sale price, the appraiser would
determine the perceived market value of the golf cart from reliable
sources. If the appraiser determines the value of said golf cart is
~ $3,500, then the appraiser would make an adjustment of - $3,500
to arrive at an adjusted sale price of $196,500.
Slide 50
50 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Inclusion of Personal Property and Cash
Incentives Personal property should be excluded from the contract
price of a comparable property; failing to do so would be
misleading. Deducting the contributory value of the personal
property may require a more complex analysis. The complexity
increases for converting non-cash seller concessions such as paid
vacations, airline miles, club memberships, and the like into a
cash equivalent price. This conversion may require additional
interviews with the parties involved in the sale transaction to
determine if a monetary value had been agreed upon for the non-cash
seller concessions, or if there is an actual dollar value
attributed to a specific sale concession such as a golf club
membership or a vacation.
Slide 51
51 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Settlement Assistance or Seller
Contributions The most common type of seller concession is
settlement assistance to the buyer. Settlement assistance exists
when the seller pays any fees or costs other than what is generally
paid by a seller as a result of tradition or law and are found on
virtually all sales transactions. The sellers payment of items such
as: loan origination fees, appraisal fees, attorney fees, loan
application fees, credit report fees, survey fees, fees for
preparation of loan documents, fees for photocopying easements and
restrictions, mortgage title policy, loan-related inspection fees,
and recording fees, would all be considered concessionary in
nature. These fees, when paid by the seller, are considered to be
concessionary in nature if they are not paid by the seller as a
result of convention or law on virtually all sale
transactions.
Slide 52
52 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Settlement Assistance or Seller
Contributions Settlement assistance is similar to loan discount
points paid by the seller as it is a sum-certain amount generally
agreed upon during contract negotiations. It is reasonable to
conclude that payment of this type concession or lack thereof would
have been a deciding factor and most likely impacted the price the
seller was willing to accept. As such, the impact of said
concession may be at least equal to the actual dollar amount of the
concession. To determine the impact of settlement assistance on the
contract price of a comparable sale, the appraiser may rely on
deductive reasoning (along with the appropriate verification) or an
interview with one of the agents or other parties to the sale.
Slide 53
53 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Settlement Assistance or Seller
Contributions Illustration: When verifying a transaction with the
selling agent an appraiser is informed that the seller paid $5,000
of the buyers closing costs or settlement fees. The home sold for a
contract price of $155,000. The agent indicated that if the seller
had not been asked to pay $5,000 in concessions, he/she would have
accepted an offer of $150,000. As such, an appropriate adjustment
would be $5,000. Deductive reasoning (along with the appropriate
verification) would also suggest that this may be a reasonable and
supportable conclusion.
Slide 54
54 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Statistical Analysis Statistical tools may
be employed to support adjustments for seller concessions. Because
of the number of independent variables required for analysis of
both residential and non-residential properties, the most useful
statistical tool is multiple linear regression. The number of
variables requires the utilization of an adequate sample size of
transactions with and without seller concessions. The fact that
concessions may take several forms complicates the regression
modeling process. Nonetheless, multiple linear regression may be a
valuable analytical tool in quantifying and supporting adjustments
for seller concessions. The appraiser should have adequate
knowledge of, and experience in, statistical methodology (including
appropriate sample size) in order to competently utilize such
tools. The following are source materials that may be useful to the
appraiser in statistical analysis: (See page 12 of APB Valuation
Advisory #2 )
Slide 55
55 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Concessions and Non-residential Property
(other than 1-4 unit properties) If concessions are present, the
appraiser would use the same methodology as with residential
property. However, given that non-residential property is usually
significantly differentiated in terms of physical and economic
characteristics (e.g., lease and occupancy rates, lease terms and
expiration dates, etc) the results may be less reliable. (See pages
13-15 of APB Valuation Advisory #2)
Slide 56
56 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Impact and Application of Concessions in the
Cost Approach and Income Approach Cost Approach - Concessions may
impact this approach in the following situations: If the land
residual technique, abstraction method or the allocation method is
used to support site value, comparable sales with seller
concessions should be adjusted for any impact said concession had
on the sale price prior to application of this technique. When
using market extraction to determine Reproduction Cost New (RCN) an
appraiser would need to adjust the sale price of any comparable
that sold with seller concessions prior to the analysis. If
depreciation estimates are derived by use of comparables with
seller concessions, the appraiser would need to adjust sales for
any impact said concession had on the sale price prior to
depreciation analysis.
