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A Must Read for Real Estate Professionals...

Reconciliation of Value (c) 2007 Leigh Pollet


Real estate appraisals are (finally-once again) undergoing greater scrutiny thanks to the current mortgage-crisis-mode-market. One aspect of that scrutiny centers on the question of how appraisers arrive at and justify their final value estimate

Ever larger numbers of appraisers appear to becoming more lax in their preparation of reports and in adhering to the appraisal process. However, with the newť Limiting Conditions in effect, the LC has passed liability for an appraisal on to a larger end-user group. If appraisers are not yet finding that they need to justify their valuation position to an increasing number of clients, they soon will be.

In the name of expediency and closing ever greater volume, appraisers and lenders justified less then quality and supportable work, and less then appropriate and defensible reconciled value, by noting that rising real estate values covered all sins – including less then appropriately addressed value estimates. That scenario is changing rapidly.

Reconciliation by definition is the final resolution, the bringing together of the valuation methodology, to arrive at a supportable, final conclusion. What has been promulgated through the years, and is the only methodology to withstand the rigors of court cases, is based on a directed value estimate leaning on a specific adjusted value of the most competitive sale, individually, to the subject.

In other words, the reconciliation of value of the Sales Comparison Approach (the Market Approach) should gravitate to the adjusted value of a specific sale comparable (adjusted) which offers the most appropriate (adjusted) characteristics of value (individually) to the subject, of the sales offered for consideration in the report, and appropriately supported by the other adjusted values.

In this manner, the appraiser has (theoretically) reviewed and compared the best available competing sales to the subject, selected the most appropriate of those sales, and then individually compared them to the subject. That is a trend that appraisers have been gravitating away from.

Appraisers (are supposed to) apply adjustments for pertinent differences, to sales comparables, individually, comparing each factor to a competing factor of the subject property. This is supposed to appropriately account for those pertinent differences, especially those that impact market derived value, between each sale, individually, and the subject. To arrive at a supportable final value estimate, we must have accurate data applied appropriately for these factors. That data is then supposed to be reconciled individually for each sale, resulting in an adjusted value for the sale that reflects an alternative substitute for the subject if the subject were replaced by that sale.

This is repeated for all of the sales comparables applied in the valuation, resulting in their adjusted values. These adjusted values are supposed to reflect and convey a value estimate which is supposed to be as accurate and market driven as possible.

These competing sales are supposed to offer an alternative to the subject if the subject were not available for sale (Theory of Substitution) and the comparables were offered as an alternate choice to a typicalť open market, arms-length purchaser.

Ideally, each appraisal would garner market drivenť adjustments from a paired sales analysis to justify each adjustment applied. Realistically, this happens far too infrequently. For the average appraiser to conduct a paired sales analysis for each 1004 completed would result in astronomical fees, excruciatingly lengthy turn-around times and probably not too different (and well within accepted tolerances) an end result from their “experience-gathered-and-applied” market adjustments. But those market-experienceť adjustments are still not quantifiable factors.

More and more reports with value estimates are being grabbed from anywhere within the range of adjusted values – and sometimes from without. There is no attempt at a true direction, no attempt at justification of the value estimate, just a number placed on the form.

For example: three adjusted values are: $150,000; $155,000 and $165,000. The sale with the least adjustments, with bracketed primary characteristic focus points or extremely competitive points or a near matched pair happens to be the bracketed value at 155,000. Sounds like a good direction for the appraiser to head for a value estimate, right? So why would an adjusted value be, say $157,000? Many appraisers answer, because that is what they feel it is worth.

Theoretically, let's take this appraisal to court with just the above data to consider. Add a second appraisal that justifies its value estimate, using the exact same data but offering a value at any one of the adjusted values, but for this argument, going to the $155,000 (adjusted) sales price.

Appraiser 1 is at the $157,000 value. Appraiser 2 is at $155,000. #2 can justify his value decision by pointing to the sale with a defined adjusted value from the three sales. Sale 2 offers the most competitive value indicators, individually to the subject and this is recognized by the adjusted value as compared to the subject. In a more detailed valuation, this would be recognized by a paired sales analysis. Therefore, the appraiser reconciled to that particular and most competitive sale with its adjusted value as identified by that adjusted value as compared to the subject. Whereas appraiser one offered a “reconciled” value estimate based upon what he feels it is worth from the value range – with no defining support for that value.

