4 questions to ask when giving real estate value adjustments

Let’s talk about adjustments. Last month I wrote about being a trigger-happy real estate adjustment giver, and I had some great feedback. One appraiser told me she is going to stop adjusting for some of the very minor stuff like fireplaces and covered patios, and an agent told me his list of adjustments was basically the one I shared as an example of what not to use. It’s great to hear of growth like this, and I love the honesty, yet I think anytime we start talking about adjustments, it can also make us feel insecure because we begin to question everything we are doing. So for the sake of growth and conversation, let’s kick around the topic a bit more. I’d love to hear your take in the comments (or send me an email).

giving real estate adjustments - by sacramento appraisal blog - image purchased and used with permission from 123rf dot com

4 questions to ask when giving real estate value adjustments

Does the adjustment represent how buyers behave? When valuing a property, we adjust the comps when there are value-related differences compared to the subject property. The adjustments are not about what one buyer would pay, but rather what a representative buyer in the market might pay. In other words, if you lined up a group of 100 interested and qualified buyers, and they would pay a difference for that certain feature, we then adjust by that difference. Remember, there is always going to be one buyer who is going to love a feature, and pay way more because of it, but we have to ask, “How much is the market going to pay for this?” Example: House shaped like Darth Vader’s light saber.

Does the adjustment seem reasonable? Take a step back from the adjustment you are giving and just ask, “Is this reasonable?” If you’re giving a $500 fireplace adjustment, does that really seem like a reasonable adjustment, or is it purely made up? Does a $10,000 location adjustment for the busy street really represent what the market is willing to pay? Or does a $25,000 condition adjustment between the fixer and remodeled home make reasonable sense? This is a big question to filter our adjustments through, and I recommend getting into the habit of asking it. By the way, I find sometimes when it comes to condition, the adjustment might be more like 20% instead of $20,000.

Is the adjustment supported? It’s easy in real estate to pull out a list of canned adjustments and start giving them whenever we see any difference between a comp and the subject property. So we see a built-in pool and automatically give a $10,000 adjustment for the difference. Yet we need to do some research in the neighborhood. Is there a price difference between similar homes with and without pools? At times our canned adjustment at $10,000 might actually make really good sense, so it’s perfect to use, but other times we might see a different story of value. It’s easy to get stuck giving that $10,000 adjustment in every case, but this is where we need to let the market speak to us. Research the sales and let them set the tone. This means the adjustment might look different in each valuation. Maybe you’ll have no adjustment at all for a pool if there really isn’t a discernible price difference, while other times you might adjust twice as much as you normally do because the pool is something special and it looks like buyers paid a premium for it. Remember, the goal ought to be to find other homes that actually don’t need any adjustments at all because they are truly comparable. I know that’s a fat chance, but keep that in mind.

Does the adjustment fall in the range of value? As much as we’d like to think there is one perfect and precise adjustment out there to give, it’s most likely we will see a range of value emerge. For example, if we surveyed a neighborhood and found homes with built-in pools were tending to sell between $8,000 to $15,000 higher in price, we have to make a decision. What should the adjustment be in the case of the subject property’s pool? If it’s an older pool, maybe we end up giving a value adjustment closer to $8,000. But if it is a higher quality newer pool we might reconcile the adjustment closer to the top of the range.

I hope this was helpful.

Questions: What is question #5? Anything else to add?

If you liked this post, subscribe by email (or RSS). Thanks for being here.

Comments

  1. says

    Great post Ryan. My experience has been that buyers don’t actually “make adjustments” the way that appraisers do. Rather, buyers are looking within a specific price range and will evaluate or rank each property within that range on its own merits and how that property satisfies their needs. They do not give a $500 adjustment for a covered patio or $3000 for half bath. Often times the factors that influence their decisions the most are not evident in the market data.

    For example, buyers are more likely to be influenced by a small master bathroom or small bedrooms. Or, a home may be more desirable because the seller had blown out a wall between the kitchen and the family room creating an open floor plan that the buyer was looking for. Speaking to the agents in the transaction can often times uncover the underlying buyer motivations but not always. And, since there is not a specific grid in the sales comparison analysis to reflect some of these factors, they are often overlooked.