Slide 57
57 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Impact and Application of Concessions in the
Cost Approach and Income Approach Income Approach - Concessions may
impact this approach in the following situations: Capitalization
Rate (Ro) Development of a Cap Rate by extraction from comparable
sales with seller concessions may be misleading unless the
appraiser measures and deducts the impact of said concession from
the sale price. The appraiser should deduct the impact of any
concessions on the sale price prior to determining an appropriate
capitalization rate. Gross Rent Multiplier (GRM) or Gross Income
Multiplier (GIM) Development of GRM and GIM by extraction from
comparable sales with seller concessions may be misleading unless
the appraiser measures and deducts the impact of said concession
from the sale price. The appraiser should deduct the impact of any
concessions on the sale price prior to determining an appropriate
GRM or GIM.
Slide 58
58 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Impact and Application of Concessions in the
Cost Approach and Income Approach Income Approach (Cont) Master
Leases/Rent Guarantees It is not uncommon for sellers of
unstabilized properties to guarantee the purchaser a specified
minimum income for a fixed period, in order to achieve a price
reflective of stabilization. A portion of the sale price is placed
in escrow and is reimbursed to the buyer if the agreed-upon level
of revenue is not achieved during the master lease term. While the
sale prices of such transactions may arguably be reflective of an
as stabilized price, it is clear that the price is not that for the
property on an as is basis, as of the date of sale. The most
supportable adjustment in such instances is based upon the
quantified impact of the master lease as reported by buyer and
seller. If such information is not available, the adjustment may be
reasonably based upon the present worth of the revenue shortfall
during the term of the master lease.
Slide 59
59 APB Valuation Advisory #2:(Cont.) Adjusting Comparable Sales
For Seller Concessions Suggested Further Reading (See APB Valuation
Advisory #2, page 17)
Slide 60
60 APB Valuation Advisory #3: Residential Appraising in a
Declining Market\ Executive Summary Many appraisers and users of
appraisal services have raised important questions regarding
appraisals prepared in declining markets. Some of the questions
that have been asked include: I. How should an appraiser define a
declining market? What has to happen in a market for an appraiser
to designate it declining? Defining a declining market is
difficult. Many appraisers and users of appraisal services differ
on what constitutes a declining market. This document suggests that
it is incumbent on the appraiser to develop the definition of a
declining market or obtain a supportable definition from a
legitimate source, preferably not the client. Regardless of how the
definition is obtained the appraiser should state and illustrate
what the term declining market means in the context of the
appraisal report. Credibility is added by citing the evidence upon
which the conclusion is based.
Slide 61
61 APB Valuation Advisory #3: Residential Appraising in a
Declining Market What databases or publications are available to
help an appraiser support an opinion of market trends? Many
appraisers find it difficult to support their opinions of market
trends because of lack of retrievable and verifiable market data;
often the quantity of comparable sales does not support statistical
analysis. National, regional or local databases can be used to
support evidence of market trends. [BLC Note: The New Jersey
Association of Realtors announced in the October 2013 Edition on
New Jersey Realtor that they will be providing state-wide, county,
and municipal market data on a monthly basis. Go to njar.com/10K or
visit NJARs YouTube channel at youtube.com/realstoryNJ.]
Slide 62
62 APB Valuation Advisory #3: Residential Appraising in a
Declining Market Databases While the types of databases listed in
this document are used by many appraisers, others are available and
may be equally or more relevant to appraisers work. Some
residential databases can present sophisticated analysis as part of
their programs. The appraiser must be careful to read the
background information of any database considered to at least
understand about possible biases and if the bias is too great, to
eliminate the data. Users of secondary data must understand the
process of collecting and analyzing the data to ensure the use of
the information is applicable in an appraisal. This means
appraisers are responsible for knowing the source, applicability,
and reasonableness of the data and analysis prepared by others that
is presented in their appraisal reports. Most clients do not ask
residential appraisers to perform significantly detailed market
analyses (scope of work). However, clients are asking appraisers to
indicate if markets are declining, increasing or stable. Support
for such conclusions can be accomplished with numerous methods.
Section II is not intended to eliminate other valid tools used by
appraisers but does suggest that any other tools utilized be tested
against other methodologies to ensure their validity.
Slide 63
63 APB Valuation Advisory #3: Residential Appraising in a
Declining Market If a client instructs an appraiser to include, or
exclude, data from short sales or REO comparables, does that comply
with the definition of value in the report? Besides market value,
what other defined values could an appraiser use? Clients can
stipulate conditions on appraisal development but even if asked,
appraisers cannot develop or report misleading analyses, opinions,
or conclusions. Other value terms that are used in practice
include: Disposition value Liquidation value Other client-defined
terms including durable value and foreclosure value Clients can
stipulate conditions on appraisal development but they cannot ask
an appraiser to develop and report a misleading analysis or
assignment results. If the client stipulates the inclusion or not
of a particular type of comparable, the appraiser may have to
revisit, with the client, the type of value developed.
