Portland Area Real Estate Appraisal Discussion

Happy New Year everyone and sorry my blogging has not been consistent of late.  For appraisers, particularly those in the Portland area, last year was an incredibly busy year.  Fees for appraisals went up by 50% or more in Portland.  This was a shock to home buyers and others looking for appraisal services, but it represented the first raise for appraisers since the 1990s.  Finally, fees in Portland are at a place where appraisers can attract fresh talent into an aging industry.  Let’s hope that these gains do not disappear in the next real estate slump, leaving appraisers looking for other ways to earn a living.

Speaking of other ways to make a living, many of my blog subscribers know that our company, A Quality Appraisal, LLC maintains a home measurement service, in addition to our appraisal business, that provides square footage estimates independent of an appraisal.  Many appraisers also provide similar side services. 

This last year was eventful for our home measurement business.  Luckily, after a little research and not a claim or problem, we found that most appraiser Errors and Omissions (E&O) insurance providers do not cover appraisers when they are doing a measurement that is not part of the development of an opinion of value.

I was shocked when told this by one of the largest appraiser E&O providers because most appraiser E&O policies claim to protect customary professional services performed in the insured capacity as a real estate appraiser, and that many of the services appraisers can provide do not involve an opinion of value.  How much more customary of a service is a measurement when almost all appraisers measure homes on almost every appraisal assignment?

After I pushed back against the E&O provider, a senior underwriter of the company responded that it would come down to the definition of appraiser as described by the insurance policy, and that they would need to decide if the measurement service was “usually and customarily rendered by a real estate appraiser.”  The underwriter explained that square footage estimates are not unique to the appraisal industry and non-appraisers can provide them.  Coverage would only be triggered if an appraisal report underlies the square footage estimate.

The senior underwriter went on to explain that when a real estate agent or broker asks an appraiser for a measurement, it is because they seek to shift liability to the appraiser.  The senior underwriter also said that measurements are considered risky by insurance companies and added that “about 50% of claims presented to our company involve sq. ft. issues.”  This was contrary to what I believed was true — that measurements are only a small piece of the appraisal liability and are easily verifiable.  I knew if we wanted to keep our measurement customers, we needed to fix this problem.

To solve it, we contacted all companies that we could find in the US that are exclusively measurement businesses and asked where they secure E&O insurance.  After chasing down numerous leads and talking to many insurance providers, we found that most home measurement businesses think they are covered through architectural or real estate policies.  However, like appraisal E&O policies, when we contacted the insurance companies, we found out that measurement services are not actually covered.

For this reason, we sought legal advice.  Thus, A Quality Measurement was split into its own business name and website, separate of A Quality Appraisal, LLC.  After committing many dollars and countless hours, we believe that we have resolved our specific insurance and liability problems.  We are not offering legal advice here, nor can we provide the plan our attorney put in place specific for our business.  I merely suggest that if you are an appraiser doing home measurements, contact your E&O provider first to see if you are covered.

Are you an appraiser who does home measurements?  We would love to hear from you.

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook.  Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos.  If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event.  We will do everything possible to assist you.

Thanks for reading,

Gary F. Kristensen, SRA, IFA, AGA

I just returned from the Oregon Solar Energy Conference as a guest speaker/panelist discussing the valuation of residential homes with owned (not leased) solar photovoltaic (PV) systems.  It was an honor to share the panel with Ben Hoen, a staff research associate with Lawrence Berkeley National Laboratory who coauthored a study published in the Winter 2016 Appraisal Journal titled, “An Analysis of Solar Home Paired Sales across Six States.”  The contributory value of PV in appraisals done for residential lending is a hot topic in the solar industry because the easiest way for owners to finance PV systems is within the mortgage of their home.

