How to Appraise in a Declining Market
An Analysis by Henry S. Harrison, MAI, SRPA, ASA of
APB Valuation Advisory #3: Residential Appraising in a Declining Market
The Appraisal Practices Board (APB) of the Appraisal Foundation has just released “APB Valuation Advisory #3 – Residential Appraising in a Declining Market” dated May 7, 2012. This 33 page document is available at the Appraisal Foundation Website: www.appraisalfoundation.org (When you land on their Homepage, single click on the left side column “Appraisal Practices Board (APB)” ; and then single click on “APB Valuation Advisory” and then on “APB Valuation Advisory #3.”)
The most frequent question I’ve received in my “Ask Henry” mailbox over the past few years is “How does an appraiser make an appraisal of a property in a declining market?” The majority of these questions come from residential appraisers and express their confusion as to how to include (or not include) consideration of distressed sales, short sales, foreclosure sales, etc. — and if such comps are to be used, how they should be adjusted. I will address these problems in more detail as I summarize and comment on the eight subjects that make up the Valuation Advisory #3.
I. How Should an Appraiser Define a Declining Market?
Since there is no universally accepted definition of a declining market, it is incumbent upon the appraiser, when they report that the subject property is in a declining market, to include in the appraisal a definition of the term “Declining Market.” Support must be presented that demonstrates that the subject market area fits the provided definition.
For example, you might say: “A declining market is one where the median house prices go down for two consecutive 3-month periods.” To use this definition, you would then have to supply the necessary data about median sale prices in the subject market, showing that they have gone down during the past two 3-month periods. Keep in mind that an appraisal is based on historic information and is not a forecast of future conditions. It is not good appraisal practice to forecast the market direction or trend for the subject market into the future.
A happy and prosperous New Year to all at Real Estate Valuation and Ask Henry Harrison!
Lot of talk out there about regression analysis becoming part of a report. I for one would be happy, but foresee a few problems. I gave up on regression as most of the people reading the reports did not understand what it is or what it means. Secondly, data input is as critical as with a real market comparison. My experience is that any savvy computer person can make the market comparison say anything they want. Sad, but there are no rules for the data input, and it often has to be expanded to competing neighborhoods.
There is no substitute for honesty and good judgment. Experience in these trying times is more important than ever.
I'm tired. Tired of taking a rap for working for an AMC. (I do a fair number of reviews, and most would not make it to first base for the people I work for!) Tired of competitors coming fifty miles, with no local MLS data, or geographic competence writing meaningless reports to support a value that cannot be reconciled.
Certified Residential Appraiser - Florida