Slide 64
64 APB Valuation Advisory #3: Residential Appraising in a
Declining Market When labeling a market as declining, should the
appraiser limit the criteria to an area equal to the neighborhood,
or should a market study include a larger or smaller geographical
area? 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.
Slide 65
65 APB Valuation Advisory #3: Residential Appraising in a
Declining Market Is it an appraisers responsibility to verify data
used in an appraisal? Should an appraiser know what the primary
motivations were of the buyers of each comparable? If an appraiser
is developing an opinion of market value it is necessary to decide
who the most likely type of buyer would be. In some markets, the
most likely buyer is an investor who requires an entrepreneurial
incentive and in other markets the most likely buyer is an
owner/user who decides what property to purchase based on his or
her specific needs. Determining the most likely type of buyer
requires data verification, which is also required by USPAP. The
intended use of the appraisal, based on communication with the
client, influences the type and definition of value to be used in
the assignment, which in turn guides the selection of comparable
transactions.
Slide 66
66 APB Valuation Advisory #3: Residential Appraising in a
Declining Market In declining markets where appraisers need to
adjust for differences in buyer motivations, may an appraiser make
condition-of-sale adjustments? What are reasonable methods for
supporting adjustments in declining markets for conditions of sale?
Appraisers can use condition-of-sale adjustments to compensate for
the motivations of the participants in the sale. If the most likely
buyer is an investor, it may be necessary to adjust for the
required entrepreneurial incentive. When using secondary market
appraisal forms the appraiser should account for conditions of sale
(although this applies in any market, not just those that are
declining).
Slide 67
67 APB Valuation Advisory #3: Residential Appraising in a
Declining Market Four generally-accepted techniques may be utilized
to support adjustments in appraisals. These techniques include the
following: Extraction from comparable sales also known as paired
sales analysis. Depreciated cost Cost of construction less all
applicable depreciation. Income capitalization If rental
differences reflect the market adjustments. Buyer interviews If
truthful answers can be obtained, this technique most clearly
mirrors market reaction to a feature or an arrangement. In
declining markets, the most commonly-used technique for supporting
condition-of-sale adjustments is extraction from comparable sales.
This is often done by paired-sales analysis.
Slide 68
68 APB Valuation Advisory #3: Residential Appraising in a
Declining Market Integration of the Opinion of Market Trends into
the Appraisal Analysis In many appraisal analyses, the only need
for adjustment for declining markets is in the cost approach (in
the form of external obsolescence). In most circumstances, an
appraiser that uses comparable sales from the same market as the
subject should already reflect market conditions. The income
approach should already reflect a weak market because of lower
rental rates and lower gross rent multipliers..
Slide 69
69 APB Valuation Advisory #3: Residential Appraising in a
Declining Market In declining markets, what statistical tools are
available to support adjustments and rates of change in market
conditions? More and more statistical tools are becoming available
to appraisers and valuation companies. While development of
Automated Valuation Models (AVM) or Computer Assisted Mass-
Appraisal (CAMA) may be most closely associated with large firms
with considerable assets, current technology and databases allow
appraiser-practitioners to access and develop their own statistical
tools to support opinions about market trends..
Slide 70
70 APB Valuation Advisory #3: Residential Appraising in a
Declining Market In conclusion, when appraising during a period of
declining markets: 1.It is incumbent on the appraiser to develop or
adopt a supported definition for a declining market, and to support
a conclusion of that decline in his or her appraisal; 2. Several
sources of data are available to support conclusions of declining
values; 3. In addition to market value, numerous definitions of
value exist; one or more of these other definitions may better
describe the nature of competitive transactions in the relevant
marketplace and meet the clients needs; 4. The market area may be
more relevant for the collection and analysis of trend data;
Slide 71
71 APB Valuation Advisory #3: Residential Appraising in a
Declining Market 5. Verification with one or more of the parties to
the transaction will be needed to understand the motivations of
market participants and to enable forming a conclusion of the
likely buyer type as a subset of the highest and best use
conclusion; this in turn influences the selection of the value
definition (in conjunction with communication with the client),
which in turn guides the selection of comparable transactions; 6.
Supported adjustments should be made where necessary for condition-
of-sale adjustments in declining markets; and 7. Statistical
methods may offer a way to support a variety of adjustments. [End
of Executive Summary]
Slide 72
72 APB Valuation Advisory #3: Residential Appraising in a
Declining Market I. How Should an Appraiser Define a Declining
Market? (Page 24) II. What Databases are Available to Support a
Market Trend Conclusion? (Page 26) III. What are Some Alternative
Value Definitions? (Page 27) IV. Defining a Market vs. a
Neighborhood (Page 30) V. Verification of Data (Page 32) VI.
