Tag Archive for: Tips and Tricks

The Client Accommodation Trap

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Appraisers try to accommodate their client’s interests. There is nothing wrong with this per se.  Appraisers commonly write, “at the client’s instruction…” or “per the client’s request…”, then the appraiser describes what the client instructed or what the client requested, as well as what the appraiser did to comply with the instruction or request.

This language, however, implies the appraiser is trying to do the appraisal, or write the appraisal report, in a manner that pleases the client, a potential USPAP violation. By definition, a real estate appraiser must be independent, impartial, and objective. Such accommodating language not only calls into question whether the appraiser has complied with these three qualifications but also smacks of advocacy.

Omit the offending language.  For example, appraisers commonly omit the analyses of the Cost approach. However, certain clients may request the inclusion of these analyses as part of the appraiser’s value conclusion. Instead of saying, “at the client’s request, the appraiser has included the protocols of the cost approach…”, please consider saying, “the appraiser included the protocols of the cost approach as both applicable and necessary to the formation of a credible value conclusion”, never mentioning the client’s request.

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I spent $25,000, and my pool is worth how much!?

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Sometime back a Realtor acquaintance called to ask how much to adjust for a swimming pool. The question implied that we appraisers have access to some kind of secret “book” in which we maintain the dollar amounts of our various adjustments. Would that this were true! I explained to the Realtor© we had to extract our adjustments from market data. The parting comment was something along the lines of, “Well, that would take too long!” And our conversation ended. So, let’s talk about that.

It’s not particularly difficult to calculate a swimming pool adjustment. This can be done by paired-sales analysis or by regression analysis. While I prefer regression analysis, both produce perfectly acceptable results. The results are acceptable not because one or the other is “right” or “correct”. Rather, they are acceptable because the adjustment comes from the market, which must be the source of all of an appraiser’s adjustments. So let’s consider a hypothetical paired-sales analysis to extract a swimming pool adjustment from the market.

Take 10 sales more-or-less comparable with the subject that have swimming pools, and then compare those with 10 sales more-or-less comparable with the subject that do not have swimming pools. You’ll probably end up with 10 indications of the contributory value of a swimming pool. Next, arrange the differences from low to high. Take a look at this range. If there are one or two numbers that are obviously outliers, delete them. Now consider this range to determine if there is a central tendency. For example, is there a contributory value indication that repeats itself? This would be a modal value. Is there a range of contributory values that repeats itself? If so, somewhere within this range is the likely contributory value of the swimming pool.

Look at the average and median differences as well. Frankly, you probably want to avoid the average contributory value because of the inherent differences there are in swimming pools. An average weights all of the numbers in the array the same. Since the market likely does not do this, it’s best to avoid it. The median value represents the absolute middle of the range, but is not affected by extremes or outliers.

You started out with a rather wide range of contributory values, but via the above analyses you have likely narrowed it. This narrowing process is exactly what you’re looking for from paired-sales analysis.

Suppose that your analyses indicated a reasonable range from $10,000-$15,000. Out of this range you are going to choose your adjustment (even though a range is far more indicative of the market’s thinking). Also suppose that the swimming pool at your subject is relatively “plain vanilla”. For this reason, you would probably go with the low end of the range, say $10,000. On the other hand, were your subject swimming pool rather ornate, large, and/or came with an overly large patio and pool deck area, you would probably go with the higher end of the range (although, that would be your judgment call).

The point here is that you did not “guess” at the contributory value of that pool, etc. You did not try to cost out a pool as if new and then apply a depreciation factor. You did not apply a “rule-of-thumb” to determine your adjustment. Rather, you went to the market and, via analyses of the available sales within a market comparable to that of the subject, teased out of it a reasonable approximation of the contributory value of the swimming pool.

Please understand that the best you can do is approximate the contributory value of the swimming pool. This is because individual buyers and sellers react to such an amenity differently. As a result, your adjustment of, say, $10,000 does not mean the market sees the contributory value of a pool to be merely $10,000. Via your analyses, you demonstrated that the market sees a range of contributory values. From that range you, the appraisal expert, concluded that an adjustment of $10,000 approximated the contributory value of the swimming pool at your subject.

In other words, you supported your conclusion. This is all a client can ask for. Your client may not agree with your conclusion. However, your client must agree that your adjustment is based on logic, reasoning, and market evidence. That’s really the best you can do.

So, the point here is, while you may not be able to prove exactly how much a swimming pool contributes to the market value of a specific property, you can show the range of that value. Then, from it, you choose an individual number, even though that range makes more sense in the market. It’s your opinion that the swimming pool at the subject contributed $10,000 to overall value. You base your opinion on market data, therefore your opinion is well-formed. As such, you have formed an independent, impartial, objective, and credible opinion of the contributory value of that particular amenity. That’s what appraisers do.

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Lies, Damn Lies and Inadequate Sample Size

Benjamin Disraeli was the Victorian era Prime Minister of the United Kingdom.  He famously said “there are three kinds of lies: lies, damned lies and statistics”.  He died in 1881.  This was after Sir Francis Galton coined the term standard deviation, but before he popularized concepts like of correlation and the Central Limit Theorem with his publication of Nature in 1889.

Perhaps Disraeli was witness to how misleading statistics could be without an understanding of sample size requirements.  Most people wander about in the same fog that engulfed Disraeli.

The Central Limit Theorem states that a sample size equal to or greater than 30 is required to make credible assertions about a population.  “In practice, the Central Limit Theorem allows us to make inferences about population means relying on the normal distribution when a) the population is normal or b) when n ≥ 30. As a practical matter, the sampling distribution of the mean will be approximately normal when n ≥ 15 and the population is symmetrically distributed. However, appraisers usually know very little about the shape of population distributions of price, property attributes, financing arrangements, and the like. Therefore, the n ≥ 30 criterion generally applies to real property valuation work.”[1]

In general, if the mean and the median of a population differ, the distribution is not normal and you need a sample size of 30 or greater.

[1] Marvin L. Wolverton, PhD, MAI, An Introduction to Statistics for Appraisers (Chicago, The Appraisal Institute)

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