    Completing mortgage-based appraisals requires that we make specific adjustments based upon the market data as we see it. Many times though, qualitative analysis and ranking analysis may be far more similar to the way buyers think. Mortgage-based appraisals do not require a qualitative analysis and therefore most appraisers don’t consider it. But completing a qualitative analysis may help the appraiser think more like a buyer and therefore make more sense of the market data in the long run.

    • says

      Thanks Tom. Excellent comment. You made the post better. I always appreciate your take. I bought a different home earlier in the year, and it actually ended up being way different than what we originally sought to buy. The bedroom count, bathroom count, and square footage were not quite what we were looking for, but the very open floor plan was absolutely perfect. Moreover, there was a 4+ car garage that was the driving force. Had the house not had the large garage, I would not have bought it. I knew the appraiser would assign a value to the garage, and my guess was $7500 ($5000 for the extra space and $2500 for the tandem space). That’s almost exactly what the appraiser ended up doing. For me as the buyer, it was really a part of the total package. I actually didn’t care that there was one less bathroom and one less bedroom that I originally wanted because of the garage. In my mind as a buyer the garage was central to the purchase and more than $7500. But what would the market pay? It gets complicated to have to put a number in there. .

  2. says

    I noticed early on that many of the transactions that I was involved in the appraisals came back at or very near value. I was new in the business and I was a bit surprised. I decided to ask a couple of appraisers that I knew about my accuracy. Both reminded me that one definition of value is when an informed buyer and an informed seller come to terms. That simple concept has made the whole process easier for me.

    It is interesting that you mentioned busy streets and their affect on value. One appraisal that was a definite outlier event for me involved comps that backed up to busy streets…four of them. The subject home was on a nice, quiet street and I had even tried to show my clients two of those same comps that the appraiser used. My clients would not even get out of the car. The adjustment in value, zero. Sometimes pricing is as much an art as it is a science. The house on the quiet street did sell for a higher price. The appraisal just did not reflect the added value. An informed buyer and an informed seller came to terms. Who was correct?

    • says

      Thank you so much Ray. I appreciate it. It sounds like the appraiser maybe rubber-stamped the deal if adverse locations weren’t even mentioned. In the house I bought earlier in the year, the appraiser used a property that backs a car wash as a comp without mentioning any adverse location. I would say that property could have easily sold for 10% more had it not been next to the car wash, so I know the location had a value impact. These things happen. Appraisers are supposed to be coming up with market value, which represents the most probable price the property should bring in an open market. One buyer and seller agreeing may or may not reflect the market. This is what makes it interesting. Thanks again.

  3. says

    Ryan, I’m an appraiser of 15 years and so keep in mind that my questions or comments don’t come from a lack of experience, but a legitimate question that I’ve experienced in my career over and over again. Here’s my question: what are appraisers to do with contributory items/factors that present very subjective (or gray area) results?

    Take a busy road for example. I just recently sold a house (Realtor too) that backed up to two busy streets. It was remodeled GORGEOUSLY! The listing agent told me that there was a lot of interest, but ultimately buyers just couldn’t get over the busy road. However, my buyers were an elderly couple that did not care about the busy road factor and were willing to overlook that. This home was in a gated community, and I would say there are an equal number of families and retirement couples. So who is the “typical buyer” in this case? The ones that turned away (ultimately wanted a steep discount) due to the busy road, or the elderly couple who didn’t mind it?

    Other examples: A ‘subjective’ view such as a bluff view, or mountain views. Sure lake views or river views are easier to quantify (in my market), but views like mountain or city lights or bluff are much more difficult and often vary from person to person. Some homeowners boast about their views and maybe even bought that property because of the views. While other market participants don’t care about that view at all and certainly wouldn’t pay a premium for it over another property. This is most common in rural foothill areas where no two views are exactly the same.

    Thoughts? Great post by the way, as usual!

    • says

      Hi Jacob. Great questions. I appreciate the critical thinking here too. I would welcome any readers to pitch in thoughts too as there can be tremendous value found in a post’s comments. If you have two cents, please share it.