During our session we discussed the rapid increase in solar installations across the country, including Portland, and the complexities that such features present to appraisers.  Some of the appraisal problems identified by the panel include: finding comparable sales of homes that sold with owned PV systems, difficulties in obtaining performance characteristics about the PV systems on home sales, how to ask for and find appraisers with solar or other green credentials, and the green addendums  that can be filled out by homeowners and agents to help appraisers gather information about a property.  (Click here for an example of one popular green addendum)  The panel also discussed several different ways that appraisers can support adjustments for PV solar systems.  A listing of techniques that appraisers can use to estimate and support adjustments for PV systems follows.

1. Paired Sales – This method is most accepted, but it can be difficult to find comparable sales; however, an appraiser is not only limited to properties that would compete with the subject for paired sales. For example, the appraiser might appraise the subject as if it has no PV system and then use sales from a nearby community (or further back in time) to help support an adjustment that can be applied to the gridded comparable sales in the report and other approaches to value.
2. Cost Approach – Studies, like those published in the recent “Appraisal Journal,” have shown that there is a strong correlation between the net cost of a PV system (less total of all incentives) and value. This is reasonable because someone should not pay more for something on one home that they could merely purchase for another home; although cost and value are not always equal, and it can be difficult to accurately estimate depreciation if the system is more than a few years old. In addition, the appraiser must estimate the current cost of the system and not its cost at the time of installation. This is particularly important because of the rapidly falling cost of solar power systems within recent years.
3. Income Approach – Recent studies also show that the present value of the energy savings has a strong correlation to value. This is reasonable because the main selling point of a PV system is to save money on future utility bills (although buyers often see other benefits such as prestige or feeling good about conservation). Appraisers and others can estimate the present value of energy savings using spreadsheets or a free online tool called PV Value. The limitation of this approach is that it can be difficult for the appraiser to estimate or support the risk premium to apply to the discounted cash flow (studies on risk premiums are coming) and other factors like energy production or energy prices over time. The good news is that much of the necessary information can be obtained from the new system documentation and unknowns can be estimated using PV Value defaults or online estimators like Solmetric Roof Azimuth Tool or PVWatts Calculator.
4. Additional Support – After appraisers have performed one or more methods to support an adjustment for PV, the indicators can be checked against recent studies to see if the results are reasonable given the quickly growing body of evidence. However, appraisers need to be aware that often the studies are dated by the time they are published and may not be applicable to a particular subject property.

If you need more resources, the Appraisal Practices Board recently issued an advisory on “Valuation of Green and High-Performance Property: One- to Four-Unit Residential.”  It is a voluntary guidance for appraisers on methods and techniques for valuation that includes green homes, but it also includes a section on PV systems.  Solar power systems are here to stay and are becoming increasingly common.  Are you ready?

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook.  Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos.  If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event.  We will do everything possible to assist you.

Thanks for reading,

Appraisers and real estate agents often ask what adjustments I use and/or how I support my adjustments.  The answer is that most properties require a different adjustment that is specific to its market (e.g. size, location, condition, etc.) and there are many different ways to support any individual adjustment.  No one method for supporting adjustments is perfect.  Appraisers should select the method or methods that will produce credible results for the given assignment and available data. 

I recently appraised a roughly 1,200 square foot 1970s ranch home on a city-sized lot in a Portland suburb wherein the quantity and quality of the available data was particularly good.  For this reason, I was able to have a little fun and support my appraisal adjustments for this one assignment in many different ways.  Here are the multiple approaches and real data for supporting my Gross Living Area (GLA) adjustment.  (Information that may identify the subject or comparable sales have been redacted for confidentiality.)

1. Paired Sales – Paired sales are a cornerstone of textbook appraisals, but textbook cases of paired sales rarely occur in practice. In a common textbook scenario, paired sales are two sales that are the same in every way except the one factor for which the appraiser is trying to estimate an adjustment. For this reason, it is easy for appraisers to forget that a paired sale can have other differences (although it is important that the differences are minimal and that adjustments for the differences can be supported). In this assignment, my grid included four sales that had very little difference from one another except for GLA. After adjusting for a couple of minor factors, the paired sales all suggested an adjustment of $51 and $60 per square foot for GLA.
2. Simple Linear Regression – I’ve blogged in the past about supporting adjustments, particularly GLA, using simple linear regression. Linear regression is basically analyzing trends in data. (Here is a link to the most-recent post and to a video on how I use this tool.) For this assignment, simple linear regression suggests $53 per square foot when comparing sales price to GLA. Significant variation exists among the data of this sample, but the datum points are spread evenly along the entire regression line suggesting that the indicator is not being skewed by a small subset of outliers. It is okay if the properties in the sample have differences, however it is important to make sure to filter out differences that would skew toward one end of the range or the other. For example, if a larger site size also tends to include a larger home, then it would be important to make sure that the homes in the sample all have similar site sizes or the adjustment could be falsely overstated. Also, it is helpful to the outcome of the regression analysis that the subject property is in similar condition to the majority of the sales in the sample. The following chart shows the linear regression outcome in this appraisal.

    

3. Grouped Data Analysis – This method is closely related to simple linear regression and is essentially many paired sales representing a fast way to estimate an adjustment simply by sorting comparable sales. This can be done using quick searches on the local multiple listing service or using data exported to a spreadsheet. But remember that the same factors that can skew linear regression will also skew grouped data analysis. For best results, it is important to sort out all of the features that might distort the results without sorting to the point where the sample sizes are small and wildly varied. For this assignment, I filtered out all ranch sales in the past two years with a lot size of 7,000 to 9,999 square feet, that feature two baths and three bedrooms, and that were built within ten years of the subject. Sales of homes meeting these criteria between 1,000 and 1,199 square feet have an average of 1,128 square feet and an average sale price of $212,637. Sales of homes meeting these criteria between 1,200 square feet and 1,299 square feet have an average of 1,253 square feet and an average sale price of $220,055. The difference between the average of these two sets is $7,418 and 125 square feet or $59 per square foot. The median could also be compared as well to provide another indicator that is less likely to be skewed by outliers.
4. Depreciated Cost – The cost approach value in this assignment is consistent with values suggested by recent comparable sales. This suggests that the cost approach is likely valid and could be used as a way to test reasonableness or support adjustments. The subject’s original cost is estimated at $108 per square foot and the depreciated cost is estimated at $81 per square foot. A simple depreciated cost adjustment might not be a good adjustment to apply to comparable sales. This is because the depreciated cost is a straight-line measure from zero square feet all the way to the total area including the kitchen, bath, mechanical, and everything else in the house. For this adjustment, we are just looking for the value difference from a similar-sized comparable to the subject. To obtain this adjustment using the cost approach, I ran a cost estimate for the smallest comparable sale and another cost estimate for the largest comparable sale with no physical changes for anything other than living area (e.g. room count, garage, quality, and all other factors kept equal). The original cost difference between the low and the high came out to $79.53 per square foot. If this number is depreciated based on the cost approach in the appraisal, a reasonable adjustment of $60 per square foot of GLA is estimated.
5. Income Approach – The income approach was not performed for this appraisal assignment, but if it had been, the income approach could have been used to support another indicator for the GLA adjustment. One way the income approach could be used to support a GLA adjustment is by taking the estimated loss or gain in rent from an additional square foot of living area (can be estimated using any of the above approaches except for cost) and apply a Gross Rent Multiplier (GRM). Critical to this approach is that the multiplier and rent estimates are market derived and that rent might be a consideration for the typical buyer.
6. Sensitivity Analysis – This method is closely related to paired sales and I think it works best for secondary or tertiary support for an adjustment or helping to reconcile what adjustment is most effective. However, this method is not very useful if adjustments for other comparable sale differences are not accurate. Once all of the comparable sales have been placed side-by-side in a comparison grid and adjusted for all other factors using market derived adjustments, the appraiser can test different GLA adjustments to see what adjustment produces the tightest range of adjusted value indicators. If the appraiser is unsure by simply looking at the data, the Coefficient of Variation (CV) can be applied to each set of adjusted indicators to mathematically test what adjustment is producing the tightest range. The lower the CV, the better the adjustment is working within this sample of sales. Here is a link to a free CV calculator. Just enter your adjusted indicators separated by commas and press calculate. Then test another adjustment and repeat with the calculator. An appraiser could also set up a formula using the Worksheet function in a la mode Total to instantly provide the Coefficient of Variation. For this appraisal, sensitivity analysis helped me reconcile that the simple linear regression adjustment is most well-supported adjustment because it has the lowest CV as seen in the following table.

None of the above methods for supporting an adjustment are without limitations and there are many more ways an appraiser could support an adjustment.  Although this is an example where data sets are particularly plentiful, the example shows that information does exist outside of textbooks for supporting adjustments; and when multiple approaches are combined and reconciled, a strong case for the appraiser’s conclusion can be made.  An appraiser won’t always need to go this far to support one adjustment, but if that one adjustment is crucial to the outcome of the appraisal or the appraiser believes they will be challenged on this adjustment, then the appraiser should expand and explore multiple methods for support.

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook.  Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos.  If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event.  We will do everything possible to assist you.

Thanks for reading,

My wife and I purchased our Portland area split entry home over ten years ago.  At that time, our real estate agent told us, “Buyers usually only buy one split entry home.”  I do not know if that statement is true, but it says something about the local perception of split entry homes and how they can be a unique appraisal problem.

A split entry, split (for short in our area), or two-story bi-level home is one where there is a small entry landing between two levels of the home.  This should not be confused with a split level home (typically called tri-level in the Portland area) where the entry leads to a main kitchen, living, and dining area of the home and you can either go up or down half levels to access the bedroom or garage levels.  On split entry homes, there is usually a half stairway that leads down into a daylight basement and garage or up to the main living area of the house, directly from the entry landing of the home.

The reason that split entry homes can sometimes be difficult to appraise, particularly if there are not many other splits in the area, is that they are functionally different than most homes.  Therefore, comparisons to other types must be made with caution.  Here is a list of negative aspects related to the marketing of split entry homes.

1.    Since the garage is usually on the lower level and the kitchen is usually on the upper level of a split entry, a simple trip to the grocery store means that all the groceries must be carried up a full flight of stairs to the kitchen level.

2.    Answering the front door on a split entry home can be difficult.  Imagine standing in a typical four by seven foot split entry landing where the door swings into the middle of that space.  Inviting your guests to also step into the roughly three feet by three feet that remains between the door and the base of the stairs can be challenging and awkward.

3.    The lower levels of split entry homes are often dark and cold because of concrete floors, partial concrete walls, and smaller windows.

4.    Split entry homes typically have the kitchen, living, dining, and bedrooms all on the main level.  For this reason, split entry homes can often feel small on the main level in relation to the total area and the relatively large lower level family rooms.

5.    Split entry homes frequently have uneven or less usable yards with retaining walls or steep slopes because the dirt excavated for the basement usually gets piled up and redistributed on one side of the home.  Also, split entry homes are often the best use of a sloped site.

Split entry homes offer positive aspects like lower build cost per square foot, ducting that is usually within the heated envelope, window privacy on the elevated main level, cool basements in the summer, and good separation of living.  However, in Portland, the negatives usually outweigh the positives; consequently, caution must be used in the appraisal process.  Here is my list of tips for appraisals of split entry homes.

1.    Select split entry homes whenever possible as comparable sales.  If none are available, the best alternatives in the Portland area are usually ranch homes with a daylight basement that also have a lower level garage or choose tri-level homes of similar vintage.  Recognize that split entry homes might be perceived functionally inferior to many alternatives. 

2.    Be aware that typically split entry homes are built as a way to get the most finished area for the lowest cost.  Therefore, split entry homes often lack other features that relate to quality.