Support for Adjustments (Page 35) VII. Integration of the Opinion
of Market Trends into the Appraisal Analysis (Page 37) VIII. Using
Statistical Tools in the Development of Appraisal Analysis (Page
37) Glossary of Terms (Page 41) Bibliography and Other Readings on
the Subject (Page 49)
Slide 73
73 Revised APB Valuation Advisory #4 Identifying Comparable
Properties Important Note: This revised APB Advisory #4 is being
issued to make edits to a Supreme Court Case citation on page 9 for
the Mississippi & Rum River Boom Co. v. Patterson, 98 U. S. 403
(1878). Additional edits were made to add complete text titles and
correct page references in the Glossary of Terms and Definitions
beginning on page 13. Date Issued: September 26, 2013 Application:
Residential and Non-residential Real Property
Slide 74
74 Revised APB Valuation Advisory #4 Identifying Comparable
Properties Comparability analysis is a fundamental study in
determining property value. This analysis involves a side-by-side
examination of physical and transaction characteristics of the
identified comparable properties relative to the subject. The
reliability of this valuation technique relies heavily on the
proper selection of suitable comparable properties. This guidance
discusses the terms and definitions associated with a comparable
property, the characteristics generally considered for determining
comparability; and the degree of suitability of a property as a
comparable. The guidance addresses whether there is a threshold of
differences, which based on their magnitude, automatically
disqualifies a property as comparable. The guidance examines a
closely related topic; the differences between the terms, market
area and neighborhood and a broad summary of the characteristics to
consider for delineating a market area.
Slide 75
75 Revised APB Valuation Advisory #4 Identifying Comparable
Properties I. Introduction Real property valuation considers three
approaches to value which are distinctly different given their
underlying foundational premises. However, all three approaches
rely on a comparability analysis in developing credible results
under each approach. The Sales Comparison Approach provides an
indication of value based on units of comparison derived from sales
of similar or comparable properties. The Cost Approach requires
land value comparability analysis, cost comparability analysis, and
market extracted depreciation comparability. The Income Approach
requires income/lease comparability, expense comparability, income
potential comparability, capitalization rate, and minimum
acceptable rate of return on investment comparability. All of the
above approaches rely on the same fundamental underpinnings of
determining comparability. Therefore the identification of what
constitutes a similar, or comparable property is critical to the
proper application of the three approaches to value. In this
Advisory we will provide guidance to assist in the identification
of comparable properties.
Slide 76
76 Revised APB Valuation Advisory #4 Identifying Comparable
Properties II. Property Characteristics The principle of
substitution is the foundation of comparability. It states that a
rational buyer will not pay more for an item than the cost of an
acceptable substitute. The appraiser must analyze transactions of
closed sales, pending sales, and listings of properties and
determine which are acceptable substitutes by weighing the elements
of comparison. In developing an opinion of value for the subject
property, the appraiser attempts to answer the question What would
a buyer of the comparable property have paid for the subject
property given the observed sale price (or asking price, in the
case of a listing) for the comparable property? Generally speaking,
the more similar a competing property is to the subject property,
the better. A high degree of similarity in property characteristics
between the subject property and the available properties improves
comparability. Many courts recognize ...that similar does not mean
identical, but means having a resemblance, and that property may be
similar in the sense in which the word is here used though each
possesses various points of difference. 2
Slide 77
77 Revised APB Valuation Advisory #4 Identifying Comparable
Properties II. Property Characteristics The appraiser weighs the
relevance of the property characteristics (including, but not
limited to: location, economic, legal and physical factors) based
on the importance assigned by market participants. The most
relevant property characteristic(s) are then examined on each
available property. By examining and weighing the relevant property
characteristics, the appraiser is better prepared to select the
most appropriate comparable properties available. Another court has
defined a comparable property as one that Has similar use,
function, and utility; is influenced by the same set of economic
trends and physical, governmental, and social factors; and has the
potential of a similar highest and best use. 3 3 Montana Code
Annotated 2011, 15-1-101, retrieved from
http://data.opi.mt..gov/bills/mca/15/1/15 1 101.htm on
08/26/2012.
Slide 78
78 Revised APB Valuation Advisory #4 Identifying Comparable
Properties II. Property Characteristics Because real property is
truly unique, there are always differences between the property
under analysis and the selected competing properties used for
comparative purposes. When considering a property as a comparable,
the appraiser should first ask Is the property sufficiently
similar, in all fundamental aspects to the subject property? This
leads to the critical analysis of evaluating the property
characteristics that make a property sufficiently similar. The
following chart below summarizes the primary elements of
comparison: (Page 55)
80 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability Sales information4: Before a
property can be considered a comparable, the appraiser must confirm
the type of sale transaction. In other words, did the sale occur
under conditions commensurate with the type and definition of value
under consideration? In the case of market value, the following
factors must be considered: 4 Sources of sales information are
discussed in APB Valuation Advisory #2: Adjusting Comparable Sales
For Seller Concessions.