      I suppose I would be simply trying to find the best available comps from a location perspective. What did the homes next door previously sell for? Was there a negative reaction in the market at the time of the sales? Or has the subject property sold on the open market before? Was there a negative reaction at the time? We always have to consider the context of previous sales of course (inventory levels, what the market was doing, the nature of the transaction, etc…), but it’s hard to argue against data like that. Yes, someone may come in and ignore the location, but what would most buyers do? Or what have most buyers done recently and historically in the very immediate neighborhood and with very competitive locations? Most buyers represent the market, and the proof is whether homes with a very similar location are selling for less or not. We all know this becomes difficult to measure, but what story does years worth of data tell? What story do we hear from agents working the neighborhood with current listings and recent sales also? It sounds like your buyers did not represent the market in this case, but rather an individual perspective that was willing to overlook the busy location. But the proof is going to be in the comps and other data collected. Obviously I cannot draw a conclusion in this post.

      Your example of the view is important too. This is where it becomes easy to be subjective and start bringing in our own ideas about value. I remember hearing from appraiser Patrick Egger (I think) an example of a condo complex with units having either a lake view or a view of the city. The temptation in a complex like this might be to give a higher value to the lake view, but the city views were selling for more because of the more brilliant view at night. Owners simply weren’t there during the day to enjoy the lake view, so its value was more minimal, but they were there at night. So we appraisers would have to start looking at what buyers have actually been willing to pay, and let that shape any adjustment we might consider giving if relevant. The proof is in the market (though it’s certainly not easy to see at times).

  4. says

    Great post Ryan. The thing I want to add to the conversation is that (as an appraiser) I like to stay away from the word “give” (in relation to adjustments) and use another word like “support”, “reconcile”, “estimate”, etc… The word “give” sounds, to me, more like appraisers are pulling numbers out of the air rather than analyzing data. I know that nobody thinks that after reading your posts because of the explanations, just a buzz word for me. Again, great article, I can only pick on one word. You’re the king!

  5. says

    Hey, my mind is definitely more creative and sharp when drinking coffee. No wonder I have better adjustments then. 😉 But seriously, even though real estate agents do not do the level of analysis that appraisers do it is a great idea for them to understand our mindset because I think it can help them price their listings more accurately.

    • says

      Funny, Tom (but oh so true). I love coffee. It’s one of those things I struggle to use in moderation though, so I’m constantly drinking too much, cutting back, finding balance, and then drinking too much again. 🙂 Well said. Agents and appraisers can learn so much from each other. There is often a very different perspective for sure.

  6. says

    Great post indeed, Ryan. It’s always neat to take a peek inside the brain of an appraiser to see how their mind works when it comes to doing what they do 🙂

  7. says

    Great read, and very useful. While property owners often assign a price to different aspect they feel add value to the property, buyers rarely think of these individually. Buyers have a budget constraint that they need to weigh everything against. Oftentimes every adjustment needs to consider several factors. Let’s say, the house in on a busy street. The adjustment could be different if the house is facing the busy street or the busy street is behind the house. If the street is behind, how large in the backyard, which would determine the level of disturbance to the homeowner. Oftentimes sellers will take into account all these factors, while buyers think “house is near a busy street”.

    • says

      Thanks so much Alexis. I think you’re right on about a “busy street” too because it certainly makes a difference whether you face or back (and how busy the street is (2 lanes or 4 lanes). Not all locations and streets are created equally. That’s for sure.

      Thank you again.

  8. says

    Adjustments are probably the most difficult thing for an appraiser to justify. Many ways of estimating adjustments and a familiarity with your market place is probably the most accurate. You must “put on” the hat of the typical purchaser and decide what premium or negative that they might apply to the characteristic.

    Thanks for the topic…..

    Marten Davis, SRPA

    • says

      Thanks Marten. I appreciate your take. Right now I am working on something difficulty, and I happen to be in the middle of figuring out adjustments (if any). How does the market really behave? That’s an important question.

Leave a Reply

Your email address will not be published. Required fields are marked *


*