Appraisers in Portland, Oregon and everywhere else are talking about supporting adjustments, due mostly to fears of Fannie Mae’s new Collateral Underwriter (CU). Supporting adjustments can be an important part of producing a credible opinion of value and I often blog about adjustments. However, when reviewing the reports of other appraisers, I frequently have very different opinions on the adjustments applied, but then just as often, the other appraiser comes very close to the same value conclusion that I would reach. So how is that possible? The key lies in understanding qualitative and quantitative analysis.
Appraisers often use both qualitative and quantitative analysis when making comparisons. Qualitative analysis means that the appraiser is recognizing distinctions and ranking the comparable sales in terms of superior, inferior, or similar, rather than actually trying to measure the difference or apply adjustments. Quantitative analysis means that the appraiser is making a “quantity” of dollar or percentage adjustment to comparable sale prices (for recognizable differences) to arrive at an indication of value for the subject property.
Qualitative analysis simulates the thought process of a typical buyer who is simply trying to find the most home for the least amount of money. Qualitative analysis is also a quick way for real estate professionals to arrive at a value conclusion when there are plenty of comparable sales, and it can additionally be an accurate way to check the reasonableness of the results in a quantitative appraisal. Some appraisers will make an adjustment grid for qualitative analysis that looks like any other adjustment grid, but instead of making dollar adjustments, the appraiser will just place plus and minus symbols (most common in commercial appraisal). Some appraisers might use multiple minus or multiple plus symbols when a factor is much superior or much inferior to the subject. Sometimes a qualitative analysis might just be an ordering or ranking of the comparable sales by price to see where the subject’s value would most likely fall as in the following example.
In the above qualitative example, comparable sales are ranked from lowest to highest sale price. It is easy to see that the subject is nearly as large as Comparable 3, is the same age, has almost the same size lot, and has the same garage count. Based on a qualitative analysis of the above sales, the appraiser should reconcile a value that is close to Comparable 3 and significantly more than Comparable 1 and 2. Anything more than the sale price of Comparable 3 ($325,000) would not be reasonable given only the above information.
Quantitative analysis is a required process in most appraisals for residential lending where federally backed loans are obtained. The strength of quantitative analysis is that it can be more precise and, when performed correctly, provides the appraiser with a tighter and more accurate range of value indicators. One problem with quantitative analysis is that it can be very difficult for appraisers to support some adjustments, and if those adjustments are incorrect, may lead the appraiser to the wrong conclusion or a point of contention that could damage the credibility of the entire appraisal. However, the following examples show that, if the appraiser is paying attention to the qualitative ranking of the comparable sales and is reconciling thoughtfully (rather than with an average), the value conclusion could be credible, even if the adjustments are not.
In the above example, the important factors are quantitatively accounted for using dollar adjustments. Comparable 1 and Comparable 2 have not been adjusted for age because the agents explained that these two properties were particularly well cared for, lightly lived in, and freshly painted. Site size is not adjusted because the small differences are not estimated to be noticeable by the buyers in this market. The garage and GLA are accounted for and the tight range of adjusted indicators from $319,000 to $322,100 suggests that the estimated adjustments are reasonable. Consequently, it should be easy for the appraiser to reconcile within this range.
The next table shows the same comparable sales with very different adjustments applied by the appraiser.
In this example, a different appraiser has adjusted half as much per square foot of living area, half as much for the garage, and has estimated that the older properties require an age or condition adjustment. These are all reasonable conclusions in the lack of other evidence supporting the adjustments. Here, two of the comparable sales, including the strongest, have adjusted value indicators that are within the range of the data in the prior sample. It is easy to see that even with dramatically different adjustments, the appraiser will likely still reconcile the same value conclusion for the subject with most weight to the strongest of the indicators (Comparable 3).
The above two examples show:
Appraisers might have dramatically different opinions of adjustments and might still come to the same value conclusion because they have thoughtfully employed both qualitative and quantitative analysis in the appraisal process.
Qualitative analysis can be a quick way to come to a value conclusion and a handy way to test the reasonableness of appraisal conclusions.
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Thanks for reading,
Gary F. Kristensen