Slide 81
81 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) 1. Did the sale
convey property rights similar to the property rights being
appraised? Were the property rights similarly encumbered or
unencumbered at the time of sale? 2. Were both the buyer and seller
typically-motivated? 3. Were both parties well informed or advised
and each acting in what they considered their own best interests?
4. Was the property allowed exposure in the open market for a
reasonable length of time? 5. Was payment made in cash or its
equivalent? 6. Was financing, if any, on terms generally available
in the community at the time of sale and typical for the property
type in its locale? 7. Did the price represent normal consideration
for the property sold unaffected by special financing amounts
and/or terms, services, fees, costs, or other credits incurred in
the transaction? 5 5 Real Estate Valuation in Litigation, 2nd
Edition, pp. 204-205.
Slide 82
82 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) The appraisers
experience and skill in consistently observing the market coupled
with ongoing interviews with buyers, sellers, and brokers as to
what factors drive local values assist in providing credible value
indications by comparison. In addition to closed sales, knowledge
of listings and pending (under contract) properties may be used to
demonstrate the most current market activity and current
competition considered by potential buyers. Because the final
conveyance amount is unknown, listing comparables and pending sales
should be used cautiously, but are often helpful: (a) in
establishing the upper limit of probable value in the final
reconciliation, or (b) as guidance in times of rapidly changing
market conditions.
Slide 83
83 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) The appraiser cannot
control the quality or suitability of the activity available in the
market during the timeframe of analysis. Information could be
limited in many markets, and many properties do not lend themselves
to simplified comparison. In such cases, analysis of older
transactions may also be required due to limited current activity
in the market; however, such data should be cautiously considered.
It is necessary for the appraiser to clearly express these
limitations and to reconcile the reliability of the approach where
a substantial number of the elements are sufficiently
different.
Slide 84
84 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) Magnitude of
adjustments: In markets where competing properties are highly
similar to the subject property, it is unlikely that large and/or
numerous adjustments would be required. However, in markets that
are less homogeneous or have limited market activity, it is
possible that large and/or numerous adjustments may be necessary.
When a comparative analysis requires large and/or numerous
adjustments, questions may arise regarding the true comparability
of the property. At what point is a competing property not
considered comparable? While there is no single source to determine
comparability, it is up to the appraiser within the context of the
scope of work to determine whether the property is comparable and
will lead to credible assignment resultsThe degree of similarity
varies from case-to-case, so neither appraisers nor the courts can
arrive at a formula to test comparability or similarity.
Slide 85
85 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) Some of the most
common written guidelines on this issue are the appraisal
underwriting guidelines issued by Government Sponsored Enterprises
(GSE) (e.g., Fannie Mae). It is important to recognize that these
appraisal guidelines are written primarily to determine whether or
not a property is eligible for purchase on the secondary mortgage
market, and not as a definitive tool to determine comparability.
GSE guidelines also apply exclusively to residential properties,
generally speaking the most homogeneous property class nationally
with sufficiently similar properties transacting within the
shortest period of time. It is typical to find that appraisals of
non-residential properties, complex residential properties, and
properties in unstable markets require the use of comparable
properties that may possess greater differences.
Slide 86
86 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) According to Fannie
Mae, a property is comparable if the market considers it a
competitive substitute. Once a property is determined to be
comparable by the appraiser, then appropriate analysis and market
adjustments are applied. Analysis and adjustments to comparable
sales must be based on market data for the particular neighborhood
and for competing locations not on predetermined or assumed dollar
adjustments. Adjustments must be made without regard for the
percentage or amount of the dollar adjustments.7 (Bold added for
emphasis.) The key is for the appraiser to adequately explain and
support the rationale for using the comparable properties selected
in the appraisal report. Such narrative assists in demonstrating
the reliability and credibility of the opinion of value. Where the
comparable properties possess significant differences from the
subject property, additional comparable properties may be included
for additional support of the opinion of value.
Slide 87
87 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) Appropriate
analysis, consideration, and explanations are necessary regardless
of the amount of an adjustment. If numerous adjustments or a
singular atypical adjustment is required, then an explanation and
support (i.e., stating search criteria and results) regarding the
lack of more similar properties that require fewer adjustments
should be explained. If the subject property has a significant
element of comparison that competing properties lack or conversely,
if the subject property lacks a significant element of comparison
that competing properties possess, explanation is necessary. In
such situations, generally recognized appraisal methodology would
dictate an effort to use comparable properties that are both
superior and inferior to the subject for that specific element of
comparison (this process is often referred to as bracketing).
