Realtors understand that one of the most common issues with property appraisals is the amount and type of appraisal adjustments. Sometimes, borrowers, agents, and lenders question the validity of reports, asking questions regarding the value of adjustments. Contrary to popular belief, appraisal-related adjustments are not merely the appraiser’s guesses. Also, note that they are not calculated figures. Appraisers don’t use them to mathematically force a preconceived or predetermined adjusted market value estimate to support a value conclusion for the relevant property.
A CoreLogic study revealed that adjustments are made in 99.8% of all appraisals. Did you know that the most frequent appraisal adjustments usually involve objective features of a house, such as rooms, living area, car storage, and porch, etc.?
Appraisal adjustments are important, and if an appraiser fails to support their adjustments, then the appraisal results will be subject to questions, leading to many possible adverse outcomes.
What is an Adjustment?
An appraisal adjustment is usually a small line-item addition or subtraction from the value of a comparable property. This is done to account for any changes in demand attributable to each external and internal factor. It is worth noting that each comparable or difference taken separately will not provide a reasonable or sufficient basis for estimating the property value. However, when a suitable selection of sold and active comparables is adjusted, it often provides strong and reliable statistical support for a value estimate that accurately represents the market value.
If the adjustments are accurate, then the range of possible values is narrow, and the report is more accurate. So, this is the main reason professional appraisers place a lot of emphasis on collecting relevant and substantial market data in order to make the most accurate adjustments.
Common Appraisal Adjustment Factors
Here are some of the factors that affect appraisal adjustments:
Conditions of sale, like motivation
Property rights conveyed
Market conditions that affect the subject property
Location of the property
Physical characteristics of the land and improvements
Several use considerations, like water and riparian rights, zoning, environmental issues, and building codes
Appraisal-related Adjustments and USPAP
A majority of adjustments should directly come from the real estate market that affects the subject property. Also, note that the Uniform Standards of Professional Appraisal Practice (USPAP) require property appraiser familiarity with the specific market area where the relevant property is located to complete the required property appraisal process. However, keep in mind that there are some unique properties that sometimes require the calculation or extraction of reasonable adjustments via extraordinary means.
Calculation of Appraisal Adjustments
You can calculate property adjustments by multiplying an adjustment factor with the quantity difference between the comparable and subject property. For instance, if the Gross Living Area (GLA) for the subject property is 2,200 square feet and for a comparable property, 2,000 square feet, you can multiply the difference, 200 square feet, by the adjustment factor.
Note that if you have determined the GLA adjustment factor to be $60 per square feet, then the adjustment would be 200 square feet x $60/square foot = $12,000 added to the sales price of the comparable.
Analyze Property Sales in the Neighborhood
If you would like to calculate the appraisal adjustment, this is one of the best methods. You can compare houses in a neighborhood in order to calculate the adjustment. So, you have to find matched paired sales to determine what homebuyers are willing and ready to pay for a specific feature.
For example, if you find a residential property that was sold at $230,000, averaging 1,700 square feet, but a similar property was sold at $220,000, averaging 1,500 square feet, it indicates that the market paid an additional $10,000 for the extra 200 square feet. Keep in mind that in this case, the adjustment factor for square footage is $50 per square foot, as $10,000 divided by 200 is $50 per square foot.
However, it is vital to stress that this is only one example. You have to find many other matched pairs in order to make a reasonable judgment about the amount the market can pay for additional square footage.
Closing Date vs. Contract Date
The closing date or contract date can be more crucial in evaluating both the suitability of and estimating the appraisal adjustments for a sold comparable, depending on the specifics of the property or transaction. Did you know that the contract date is essential to consider when comparing different properties as the real estate market is often fluctuating?
While you can also consider closing dates, usually delays in funding and closing often result in settlement dates that fail to reflect the market period influencing the property’s contracted price. Also, note that when a comparable is superior to the subject property, the estimated value difference is deducted from the market value of the comparable.
For example, if the comparable property has a pool, but the subject property does not, we can subtract the market value of that pool (not its construction costs) from the comparable.
After you make adjustments for several factors, you will get a clear idea about the likely market value of the subject property. This is especially true when the market is brisk, and several sold and active comparables are readily available for analysis.
Using a Standard Figure
At times, appraisers use a single cost adjustment number for every single neighborhood. However, this is not suitable as some neighborhoods will likely pay far more for additional space.
Also, it is worth mentioning that when the real estate market is hot, the price difference between large and small homes tends to squeeze together. However, when the property market is declining, home values often spread further apart.
If an appraisal does not square with the contract and threatens the property deal, it is essential to take a good look at the adjustments made in the appraisal on various subjective factors, like quality and condition. At AmeriMac, our panel of experts understands that no two appraisals are ever the same. Contact us today to learn how we can improve your appraisal process experience.