July 1, 2013 – Post No. 20 – Not much news in the past week. It seems like everyone has gone on Summer vacation. Sometimes it is good if we all get a break from the chaos, eh:)
The topic that comes to mind is the habit appraisers have of reconciling at the average of the comparable sale indications. One of the things I recall learning in Appraising 101 was to not conclude at an average. Although straying from this topic, another thing I recall being told was to never adjust Gross Rent Multipliers. But I digress….
The reason not to conclude at an average is that an average is affected by the number of sales used in your report. Simply adding or deleting one sale will most likely change the average value indication. Which results in the question – Why should the value of a property change simply because the appraiser adds or deletes a comparable sale? Obviously it shouldn’t.
Another problem I have with using an average has to do with this indicating that all comparable sales are given equal weight. Maybe it is just me, but this is saying that all of the comparables are equally different with the subject. If that wasn’t the case, then wouldn’t the sales that are less different be given more weight?
So if all of the comparables are equally weighed, this raises the question – What are the odds that 3 or 4 or 5 sales differ from the subject by the exact same amount? I’m thinking I will win lotto before that occurs! And if this longshot event did occur, doesn’t that mean we have stumbled upon those paired sales that most appraisers say cannot be found in the marketplace? As a reviewer, I can tell you that there is an abundance of paired sales out there. They don’t just exist in textbooks.
All of the above leads to the title of this posting – when did we forget about definitive comps? In Appraising 101, we are taught to look for a property that has sold that is most identical to the subject. After that, we continue to find comparable sales albeit they will be less and less similar to the subject. Only recently have I seen a few residential appraisers start to reconcile at the sale with the least gross adjustment percentage. That sale is most like the subject and thus represents the best indication of value. It is refreshing to see appraisers start to revisit this basic concept. Hopefully, this will be ‘trending’ as the younger generation likes to stay nowadays.
As always, I welcome your thoughts on anything I post. It is a few days early, but…
Happy Independence Day,
George R. Mann, CRE, FRICS, MAI
Managing Director
Collateral Evaluation Services, LLC