Comparing properties with superior, similar, and inferior elements
of comparison to the subject property may assist in validating the
adjustments applied.
Slide 88
88 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) Following is an
illustration of bracketing on two physical features of a
residential subject property. The features bracketed in this
illustration are the subject propertys gross living area above
grade and the garage count. This is a generalized illustration of
the sales comparison analysis focusing on these two units of
comparison only (highlighted in yellow). In the following example,
the subject propertys gross living area (GLA) was measured at 2,200
sq. ft. The GLA feature is bracketed by comparable property # 1
that has an inferior GLA at 1,950 sq. ft. and by comparable
property # 2 that has a superior GLA at 2,500 sq. ft. Similarly,
the subjects 1-car garage amenity is bracketed by comparable
property # 1 that has a superior garage count of 2-cars and by
comparable property # 2 that has an inferior garage amenity of no
garage.
90 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) In this
illustration, the subjects sale price of $183,000 is also bracketed
by the pre-adjusted sales prices of the comparable properties
($180,000 to $185,000). Both downward and upward adjustments are
applied resulting in the adjusted sale price range of $183,000 to
$184,500 (the value bracket of probable range) for the subject
property. When a sales comparison approach requires substantial and
varied adjustments, the reconciliation should enable the reader to
understand why the sales were used. Adequate reconciliation is a
required and integral part of any value conclusion. Standards Rule
1-6(a) of the Uniform Standards of Professional Appraisal Practice8
states: In developing a real property appraisal, an appraiser must
reconcile the quality and quantity of data available and analyzed
within the approaches used. 9
Slide 91
91 Revised APB Valuation Advisory #4 Identifying Comparable
Properties III. Comparable Suitability (Cont.) Highest and Best
Use: A necessary consideration for determining if a property is
comparable is whether the highest and best use of the subject
property and the competing property is the same. Appraisers have a
special responsibility to scrutinize the comparability of all data
used in a valuation assignment. They must fully understand the
concept of comparability and should avoid comparing properties with
different highest and best uses, limiting their search for
comparables, or selecting inappropriate factors for comparison. 10
Likewise, the Supreme Court of the Unites States in Mississippi
& Rum River Boom Co. v. Patterson, 98 U.S. 403 (1878), states
that the highest and best use of a property should consider a
change in current use of a property by reference to the uses for
which the property is suitable, having regard to the existing
business or wants of the community, or such as may be reasonably
expected in the immediate future. These factors can be applied to
both the subject property and the selection of comparable
properties.
Slide 92
92 Revised APB Valuation Advisory #4 Identifying Comparable
Properties IV. Market Area and Neighborhood Characteristics
Location is a primary consideration in the comparable property
selection process. Ideally, a comparable property would compete
with the subject property in location as well as other
characteristics. When considering a comparable propertys location
competitiveness to the subject property, the subject propertys
local market performance and characteristics are measured alongside
the comparable propertys local market. Preferably, the comparable
property is located in the subject propertys market area. While the
terms market area and neighborhood are often used interchangeably,
in truth, the two terms have distinctly different meanings, in both
residential and non-residential appraising. Data and analysis
related to a neighborhood is broad and general in nature, whereas
data and analysis related to a market area is specific and related
to a particular property type or category. 11 The confusion between
these two concepts arises in practice because the method of
delineation for both a market area and a neighborhood follow the
same four basic principles. Both can be defined by their physical
boundaries (man-made and natural) and their intangible boundaries
social and political).
Slide 93
93 Revised APB Valuation Advisory #4 Identifying Comparable
Properties IV. Market Area and Neighborhood Characteristics
Appraisers make a distinction between the neighborhood in which a
property is situated and the market area in which comparable
properties will be found are located. Market area is formally
defined as the geographic or location delineation of the market for
a specific category of real estate, i.e., the area in which
alternative, similar properties effectively compete with the
subject property in the minds of probable, potential purchasers and
users. In contrast, a neighborhood is defined more generally as a
group of complementary land uses. 12 In other words, the
neighborhood boundaries in which the subject property is located
may contain residential properties as well as non-residential
properties that serve the residents of the neighborhood, whereas
the boundaries of the market area for the subject property is based
on the area in which similar properties compete with one another.
