Portland Area Real Estate Appraisal Discussion

Due to a new City ordinance, on January 1^st, 2018 most homes listed for sale in the City of Portland are required to first obtain a Home Energy Score.  Our sister company, A Quality Measurement now offers this service.  Portland’s policy is unique in that sellers are required to obtain the energy score prior to listing the home for sale.  This can be a burden to sellers, but it is a benefit to buyers who want to purchase a home that uses less energy.  The question that always comes up is, “If I get a low score, will my home sell for less?”  I have two thoughts on this.

1.  The Home Energy Score is like the miles per gallon (MPG) rating of a car.  We all know that a car with a lower MPG rating is not necessarily less valuable than one with a high rating.  For example, a luxury SUV may have a very low MPG in relation to a compact car.  However, it is also likely that the luxury SUV will sell for more money.  A low score does not necessarily equate to a low value.

2.  On the other hand, a home with a lower energy score might sell for less.  If two homes are equal except that one uses less energy, we can expect that a well-informed buyer will pay more for the more energy-efficient home.  A long history of scientific (and unscientific) studies link a buyer’s willingness to pay more for a home that uses less energy.  However, most such studies involve new homes where buyers are more likely to have information about estimated energy consumption.  Now buyers of used homes in Portland will have the information and scientists, appraisers, and real estate agents will be watching to see what happens.  Here is a link to a blog post where I go into more detail about existing studies.

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 a daytrip to Las Vegas where I addressed the attendees of the Appraisal Summit and Expo.  It was such an honor to speak at this event alongside my business mentor Roy Meyer and to meet some of the most involved and inspirational people in the appraisal industry.  My only wish is that I would have been able to stay longer to build more connections and listen to more of the speakers. 

Also while in Vegas, I was interviewed for an upcoming episode of the Appraiser Coach Podcast with Dustin Harris, I got to meet Jeff Bradford and demo the new Bradford Technologies Appraiser Mobile App, and I received a live a demo of ANOW appraiser business management software.  Talking directly to the people behind these brands and seeing them in action is so much more valuable than visiting a website.  It was definitely a worthwhile trip.

If you were at Appraisal Summit and Expo, hopefully we got a chance to meet.  If we did not connect, please get in touch with me online and perhaps we can meet up at the next big appraisal event.  One of the things that I most enjoy about being an appraiser is meeting appraisers from all over the country.

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,

One small part of what real estate appraisers do is measure homes to calculate the living area or “square footage.”  The standard that is typically used by most home appraisers to measure and calculate living area is provided by ANSI (American National Standard Institute).  However, in this post I’m focusing on the geometry and simple math of determining the total area.

Normally, appraisers draw homes using software that automatically calculates the area.  Our company recently measured a home of an engineer by using just such software.  After examining the computer generated home sketch, the engineer said that the upper level of his home (shown in the illustration above) had been incorrectly calculated.  He then provided his handwritten calculations as support. 

When I heard this, my stomach knotted up and I thought, “Did this engineer find a bug in our software?”  A Quality Appraisal associates measure many homes each year all around the Portland area.  I thought, “Is this an isolated bug or something that could have caused errors in hundreds of appraisals or measurements?”  We don’t manually check the calculations of the software on all of our measurements before they are delivered to a client.  Maybe we should.

I could not wait to get back to my office and check for myself.  Once in the office, I deconstructed the drawing into five smaller shapes (a composite figure and some appraiser software will do this automatically) and then I was able to easily calculate the area as shown in the figure above.  To my relief, I came up with exactly the same number as the software total for the upper level.  After this experience, I concluded it is good practice for appraisers to occasionally check the calculations totaled by our sketching software.  For more information on how to deconstruct a composite figure and add up the individual areas, here is a short helpful video from Mathtrain.TV.

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,

World class appraiser blogger Tom Horn wrote a great article titled, “Things agents do that appraisers hate.”  Tom’s article inspired me to think about the opposite side of that coin.  Whenever I speak at real estate offices, agents often tell me about off putting things that some appraisers do when interacting with agents.  It is important for both appraisers and real estate agents to understand the thoughts and frustrations of the others so that we can conduct our work in a manner that is both efficient and respectful.  Here are my top three agent irritators.

1.    Agents complain that appraisers go to vacant lockbox properties without first calling and asking the agent.  This is against the rules of the Portland area RMLS (Regional Multiple Listing Service) and to me, it is trespassing.  Appraisers do not have the right to use the RMLS lockbox anytime we want.

2.    Agents complain that appraisers will show up at the property, not talk or ask questions, and then leave quickly.  I understand that appraisals are business and that time is money.  It is difficult to make a living as an appraiser these days without being quick.  However, the real estate agent and the homeowner hold a wealth of information.  Each should be interviewed carefully by the appraiser.  From my experience of having several appraisers who work for me, the ones who take time to chat with homeowners and agents build trust.  Their appraisals do not get challenged nearly as often, even if the appraisal report quality is similar.

3.    Agents complain that appraisers will call them and say, “Can you tell me what the concessions are on this recent sale?”  Once answered, the appraiser quickly ends the call.  As an appraiser, it irritates me that other appraisers would be short when someone else is helping them, but is also annoying that many appraisers would only be interested in concessions.  The concessions are important, but there are many other important things that an appraiser should know about a sale that do not make it into the RMLS.  In addition, agents are not only sources of information for appraisers, real estate agents are important sources for continued appraisal work.  A Quality Appraisal, LLC is built on non-lender or private appraisal work.  Real estate agents generate most of our private estate and divorce appraisal referrals.  It is important for appraisers to be courteous, humble, and grateful on the phone or in emails when requesting information.  Our company has received many referrals directly resulting from data verification emails and phone calls.

Did I leave anything out or do you want to join in the conversation?  Are you a real estate agent with appraiser grievances?  Let me know constructively 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,