That is not the definition of reconciliation of value just a blind opinion with no essential supporting documentation. Why wouldn't an appraiser want to present the best possible and most supported value direction on a 1004 (if he/she would in a narrative?

Generally speaking, a court would almost always toss out the first appraisal as an unsupported opinion of value, while accepting the second as a (better) supportable opinion of value.

Appraisers need to treat a 1004 or any form report as a condensed version of a narrative, and offer the best and most supportive data and reconciled approach to a value opinion; a reconciled value that is able to defend itself. That defense is a resolved value based upon the most competitive sale, adjusted to the subject and then the reconciled value selected to that particular sales’ adjusted value (supported by the other (two) sales). Not an (unsupported) value grabbed from anywhere in the adjusted value range.

Mr. Pollet has been an appraisal professional since 1980. He currently serves as a chief regional appraiser for one of the nations largest lenders; prior to this position, he was the CEO and founder of a firm bearing his name for over 11 years until selling the company. Before that, he served at several major financial institutions as a corporate officer and chief appraiser.

This article is owned by Mr. Leigh Pollet (c) 2007. This article may be reproduced as long as it is reproduced in its entirety and the author and copyright are clearly displayed.

Discussion on marketability and sale prices

in a Market impacted by a natural disaster: 2012


Leigh Pollet, New York State Certified Appraiser,

Accepted Real Estate Valuation Expert, President, Pollet Assoc., ltd.


and with assistance from : Bill C. Merrell, Ph.D.

N.Y. State Certified General Appraiser/Educator

Director/Founder: Merrell Institute


This article was written by Mr. Pollet with assistance from Dr. Bill Merrell and its use is governed by all applicable copyright laws. Its use is permitted as long as the authors are recognized by any persons/organizations quoting from this article.Both Dr. Merrell and Mr. Pollet are appraisal experts; both have been accepted by and have practiced in front of federal regulators, as well as  state and local governmental authorities and in numerous and various types of litigation. They have a combined 65+ years of valuation experience. Mr. Pollet has published extensively on real estate valuation issues and his articles/research have been used and quoted in litigation as well as scholarly pursuits.


There is an immediate demand, especially from lenders, for appraisers to make snap decisions regarding market value and marketability, of properties in disaster areas such as the current situation with Hurricane Sandy on the east coast.


The first thought from most appraisers is that property values in the impacted areas have declined as a result of the disaster. It is "assumed" and "expected" by lenders that the appraiser(s) will so note that dimunition of value in disaster reports.


However, 'gut feeling' and assumptions are not necessarily supported by empirical data.


As of this writing, the recent hurricane has impacted closing activity so that in certain areas, there has been no recorded sales activity since October 28-29. This is actually to be expected, especially for homes in the disaster impacted areas, as people are more interested in rebuilding their lives, having power restored, heat, etc. than buying/selling homes.


Since there is nothing recent to compare with, the appraiser(s) have conducted research into prior disasters and their impact on housing prices and housing marketability.


Florida has seen extensive hurricane activity over the years, and there are several published data bases relating to the aftermath of these disasters on housing. Repeated disasters face a different set of circumstances than the current situation we face in the New York metro area, which is viewed as a once-in-a-lifetime disaster. A more competitive situation to view would be that of Hurricane Katrina in New Orleans. While the appraiser(s) did conduct research into various Florida hurricanes, this article concentrates on presenting data extracted from Hurricane Katrina.


As noted, Katrina, as an essentially "one time" disaster, appears to compare to Sandy. While the level of destruction of property was far worse with Katrina on the New Orleans area than Sandy had on the New York area, similarities abound, making it a useful comparison for market value trends and marketability factors, especially since the economic impact of Sandy now appears to actually be worse than the economic impact of Katrina.


Immediately out to +/- three months post Katrina, as would be expected, marketability of properties and sale prices dropped. Additionally, housing stock/inventory skyrocketed - and was joined by vacancies (of both habitable and uninhabitable properties).


While vacancies might be expected in the aftermath of a disaster, a jump in houses for sale was slightly unusual. A disaster on the magnitude of a Sandy or Katrina is a sudden and severe trauma to typical marketplace activity. There can be no preparation for it. There is widespread destruction of property. Available housing stock is set upside down with a critical shortage of habitable housing, both of current inventory and potential inventory. Pricing structure is non-existent; with some habitable stock available-for-sale, people with means or insurance, may be tempted to pay beyond the prior market median to retain habitable shelter, while others may simply walk away from the market.