In some cases, the subject propertys neighborhood and market area
may have the same boundaries, but in other cases the market area
may contain several neighborhoods or portions of different
neighborhoods. A market area is defined by the type of property,
the type of transaction (rental or sale), the geographic area in
which competition exists, and the homogeneity of properties within
its boundaries. 13
Slide 94
94 Revised APB Valuation Advisory #4 Identifying Comparable
Properties IV. Market Area and Neighborhood Characteristics The
geographic area used for selecting comparable properties depends on
the property type. For a large industrial property, regional or
national market areas may be relevant since this is the market in
which buyers of similar properties effectively compete. For a
(non-complex) residential property, adequate sales data may be
available within a few blocks of the subject property.14
Neighborhoods tend to define the primary market area for most
non-complex residential properties since homes in the area
immediately surrounding a property tend to attract like-minded
buyers. However, it is recognized that competitive neighborhoods
within a larger market area might need to be considered. Care
should be taken to analyze and align the specific neighborhood
characteristics to ensure they are truly competitive. Note: Market
discussion for non-residential properties starts on page 61.
Slide 95
95 Revised APB Valuation Advisory #4 Identifying Comparable
Properties V. Summary of Valuation Advisory #4 starts on page 62
VI. Glossary of Terms and Definitions starts on page 63 APPENDIX I:
Examples of Physical Comparability Factors starts on page 66
APPENDIX II: Suggested Further Reading starts on page 67
Slide 96
96 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice TO: All
Interested Parties FROM: John S. Brenan Director of Appraisal
Issues RE: Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice DATE: October
8, 2013
Slide 97
97 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice At the request
of its Industry Advisory Council, The Appraisal Foundation has
drafted the attached white paper on Alternative Valuation Products
and the Uniform Standards of Professional Appraisal Practice
(USPAP). The white paper is intended to provide information to
assist appraisers, users of appraisal services, and others, with a
greater understanding of Alternative Valuation Products and their
use in the marketplace. The paper also attempts to view these
products in light of an appraisers USPAP obligations. All
interested parties are encouraged to comment in writing before the
deadline of December 31, 2013. Respondents should be assured that
each comment will be thoroughly read and considered.
Slide 98
98 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice Written
comments on this white paper can be submitted by mail, email and
facsimile. Mail: Comments: Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice (USPAP) The
Appraisal Foundation 1155 15th Street, NW, Suite 1111 Washington,
DC 20005 Email: [email protected] Facsimile:
(202) 347-7727
Slide 99
99 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice IMPORTANT
NOTE: All written comments will be posted for public viewing,
exactly as submitted, on the website of The Appraisal Foundation.
Names may be redacted upon request. The Appraisal Foundation
reserves the right not to post written comments that contain
offensive or inappropriate statements. If you have any questions
regarding the attached exposure draft, please contact John S.
Brenan, Director of Appraisal Issues at The Appraisal Foundation,
via e-mail at [email protected] or by calling (202)
624-3044.
Slide 100
100 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice Introduction
In the appraisal industry, particularly the residential mortgage
sector,1 there has been a proliferation of products and processes
attempting to provide alternatives to traditional appraisals in
recent years. The primary factors behind development of these
Alternative Valuation Products (AVPs) are generally to reduce cost
and improve timeliness. For many years appraisers heard tales of
someday being replaced by a black box that could determine the
value of a property without the judgment that an appraiser may
bring. In fact, to some extent this has come to pass with products
that exist and are in use today, such as Automated Valuation Models
(AVMs). Interestingly, however, there are many cases where an
appraisers training, experience and expertise are necessary to
provide a credible analysis and, ultimately, opinion of value.
Slide 101
101 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice This paper
will attempt to: identify a number of the products being used today
as alternatives to an appraisal; describe who uses these
alternative products and why14 discuss who performs assignments
utilizing alternative products; and examine these 15 products in
light of the Uniform Standards of Professional Appraisal Practice
(USPAP). While this document is neither intended to be an
exhaustive study of all AVPs, nor a thorough examination of their
overall impact in the collateral valuation marketplace, it is hoped
that this paper can be an aid to understanding AVPs and why they
are being used. It is our belief that a USPAP-compliant appraisal
completed by a competent and ethical appraiser remains the gold
standard, incorporating relevant data and the analytical expertise
provided by an appraiser. However, we fully recognize that AVPs
play an important role in the valuation marketplace, and we would
be remiss not to examine that role in a meaningful manner.
Slide 102
102 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice What is an
Alternative Valuation Product (AVP)? For purposes of this paper, we
will define an Alternative Valuation Product (AVP) as: A product
that communicates an opinion of value (or price) other than a
traditional appraisal. Note: In the residential mortgage valuation
sector, this means something other than an appraisal developed and
reported using standard Fannie Mae/Freddie Mac appraisal report
forms. It should be noted that not everyone in the residential
mortgage sector defines an AVP as noted above. However, this is the
definition that we will base this paper on and AVPs will be viewed
in comparison to appraisal reports prepared using standard Fannie
Mae/Freddie Mac appraisal report forms.
