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Take the self-discipline out of mortgage pay-downs

National Mortgage Professional
Aug 28, 2007

From the Appraiser's Perspective Charlie W. Elliott Jr., MAI, SRAunique property appraisal, non-conforming, location, gross living area, site size, age and condition The unique property appraisal As an owner and of an appraisal company for 27 years, I have had the opportunity to review thousands of appraisals. It has been my observation that there are many qualified appraisers in our industry, and that most do a conscientious job. Yes, we run into a rotten apple once in a while, but for the most part this is the exception, not the rule. On occasions when we find appraisers who cannot or will not cut the mustard, they usually can be spotted a mile away. We either reject their work or submit it to more-than-normal scrutiny, insisting upon the necessary corrections. With such non-professionals, we usually take note not to subscribe to their services once they have demonstrated less-than-satisfactory results. Now that I have addressed this issue, it may come as a surprise to some, however, that most appraisal problems that we encounter do not involve unprofessional appraisers. Without question, most of the challenges, which we are confronted with as appraisal professionals, are that of the unique and non-conforming property. We use the term "non-conforming" because, as appraisers, we use certain criteria for comparison purposes to establish a value for subject properties. If the property is so unique that this criteria is all over the board or is light years apart when the comparable is compared to the subject, it is often of little value to the appraiser in determining and/or demonstrating value. What are some of the criteria that make a property unique or non-conforming? Listed below are a few of the qualities possessed by properties that we find most often causes them to be classified as unique. Location One of the most-often confronted issues relative to the uniqueness of a property has to do with location. In recent years, we are finding that more and more homes are built in rural or mountainous areas. This seems to be especially true of expensive second homes that are, in many cases, owned by wealthy people. This is somewhat of a contrast to the past, when such areas were associated with less-expensive homes owned by less-affluent people. It can present a problem when there are few, if any, upper-end properties in such areas to compare the subject to for evaluation. An example would be when a rich doctor buys a 30-acre mountaintop in a sparsely populated area and builds a million-dollar home at its pinnacle. In this case, there would be little to compare it to other than a similar property 100 miles away or in another state. Comparables such as these may or may not be indicative of the value of a similar property a distance away. Gross living area Being able to locate comparable sales that favorably compare to the subject in size is very often a challenge, especially when the subject is a larger home. This issue frequently runs in tandem with location, since there are literally millions of larger homes that sell each year. However, a lot of the time these homes are not in close proximity to each other. That makes them less comparable, even though there may be plenty of sales where the gross living area is similar. Comparable sales can be adjusted for size in order to provide an indication of value, but large adjustments can result in inaccurate value indications because adjustments are based upon contributory value per square foot, rather than overall value per square foot. For example, a property with 8,000 square feet sells for $800,000, or $100 per square foot. A very similar property in all other ways contains 12,000 square feet and sells for $960,000 or $80 per square foot. This gets especially dicey when we consider that adding just a few square feet to a house by extending one side of it a few feet usually adds much less cost than the overall cost per square foot, since this extra footage does not always have plumbing, electricity or other features that add cost to the house. This additional space may cost 50 percent or less to build than the overall cost. Site size This issue is prevalent mostly in rural areas where there is an abundance of land at affordable prices. Today more than ever, particularly in larger rural homes, we see homes located on acreage ranging from two or three acres to 50 to 100 acres. In these cases, we use comparable vacant-land sales for comparables. We make adjustments based upon the sales price per acre of the vacant land. This is not an exact science, because the existence of the homes can affect the land values on a tract. Estimating the contributory value of excess land, in some cases, can be a challenge to the appraiser. Age and condition Just how much difference does, or can, age and condition make when comparing newer properties to older ones? It can make a lot, especially when the condition and/or age are substantial. In situations where comparable sales are few and far between, this can become a major issue. An example would be a new subject property being compared to, say, a 15-year-old property, where the estimated economic life is 60 years. Does this mean that the comparable sale is 25 percent depreciated? Not always. This is especially true when the land is an important part of the value. When we consider that in some cases, at least two or three--or perhaps all of the above--conditions can affect a subject property when compared to sold properties, making allowances for differences can be a major task. It is conceivable that the above conditions could affect 50 or 60 percent of the value of the subject. Even when using the most state-of-the-art appraisal techniques, much of the adjustment process becomes an educated guess. Obtaining accurate appraisals on unique properties carries a low-confidence factor. Does your appraiser offer a confidence factor in his appraisals? A range of value can work also, in cases where unique properties are difficult to appraise. It just may be possible that a property, in some cases, does not conform to lending standards. All too often, it seems as though there is a presumption that all properties conform to lending standards. In such cases, underwriters try to find fault with appraisals when the problem lies in the property. I do not say that anything is necessarily wrong with the property, but it may be so rare and unusual that a lender may consider it a special risk. Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national appraisal company. He can be reached at (800) 854-5889, [email protected], or through the company's Web site at www.appraisalsanywhere.com. Previous columns he has written for The Mortgage Press can be seen on the Elliott & Company Appraisers Web site.
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