What was observed in Katrina, and is just beginning to be seen in the wake of Sandy, is that habitable housing stock becomes extremely valuable. This suddenly mitigates migration out of the market impacted, to a market not impacted by the disaster. Peoples first reaction to a disaster is to flee, as was seen in Katrina, and many - especially, again, in the New Orleans market, chose not to return. 


With Katrina, vast amounts of housing stock were totally destroyed. Similarly, with an event such as Hurricane Andrew in Florida in the 1990's, there were vast losses of housing stock. Compared to Sandy, those events destroyed far greater amounts of housing, and initially, promoted mass movements out of the impacted markets by homeowners.


Sandy, while causing extensively documented widespread destruction, actually caused far less total destruction of housing stock. Let me elaborate: In Katrina and Andrew, vast areas of housing were totally destroyed. With Sandy, housing stock was extensively damaged, but many of the houses still stand - albeit requiring extensive repair work. However, requiring extensive repairs versus having literally nothing left standing, is a significant difference.


In addition to the total damage to portions of the housing stock in the New York area, which has been - so far - documented as relatively small amounts of housing (of course, relative is a matter of perspective - for those who lost their homes, a loss is a loss). Certain areas sustained significant total losses of dwellings, but even in such markets, significant housing still exists and survived. Compared to photos of Florida, for example, after Andrew, whole developments were wiped out entirely. Thankfully, the New York area dis not confront such damage.


Additionally, though, there is still a large portion of housing that was damaged beyond repair. New York City has announced that it will condemn and tear down in the vicinity of 200 houses. In the balance of the New York metro area and in New Jersey, even if that number quadrupled, it would not approach the thousands of homes rendered uninhabitable in either Katrina or Andrew. In certain other areas, such as in Queens County, New York or Long Beach, in Nassau County, New York, in addition to damage directly from the hurricane (wind, water surge etc.) the hurricane induced other damage, such as fires. In Long Beach, as many as 10 homes were subjected to fire damage at the height of the storm (the waters were so high that firefighters literally could not get to the fires). However, again from a total perspective, this is a relatively small number of homes totally lost when compared with the majority of houses still standing - many, if not most, repairable.


Appraisers approach placing a value on a dwelling with one of the major theories of valuation. Most prominent is that of Substitution. Substitution is what an informed potential buyer of one property, when unable to buy that property, would pay for a similar one in a competing market.


In a disaster situation, in the first several months, there may be no comparability with which to judge such actions. The appraiser cannot use pricing models prior to the event and there is typically little activity immediately afterwards. What is seen is thus:


Those that can afford to repair and rebuild, with or without insurance, and desire to remain in place, do. Those people who do not wish to stay, regardless of the habitability of their dwelling, will leave. Those leaving will put their houses "on the open market" - and are faced with several options.


Before we discuss those options, it is important to research and understand the market impacted. With Katrina, many of the inhabitants decided to not return. This was a significant portion of the (former) population. With Andrew, many of the inhabitants did return. What we are seeing, at present (four weeks post-Sandy) is that a vast majority of the New York area hit by the disaster is faced with residents who are NOT leaving.


With Katrina, not only were lower income populations faced with an exodus of residents, but a significant portion of those people identified as significant to rebuilding the market and economy - mid-level and upper professionals, also decided not to return (many left for suburbs further out in distance from the area impacted). This has - and still is - impacting the overall economic activity of New Orleans. 


With the New York area, the vast majority of homeowners are staying. They are repairing where the damage is repairable, and those with total losses, in general (the "hard data is not yet in, so much is word-of-mouth) are seeking to rebuild.


The potential, then, is for an economic rebound in the near future.


Back to options facing homeowners:


The first option, is the homes insurance company taking the property and either leveling it or repairing it and attempting to sell it at some future date.


The second option is (will be) the influx of investors who will be seeking to buy distressed properties, with the intent of repairing/rebuilding and, in the short term, renting, with the longer term intent of selling (at a profit).


The third option, as noted, is and will be from those current homeowners seeking to stay within the same market: This group is divided into two sub-groups.


First, is the group that can rebuild/repair and remain in place.


The second group is the (apparently relatively smaller group) group whose dwellings were so badly damaged, totally lost or damaged to the point of being governmentally condemned. This group will face the options of either leaving the area, or rebuilding.  


Again, from what we are starting to see, the majority of homeowners with uninhabitable dwellings, are opting to stay and rebuild. This portends very well for the near and long term economic support for the markets impacted.


