My New Blog

After less than three years in the appraisal business, I was struck at how lenders would periodically call back for a fourth comparable...like we were holding back on that "BEST" comparable!

Since then, I have theorized why I believe three comparables are the optimum number.  In my first example, assume that the subject property is in a cookie cutter subdivision and there is plenty of similar sales data available.  To include a fourth comparable in this situation would be superfluous.  As an alternative situation, assume that the subject is in a heterogenous subdivision or outside of a subdivision where similar sales data is difficult to obtain.  As you add comparables, they become increasingly different than the subject with higher and higher net/gross percentage adjustments (almost "non-comparable", if you will) to the point that the fouth comparable adds no real or practical support to the subject's final value.  While I acknowlege that the occasional fourth comparable sale is necessary, especially when a very similar property may have sold over 1 year ago and values have not appreciably changed, often times it only adds unecessary work to the individuals that review, underwrite or in other ways are associated with the appraisal.

While appraisal business is slow, I'm sure that you have had an opportunity to provide an anxious underwriter additional market information and comparable sales data, much of which will be required for inclusion on the new FNMA Market Conditions form, set for an April 2009 debut.  While much of this newly required information is due to current market conditions (thus, the name), much of this data is useful and should have been incorporated into the FNMA 1004 updated in March 2005.  I am not sure why FNMA dictates what should be included in this form.  The current URAR asks on the top of page 2 for the number of properties currently listed and for the number of closed sales within the past 12 months.  Why did they choose not to include the simple computation of an absorption rate, and a request for an analysis of this data?

I believe, as appraisers, with a thorough knowledge of valuation, that WE should design a form that best implements USPAP requirements. I think we have earned the right to self-regulate and FNMA has blown theirs! 

I was wondering when the first article would be published accusing the appraisal industry of the recent mortgage fiasco that has caused an upheaval in the real estate industry and ripple effects throughout the economy. 

It was approximately one month later that I found an article which hinted at the appraisal industry being the root cause of the problem.  It was "the appraisers", the article explained, "that led the market higher and higher with artificially high appraisal values". 

Snickering with disbelief of what my eyes were reading, I began to worry what would happen if this accusation began to stick and we appraisers were again the culprits of an entire market to fall (remember the Savings & Loan debacle)!  How can we appraise higher and higher when we are utilizing historical sales data as comparables?  Would it not be the irrational exhuberance of the buyers that would cause higher and higher values in the marketplace?

Fortunately, the accusation did not stick, although I do recall subsequent articles which did try and pin at least some of the blame on the appraisal industry.  While every industry has its share of ethically challenged workers, I believe the appraisal industry, by its (policing)nature, has reliably ethical people who subscribe to sound business practices within the context of USPAP.

I believe we are off the hook for now, but stay diligent in your quest for "true" values.