Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal issues. This week Todd twists the knob and makes a line item assessment on the relevance of appraisal adjustment guidelines. …Jonathan Miller
Who came up with the insane “guidelines” for what constitutes appropriate adjustments on the sales comparison grid? What alternate universe were these people living in when they decided that the total net, gross, and individual adjustments should not exceed 15%, 25%, and 10% respectively? They certainly didn’t live anywhere in the New York area (and if they did it was more than 50 years ago).
Let’s start with the 10% individual adjustment. A friend of mine just renovated her kitchen at a cost of about $75,000. Let’s assume the value of the kitchen is the same as its cost. After the renovation the value of the house is $650,000 She has an appraisal done after the kitchen is renovated and the appraiser finds an identical house as a comparable, except it has the original kitchen. Under the above scenario therefore, the comparable would have sold for $575,000. The appropriate adjustment for the new kitchen would be $75,000, or, 13% of the sale price. Unfortunately, the appraiser will have to “explain” why this comparable sale, which is otherwise identical to the subject, requires an adjustment in excess of the 10% FANNIE MAE guideline, when in fact it is a great comp with only one adjustment needed!
What’s wrong here is the arbitrary and capricious 10% guideline and the fact that adjustments exceeding it require explanation, when in reality, such adjustments are often fully warranted and should be common in many cases. The gross and net guidelines are likewise, contrary to reality in many markets. These guidelines were once appropriate in places like Levittown when Levittown was first built, though probably not even there any longer. Like every other community, Levittown has evolved over time and its houses are no longer identical to one another.
In the world as it exists today, reconciling the sale prices in a given market frequently requires adjustments to comparable sales WELL IN EXCESS of FANNIE MAE guidelines.
The thing that got me started writing today about the size of adjustments was not the guidelines relating to the recommended maximums, but instead the incredibly small adjustments made by so many appraisers. On a regular basis, I see adjustments to sales with prices of $650,000 at increments as small as $2,000! What appraiser is so good as to know that a sale warrants an adjustment of less than one third of one percent?
A lot of times I find these adjustments under the site category. Subject is 0.11 acres and sale #1 is 0.13 acres. “Appraiser adjusts for site differences at $1,000 per hundredth of an acre”. Never mind the fact that he doesn’t address the shape or topography of the lots, the mere fact that he makes such a miniscule adjustment suggests a distinction without a difference. Why bother making an adjustment at all in such a case?
My suggestion is this. Abolish the guidelines for “maximum” gross, net, and individual adjustments and replace them with “minimum” adjustments (for the individual adjustment anyway). An appraiser who makes an adjustment for less than 2% of the selling price of a property must correctly answer the following question: Does the phrase “anal retentive” take a hyphen, or not?
Tags: Soapbox Blog, Todd Huttunen, Adjustments, The Hall Monitor
The question I would ask, is even though someone put a $75,000 kitchen into a house that would otherwise have sold for $575,000, is: If I saw two identical homes, and one had a renovated kitchen, would I pay 13% more for it? I don’t think a $575K home warrants a kitchen that expensive. There are studies indicating what % of cost one could recoup from investing in improvements. I think there would be a law of diminishing returns at the point your friend reached. It might not be a good investment, but if she enjoys it, that’s great. I don’t think a 13% appraisal adjustment would be warranted. If I were an appraiser, I’d try to determine what it would cost to put in a new kitchen, what it would cost to put in the old kitchen (minus depreciation), and then make an adjustment. The old kitchen had a value. So adjusting the new kitchen at full cost doesn’t make sense.