Of immediate use to our study, is the impact Sandy has had on the open market. Anecdotal evidence is that habitable units in, for example, Long Beach New York, have become extremely desirable in the three weeks post-Sandy. For example, a rental apartment building I am familiar with, had numerous vacancies prior to Sandy (+/- 5% of +/- 276 units). Post Sandy, one of the two buildings rented out entirely by the end of the second week post-storm and the other, by the end of the third week- post-storm, had only three vacancies of the nine prior to the hurricane. People were opting to stay within the market, rather than leave.


While rental buildings are not ideal to compare to single - two family detached residential units, as of the present time, this data is the only readily available known data to apply to the market.


It is important to note that many people could not find housing on a temporary basis within the impacted market. This was either an economic decision (and/or they were not covered by insurance), or the housing available was not for short term habitation (but long term, for example, with one year leases). Many of these people are temporarily staying outside of the market - but, and this is important to note, these people are returning to bring and keep their children in local schools or for local employment, proximity to family, etc. What is equally important to note is that these people are committed to staying within the impacted markets. 


Further this data demonstrates the desirability of habitable units in a sticken market, where migration out of the market is not contemplated by a majority of the residents.


The desirability of housing, however, is modified by the lack of potential buyers coming in from out of the area seeking to move into what may have been a desirable market prior to the storm.


For example, again lets's look at the City of Long Beach, New York.


Long Beach is known for its Atlantic Ocean beaches and its boardwalk, as well as the desirable lifestyle associated with an upscale beachfront community with ease of access to New York City employment centers. Most residents- again, anecdotally,  post Sandy have no intention of leaving permanently. Estimates of the "mandatory" evacuated community run to in excess of 95% of the population. Three weeks post-Sandy, huge numbers of apartment buildings (condos, coops and rentals) are still uninhabitable - but nearly all of them are undergoing repair to restore habitability. Of the entire housing stock of the City of Long Beach, within four - five weeks post-storm (as of this writing), government supplied tentative data shows that less than 5% of the entire building (not just housing) stock has been rendered habitable (or in in the process of damage-mitigation to restore habitablility/use).


Damage estimates of building stock in Long Beach run as high as 95% of the entire building stock of the city. The city has an estimated 16,000 residential dwellings. Of that number, the city is initially estimating that approximately 100 units will be condemned, which appears to include all houses rendered uninhabitable.


Prior to Sandy, the city had an active real estate market. Post Sandy, that market of people seeking to move into Long Beach, at the present time, has disappeared. However, people whose homes are or will not be habitable, and are not migrating out of the city, will put pressure on the housing stock in the near future.


This can be compared to post-Katrina New Orleans.


New Orleans-Metaire-Kenner MSA data:


total #/housing units as of 7/1/2005: 1. Jefferson Parish: 192,373

                                             2. Orleans Parish: 213137

                                             3. Plaquemines Parish: 11,290

                                             4. St. Bernard Parish: 27,292

                                             5. St. Tammany Parish: 88,791

total units/housing:  +/- 532,883.


Total % housing stock destroyed post-Katrina:              Total % housing stock with major or severe damage:

                                                1. 2.43    17.84

                                                2. 37.03 49.42     

                                                3. 35.38 45.92

                                                4. 50.37 72.13

                                                5. 1.89    19.86


(Overall, it is estimated that upwards of 90% of New Orleans flooded, mostly due to the failing of the levees post the storm surge).


The housing price index prior to Katrina shows a relatively stable line for the previous five years.


However, the third quarter of 2005 and into 2006 shows a near tripling of the housing price index, with housing prices seriously rising and continuing to rise into the first quarter of 2008, along the lines of a 25% rise in home prices during that period.


HUD estimated that the cost of housing post Katrina, rose upwards of 33% from post Katrina in late 2005 to 2009. HUD estimated that the New Orleans Metro area totally lost +/- 13% of the housing stock (rendered uninhabitable and unrepairable/unrebuildable).


Pre-Katrina, the New Orleans area had a plethora of affordable rental units (66,300 such units). Post Katrina, that number dropped to an estimated 19,300 units. Hence, with Supply and Demand, the cost of those remaining units pressured an upwards spike in rental housing costs in the range of a 27% upwards surge in cost.


HUD also offers added data: prior to Katrina, HUD estimated 587,000 residential units in the market. Post Katrina, that number  dropped to +/- 511,000 units (the balance condemned, destroyed or demolished). In the five years post-Katrina, HUD estimated that there were +/- 24,700 new residential units built in the market which still leaves the market in the vicinity of 51,000 units of housing less than pre-Katrina.