Slide 103
103 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice As indicated
in the preceding paragraph, AVPs may offer opinions of value or
price. Although some clients may not distinguish between these
terms, it is worthwhile to note that USPAP does. USPAP2 defines the
terms as follows: VALUE: the monetary relationship between
properties and those who buy, sell, or use those properties.
Comment: Value expresses an economic concept. As such, it is never
a fact but always an opinion of the worth of a property at a given
time in accordance with a specific definition of value. In
appraisal practice, value must always be qualified - for example,
market value, liquidation value, or investment value. PRICE: the
amount asked, offered, or paid for a property. Comment: Once
stated, price is a fact, whether it is publicly disclosed or
retained in private. Because of the financial capabilities,
motivations, or special interests of a given buyer or seller, the
price paid for a property may or may not have any relation to the
value that might be ascribed to that property by others. As
indicated by the definitions above, USPAP does not provide for an
opinion of price, since it defines price as a fact.
Slide 104
104 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice What are some
common examples of AVPs? There are a number of AVPs in the
marketplace, with the number seeming to increase frequently. The
list below is not intended to be exhaustive in nature; rather it is
illustrative of some common AVPs in use today, along with a brief
description of each.
Slide 105
105 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice Broker Price
Opinions (BPOs) One of the most commonly- recognized AVPs, BPOs
have been used for many years by real estate brokers in the
ordinary course of their real estate brokerage businesses. The
product was originally designed to assist homebuyers and sellers in
real estate listing and sale transactions, but in recent years its
use has been expanded for additional purposes. There is no single
recognized BPO form or format; many have been developed over the
years and tweaked for the users specific needs. The sample BPO form
included in this document (see Appendix) was developed by Freddie
Mac for loan servicing purposes. [Example of a Brokers Price
Opinion (BPO) Page 87]
Slide 106
106 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice Comparative
Market Analysis (CMAs) A CMA is a product which originally was used
in a very similar fashion to BPOs, but could also be used by agents
(i.e., real estate salespeople). Like BPOs, in addition to closed
sales CMAs may also use pending sales and active listings to assist
homebuyers and sellers. There is also no single CMA form or format
that is universally utilized. [See sample page 89]
Slide 107
107 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice Automated
Valuation Models (AVMs) In a sense AVMs are, in fact, the black
boxes some appraisers feared for many years. AVMs utilize a great
deal of data and mathematical formulae to calculate estimates (or
opinions) of value. Although some appraisers retain negative
feelings towards AVMs, these products have proven to have a place
in the valuation marketplace. The downside of AVMs is that they are
completely reliant on available data, which might require the type
of filtering performed by an appraiser. One variation of an AVM is
known as an Appraiser assisted AVM, which is intended to lend an
appraisers expertise to the value calculated by an AVM.
Slide 108
108 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice II. What types
of clients order AVPs ? To better understand what types of clients
use AVPs, it may be best to first identify those clients and
transactions where AVPs are not allowed. Under Title XI of FIRREA,
all federally-related transactions 3 and real estate-related
transactions 4 require a USPAP compliant appraisal, performed by a
state-licensed or state-certified appraiser. In these cases, the
use of an AVP is not permitted as the basis for collateral
evaluation. It is also important to recognize that the federal
financial regulatory agencies publish guidelines for appraisals, as
well as what they refer to as evaluations. 5 While an AVP may not
be used if an appraisal is required, it is possible that some AVPs
may be used in certain circumstances when an evaluation is
required. Additional guidance from the Appraisal Standards Board
(ASB) on this topic may be found in Advisory Opinion 13 (AO-13),
Performing Evaluations of Real Property Collateral to Conform with
USPAP. 6
Slide 109
109 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice AVPs are
commonly requested by lenders (for transactions that do not fall
under Title XI of FIRREA), loan servicers, government-sponsored
enterprises, hedge fund companies, and other entities in capital
markets. In addition, AVPs are sometimes used by property owners,
potential homebuyers, insurance companies, marketing agencies, as
well as a number of others.
Slide 110
110 Draft White Paper Alternative Valuation Products and the
Uniform Standards of Professional Appraisal Practice Why do clients
order AVPs in lieu of appraisals? If clients are not legally
required or otherwise obligated, why would they order an AVP
instead of an appraisal? Although there may be a number of reasons,
they can essentially be classified into these categories: to
utilize different or additional analytics to value the collateral;
to reduce the time necessary to obtain a valuation; and/or to
reduce the cost associated with obtaining a valuation. One such
example can be found in the default mortgage-servicing sector.
Clients often require valuations for each asset several times a
year. Many of these clients feel the opinion of value may not be as
important as the data presented; as a result, the cost of acquiring
appraisals on a property several times each year is considered cost
prohibitive.
Slide 111
111 Draft White Paper Alternative Valuation Products and the
Uniform