3.    Use caution when performing the cost approach on split entry homes.  Many of the cost estimation sources will underestimate the cost of the basement on a split entry home, particularly if the user of the cost data does not understand exactly what is being estimated.  This is because the cost reflected for a finished basement will sometimes not account for the higher cost of the partly above-grade nature of the split entry basement.  For example, the added cost of partial stud walls and more and/or larger windows compared to a fully subterranean basement.

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook.  Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos.  If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event.  We will do everything possible to assist you.

Thanks for reading,

A discussion among Portland appraisers occurred recently.  The debate centered on whether one of those large and exclusive infill Portland homes constructed among older and smaller homes, should be considered as an over improvement.  This stems from the appraisal principle of conformity which holds that value is maximized when properties conform. 

I hold that (speaking in general without regard to a specific house), “It might not be an over-improvement, just because the home is larger and does not conform.”  Another appraiser posits, “If there are no other homes that large, then it is an over-improvement period.”  I said, “Maybe it is, but maybe not.  What if the large home is the first of a new trend in buyer demands?  A new trend is much more difficult to prove, but appraisers cannot just rule it out based on it being the first big house in an area.”

An over-improvement (otherwise known as a superadequacy), is obsolescence or loss in value as a result of being larger or having more amenities than the ideal improvement.  An ideal improvement is a home (or other legal structure) at its “highest and best use” that maximizes the value returned to the land.  In other words, the ideal improvement is the house or building that would be most profitable to build if the land was vacant.

My thinking is that when older homes are replaced or infilled with newer larger homes, often it is because the ideal improvement (or highest and best use) has shifted to meet the demand of the times.  This is particularly true if the big new home is a speculation home (spec home) and not a custom build.  Click here for a blog post that explains how spec home builders and developers are particularly in tune to which home will bring the most profit. 

Today, buyers of close-in Portland homes can afford and are willing to pay for much larger homes than when many of the original early 1900s homes of those neighborhoods were first built.  I concede that sometimes (particularly with custom builds) the home built is in fact an over improvement.  But if the house is being built to sell after construction, builders and developers have usually done their homework and are trying to maximize profits for the lot they are developing.

Here are some ways an appraiser might be able to determine if the subject is an over improvement when a big new home is the first of its kind.

1.    If this property is an arm’s length new purchase, the appraiser could subtract the estimated replacement cost from the contract price to see if the remainder is equal to or greater than the estimated land value, plus site improvements.  If so, then the current contract suggests that for at least one buyer, the subject is not an over improvement.  One pending offer does not represent an entire market; it is just evidence.  Therefore, the appraiser’s job of supporting a conclusion would not be finished.

2.    The appraiser could look to other similar neighborhoods to see if there are sales of other similar large homes starting to infill, then do the math to see if those homes are over improvements or not.  If there is sufficient evidence to show that trends in one neighborhood connect to the subject neighborhood, then that would provide additional evidence for the appraiser’s conclusion.

3.    The appraiser could interview developers and ask about trends.  If experts are saying that trends are headed toward larger homes, then that could be used by the appraiser as anecdotal evidence of the conclusion.

4.    The appraiser could study the trends in relationship between land values and home value of newer homes within similar market areas (or neighborhoods) to see where the subject falls on the spectrum.  If the subject is outside the typical ratio of new homes, then this could be evidence of an issue with over improvement.

5.    If the property would likely be used for income, the appraiser could compare its value from estimated rent income with its estimated replacement cost and land value.  If rental income supports the construction costs, that would be evidence that the subject is not an over improvement.

My point is that things in appraisal are not always as simple as they seem.  High stakes are riding on appraiser opinions, therefore appraisers need to perform due diligence and always test their own perceptions or gut feelings with actual data.  We owe it to our clients.

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook.  Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos.  If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event.  We will do everything possible to assist you.

Thanks for reading,