The National Association of Realtors reported a "home buying frenzy" in the year post-Katrina. Two years post Katrina, that "frenzy" had subsided and leveled off. With an estimated 8,000 homes for sale in the entire New Orleans market pre-Katrina, that number ballooned to +/- 14,000 immediately post-Katrina into 2007, but slowly leveled off towards the end of 2007 to 11,000 units in inventory.


Home average sale prices from 2003 - 2005 rose from +/- $175,000 to +/- $210,000. However, post Katrina, average home prices rose from +/- $210,000 to close to $270,000 in the first half of 2006, up approximately 27%. Various organizations attribute this significant rise in prices to the paucity of habitable housing.


The area has since suffered ups and downs in the real estate market. A great deal of those swings are due to sub-areas due to the storm - migration of mid and high level professionals moving out of the metro New Orleans market, jobs lost due to the recession, significantly higher home insurance costs etc. Still, in the two years post Katrina, median priced homes were selling at reasonable levels competitive to pre-Katrina markets. Upper level priced and luxury priced dwellings were selling much slower with inventory up to +/- 23 months for luxury homes (compared to 5 months for median priced dwellings). 


This brings us back to the current subject market (New York area). The appraiser does not have a crystal ball to tell the future. However, based upon data from previous natural disasters such as Katrina, it appears that, depending upon the extent of the damage to, and loss of housing stock, prices can be expected to at least remain stable and to rise in the near term, as loss of housing stock pushes habitable dwelling prices up (supply/demand).


A significant mitigating factor will be what the actual extent is of loss of housing stock. Median priced housing and housing generating significant rental income, however, in this market, was strong and would be expected to remain so, in the wake of Sandy.


While post-Katrina data clearly shows an immediate decrease in sale prices up to +/- 3 months post the storm, there was a corresponding increase in housing prices and a decrease in housing stock (in the immediate 12 months months following the storm); compared to the subjects market area, the loss of housing stock in the subjects market does not appear to be as significant as a percentage of housing as compared to Katrina and New Orleans.


Therefore, to summarize, it is expected that sale prices of residential properties in the areas most impacted by the hurricane may drop initially in the immediate several months post-Hurricane Sandy. However, it is also anticipated that sale prices of residential real property will rebound shortly thereafter, and possibly even appreciate in the four plus months after the initial disaster.


Addressing the 1004MC L.S. Pollet, MA, CFA,  2011


The 1004MC form, now mandated to be attached to all 1-4 family mortgage related appraisals, has become an interesting exercise in creativity. The forms original purpose was to assist lenders with determining the potential for disposing of a property if the property was taken back in foreclosure, has taken on the proportions of “anything goes”. A form rooted in exposing greater transparency for the appraisal and mortgage process, has become cloaked in more smoke and mirrors than a stage magician.


The 1004MC has as its heredity the economic crisis that still enfolds the country. With lending institutions struggling to protect their assets (regardless of the parentage of the crisis) they (and certain regulators) turned back to appraisers to provide a measure of support for their valuations. Rather than merely accepting the check boxes on page one of the URAR for housing trends, lenders  and the major quasi-government agencies, especially HUD/FHA and, following HUD’s lead, FNMA and FHLMC - decided that appraisers needed to actually document the direction appraisers were stating that the market was taking.


Much was written on the 1004MC prior to its mandated use. Appraisers worried – with reason – that the form, especially if completed properly, would add extensive amounts of time to their work load. And appraisers also worried – with reason – that they would not be paid for their extensive additional work. Despite these legitimate concerns, the added workload of the 1004MC was forced on appraisers.


Regardless of the additional work load, an appraiser is bound to appropriately represent, support and complete the appraisal. And in some cases, appraisers report that appropriately completing a 1004MC can add over an hour of work to the appraisal process. Since the 1004MC becomes an important piece of the lending process, it is important to appropriately address this form.


After conducting extensive interviews while researching this article, one thing has become increasingly clear. Essentially, appraisers, underwriters, lenders, management companies and everyone dealing with the 1004MC does not understand it. And few, if any, appraisers are completing the form to anyone’s satisfaction.


The MC form is designed to supplement the 1004’s Neighborhood Section, and to especially support the appraisers “conclusions” regarding housing trends. As noted above, prior to its introduction, appraisers merely checked a box on the 1004 noting what they perceived as the direction the market was taking. There was no support for this, just three checked boxes for Property Values, Demand/Supply and Marketing Time.


Some appraisers, either on their own, or in conjunction with lenders, began to offer a short narrative description , as part of the form or in an addendum, describing the direction they took, with support from data. Others just checked the boxes. With this haphazard approach, the roots of the MC form took hold.


Few people question the need for the appraiser to document the trend of values he/she utilizes. The questioning arises around the manner and format, ie; the MC form, that is usually the sole defense for the appraiser’s conclusions.


The MC form is designed to be completed in its entirety. However, as Jim Taylor, the retired former Chief Appraiser for the FHA’s New York office noted, since the form was implemented, it has been largely ignored by the “quasi-government organizations”, ie: HUD, FNMA and FHLMC. There has been no study of the results offered by the form and no empirical data collected. In a sense, the MC form has been orphaned; instead of being used and studied for the information it ostensibly provides, by lenders and the government agencies, it is just another form to be filled out. In Jim’s words, “It could take another mortgage crisis to get the MC form evaluated, understood and changed…” to appropriately represent the data it is supposed to represent.


As most appraisers know, it is nearly impossible to completely fill in the form. Lenders and their underwriters are slowly finding that out as well. Some lenders – not all – mandate that the appraiser completely fill in the form. The refuse to accept any “N/A’s” in the boxes, even if adequately explained

by the appraiser in the summary sections. This has the obvious result of data being input that is,… let’s call “creative”.


The problem exists with databases: If data exists at all, there are limited databases that offer listing information specifically bound by the first two column time frames: “Prior 7-12 months” and Prior 4-6 Months”.  Most MLS systems only offer current listing information. “Current/active” listings listed 7-12 and 4-6 months ago may not even exist in most markets – which is why some software programs are  blocking out those two columns.  When taking into account areas such as rural or inner city markets or areas without “MLS” or with their own (private) listing services, this data becomes nearly impossible to arrive at.


Nearly, but not necessarily totally, impossible. Appraisers who have conducted extensive work in a particular market can go back through their files to uncover data-lists. I have actually taken prior MLS “runs” from my files dating back to the prior 12 months, from a market where I am currently conducting an appraisal, and analyzed that listing data, in order to arrive at a defensible information fill for the first two columns. It took well over an hour to find, compile and present the data.


And essentially proved little, since in some of the areas I work, MLS does not cover all listings (and sales). The lender got a completed 1004MC, but with, at best, only somewhat supported data.


Fannie Mae recognizes this shortcoming. Under Guidelines for Using Form 1004MC, it is noted that “In some markets it may not be possible to retrieve the total number of comparable active listings from earlier periods.”  Yet the paragraph ends with this sentence: “Regardless of whether all requested information is available, the appraiser must provide support for his or her conclusions regarding market trends and conditions.” That concluding sentence offers perhaps one of the most important directions to an appraiser for use of the MC form, yet it is backed by virtually no substantive direction from Fannie Mae. And, as noted, some underwriters and lenders do not know or understand this, and still request the entire form be completed.


There is a real need for what the MC form represents – or is supposed to represent. Lenders need to have a better understanding of the specific marketplace and it’s trends, for the collateral they are offering a loan on. Are REO’s undermining the “market-rate” properties and their list/sale prices? Are REO’s a factor in the market? Is the market still declining, stable, or, even in some cases, rebounding and showing some appreciation? What is the absorption rate for the market (inventory v. sales activity and the time it takes for the inventory to sell)?

All of these factors can play an important role in the lenders decision making process, from making – or not making – the loan, to understanding that specific markets particular risks, and maybe making the loan, but at a different interest rate.


Which brings up a side-bar. While appraisers struggle to offer lenders appropriate data, most underwriters (still) have no idea of how to decipher the information they are looking at on this form. From conversations with underwriters, I’ve been told that for the most part, they are told to make sure the form is completed, or, as per their lender’s guidelines, filled in and explained for any “N/A’s”.


All of this has resulted in greatly expanded responsibility for the appraiser. In the past, the appraiser, as part of a typical scope of work, was “supposed to” research and prepare a defensible position for market trends. Now the appraiser has been forced to take on an altered role, from not just offering a supported, defensible opinion of market value (including their opinion of market direction) but to also providing the lender with added, defensible data about the marketplace. For the most part, the scope of work has been expanded from maintaining supporting data in files, to presenting it in an additional format. And the underwriter has been forced to accept a form and format that they may not clearly understand. Or may be misleading.


Under USPAP, and good appraisal practice, an appraiser may not mislead a client. That said, when data simply does not exist, and the appraiser “finds” data to complete the report as mandated by the lender, is this not misleading?


Completing the form takes on additional complications when attempting to actually understand the intention of the form. As discussed above, the form is supposed to provide lenders with a more in-depth understanding of trends in the subject’s marketplace.


For a simple, one family dwelling, in a market with a plethora of arms-length transactions, this should be a relatively easy undertaking.


But it may not be. If the subject is a single level “ranch” style dwelling, is the universe of “comparable” properties limited to single level dwellings? FNMA’s Announcement 08-30 notes: “When completing this section, the appraiser must include the comparable data that reflects the total pool of comparable properties from which a buyer may select a property in order to analyze the sales activity and the local housing supply.” (emphasis is mine, not FNMA’s).


The interpretation of this particular section is so varied and becoming so twisted that I believe it is leading to a loss of nearly any substantive use for the MC.


Dennis J. Black, IFAC, of Florida and a member of the ASB, noted that the complications with interpretations of this area led him to shy away from mortgage appraisals. “There is no easy answer… to understanding what is required here.” he noted. “What is needed is a narrative discussion of the results the appraiser is applying in the form.”


Dr. William White, NYS Certified General and a certified appraisal instructor noted that “… If used properly, the form could offer validity to the appraiser’s direction… for representing the specific markets activity to the lender. And for the lender to make a better informed lending decision.”


The key words are IF USED PROPERLY.

Lets go back to the ranch example above. What exactly is the universe of the “total pool of comparable properties” for this subject? Is it only single level ranch dwellings? Is it the entire “universe” of single family properties in the subjects immediate sphere of influence? Is it the entire universe of residential dwellings in the subjects marketplace?


There are two veins of thought on this. Dr. Bill Merrell, NYSC General, the Director of the Appraisal Education Network School and a qualified expert appraisal witness, offers that the entire universe of single family dwellings should be considered and offered to the lender. “The form and the form’s intent are that it addresses competitive properties to the subject. In the case of a single family dwelling, that encompasses the entire single family inventory in the subjects market. There should not be a distinction between types of single family dwellings in representing the marketplace and its activity, to the lender for the lender to make an informed decision. The place for the appraiser to make distinctions is in the Sales Comparison Approach grid.”


There is a great deal of validity to this point. When the appraiser considers the Principle of Substitution, if a single level dwelling is not available for inclusion in the Sales Comparison Approach, the appraiser must seek the most similar competitive property with which to compare the subject – as a “typical” potential purchaser might do. Hence, if the appraiser is using different styles in the Market Approach, shouldn’t the appraiser also consider alternative single family dwellings as part of the “comparable properties” that the MC calls for?


Andy Mantovani, NYS Certified General Appraiser and a certified instructor opined a slightly different take by offering a “real life” direction. “Lenders are telling us their parameters so that we can duplicate or work within those parameters. At the same time, when an appraiser is offering data in the MC, that data should be able to be replicated by the lender.” 


“Using sales similar and competitive to the subject’s specific qualities can work if there is enough data. If the property is unique, and there is not enough data to develop and support trends, then the appraiser should expand his/her search radius…” to include a wider pool of data.


If the appraiser only offers the lender data on single level dwellings in the subjects market, is the appraiser offering the lender a true insight into how the subject could be marketed if taken back by the lender? Or is the lender better served if the entire pool of single family dwellings is considered?


We need to take this one step further. Many reviewer appraisers and underwriters are reporting that the MC form is becoming even more skewed. An other example is offered: A single unit condo in an urban area in a converted former townhouse was under appraisement. The unit was in the multi-million dollar range, and there was a dearth of directly competing simplex, 2,000+/- s/f GLA million dollar + sales; there were a number of such units throughout the subject’s immediate sphere of influence, but few had sold within the prior 12 months sales and there were few listings of directly “near-matched-pair” properties.


The appraiser in completing the MC form, limited his/her pool of “competing” units to the 10+/- total sales over the course of the year, solely of similar simplex, 2,000 s/f million dollar+ units, ignoring sales of slightly smaller units and units selling in the next lower price bracket. Sales of these alternative units totaled approximately 30 over the course of the prior 12 months.

Similarly, there were only three current listings (and unknown how many “current” listings during each of the prior time periods, since this was not an MLS market) of similar simplex, 2,000 sf million dollar plus units, but over 20 listings for alternative, potentially competitive units.


The appraiser made a case for this narrowed focus by offering that a potential purchaser would only seek similar units in the same price bracket and would not consider alternative, smaller and lower price point units. In not seeking an alternative unit, the potential buyer would move to a different market.


Is this disingenuous?  People with high net worth (who could afford such a multi-million dollar unit) might only consider such similar units, and not consider smaller units of lesser price points, as the appraiser noted.  But there are many examples of people considering and buying, for example, two such smaller units and combining the two to meet their needs. In the current economy – and even in previous superior economic times, this also is not necessarily supported. Potential buyers typically seek the marketplace first, and then seek a dwelling within that market.


The appraiser was also faced with another set of challenges. The subject was in a pre-war converted townhouse, was a walk-up unit and in a building with less than a half-dozen units. With the paucity of sales of such units, despite their popularity (they appeared to be selling in less time than other condo units), again, the appraiser was faced with a limited market. There was however, as noted, a significantly larger market for near-competing condo simplex units of newer, post-war and new construction elevator buildings.


If there were no sales of pre-war walk-up units, the appraiser would venture to an adjacent, competing market for competing sales. If a paucity of such sales still existed, then the appraiser would be forced to consider sales of non-walk-up units, despite certain suggestions or guidelines dissuading such comparisons. Appropriate adjustments would have to be applied in the Market Approach. But there is no “Market Approach” with which to make adjustments in the MC form.


And that brings us back to the central question: What constitutes, as FNMA noted, the “…total pool of comparable properties from which a buyer may select…” that the appraiser is supposed to analyze?


I propose that the functioning of the marketplace itself should dictate the direction the appraiser take, without manipulating the data to “make it fit” the appraisers perception (or worse, a deliberate misstatement of the marketplace by the appraiser) to support their contention of market direction.  After dissecting the information above, we come back to the fact that the market is in and of itself, an indicator. If there is a flood of inventory, then absorption rates will suffer. If the government provides a tax credit, it (did) might stimulate purchases. If the economy is in recession, most likely prices are going to depreciate along with everything else.


Hence, if the appraiser treats the market to determine data for the MC form, as he/she should with the Sales Comparison Approach, then as noted, the market will dictate the forms direction. And that will generally mean that the entire pool of “competing” properties must be considered.


For residential single family dwellings, I submit that the entire pool of single family homes in a specific, defined market are all similarly impacted by market/economic conditions. To single out solely the one level ranch style dwellings as “the competitive pool” for a single level ranch style subject property is misleading. To single out only multi-million dollar condos in a marketplace where a paucity of such units exists and ignore the balance of condo units (such as simple million dollar units!) is misleading the lender as to the actual forces shaping the market.


I have been following the prescriptions of Dennis Black, by presenting two sets of the data for the MC form, where I find it to be appropriate, along with a narrative description. I will usually offer the MC form with the data I consider to be most appropriate for the lenders overall interests, and then, in an addendum, offer the alternate set of data points for the underwriter to consider. This is by far, time consuming and sometimes duplicative, in terms of net findings. Yet it offers the lender the most supported documentation that they should be using with which to make an informed lending decision.


If one thing is actually clear and transparent, it is that the 1004MC requires revision and greater input from HUD, FNMA and FHLMC. Further, greater oversight by those agencies of use of the form, as well as a compilation of the data reported, both for documenting market trends as well as for regulatory and appraiser oversight purposes is also necessary.


Hence, the appraiser, to avoid misleading the lender, should present the most complete data to the lender on the MC form that offers a supported position for “the market” that in the most direct form, “reflects the total pool” of properties that the appraiser would fall back on in the Sales Comparison Approach under the Principle of Substitution, if the subject or an alternate, was not available.


And of course, appraisers should be paid a commensurate fee for their added work and burden.



·         Leigh Pollet is the Principal of Pollet Associates, a real estate appraisal and consulting firm originally founded in 1980. Leigh re-opened PA in 2009 and currently serves the legal community as well as financial and lending institutions. He is a former corporate officer and Chief Appraiser for several major financial institutions on a national level. Leigh has an earned Masters degree in Land Use Planning and Policy Analysis, and is a state certified residential appraiser (and has passed his state certified general classes). Leigh is currently accepted as an “expert witness” in a number of legal and governmental situations. He has also taught real estate appraisal classes and has numerous r/e appraisal articles published both in ink and on-line (including one article with over 15,000 “hits” and reportedly cited in numerous court/legal situations). He can be reached at: