Category Archives: Appraisal Industry

Review: Residential Market Analysis and Highest and Best Use

Review of Mark Ratterman’s book

I wrote the following for the December, 2022 Appraisal Today newsletter. This month Ann O’Rourke has published my article “Appraising in a Changing Market” which I will publish here next month. That said, if you’re a residential appraiser, you should sign up for the Appraisal Today newsletter. Each newsletter has advice that I can use in my business or my appraisal work. Go here for more information.

Disclosure: This book was provided by the publisher, the Appraisal Institute, free of charge to Appraisal Today to review. Ann provided it to me so I can share my thoughts about it.

Cost is $75/$60 for Appraisal Institute members for either the soft cover book or the PDF. 252 pages

I don’t understand why the PDF is the same price as the book. Apparently, the cost approach does not apply.

This is the book to get you thinking about residential market analysis.

As noted in the Acknowledgements, this book is based on Stephen Fanning’s Market Analysis for Real Estate, the general appraiser’s market analysis book. Residential Market Analysis and Highest and Best Use follows the same outline as the other book but focuses on residential properties. Both books use the same 6 step process for market analysis and 8 step process for highest and best use analysis. Most of this book is spent discussing and reviewing the 6-step market analysis process with highest and use analysis left for the last chapter.

The book discusses the difference between fundamental market analysis and inferred market analysis and provides advice on how to know what to include for your assignment. Much of the book is timely with many examples from the Covid era plus specific discussions of rapid interest rate increases and the impact of concessions on market value.

The explanation of the market analysis process is the framework for the author to share many suggestions for best practices. For example, Mr. Ratterman makes a strong case for almost always completing at least a very basic, high-level land valuation to support the highest and best use conclusion even if a cost approach is not necessary. A specific example included in the book of a mistake that residential appraisers make, not seeing that an attached duplex could be split into two one-unit properties, was a mistake I made twelve months ago. My client was kind enough to let me rewrite the appraisal instead of suing me. Examples and advice like this are what sold me on the book.

Mr. Ratterman’s writing is easy to read. As Ann’s previous reviews of his books note, his writing is the opposite of the academic, stilted style I see in other appraisal books. He repeats important concepts and provides useful examples.

I have a couple of minor quibbles. First, I found numerous typos, unexpected in a $75 book purchase. None were significant but all were distracting. The other issue I had was with the example in the Statistical Analysis chapter. I applaud Mr. Ratterman for including a detailed example of using linear regression to value a vacant lot. His example walks through the steps to do the analysis and includes a very useful discussion of how to choose the best predictor/unit of comparison (in this case, price per acre). However, his discussion is undermined because he doesn’t mention time. It was strange to read a book where market changes are discussed at length but not included in the most detailed example.

Who is it for?

The primary audience of this book is the seasoned residential appraiser with some experience appraising complex 1-4 unit properties. The book is ideal for residential appraisers working on upgrading to certified residential. It’s also ideal for folks like me working on their SRA designation. Less experienced residential appraisers may avoid future issues by reading this book.

Conclusion: I’m keeping it. Ann saved me from having to buy it. Thanks Ann.

Click here if you want more information on purchasing this book from the Appraisal Institute. (I am not getting paid for any sales)

Table of Contents

Acknowledgements
Introduction
Chapter 1: Overview of Market Analysis and Highest and Best Use Theory
Chapter 2: Market Research in Real Estate Appraisal
Chapter 3: Levels of Market Analysis
Chapter 4: Urban Patterns, Development, and Externalities
Chapter 5: Location
Chapter 6: Productivity Analysis: The Subject Property
Chapter 7: Market Area Delineation
Chapter 8: Demand Analysis
Chapter 9: Competitive Supply Analysis
Chapter 10: Evaluating Market Cycles
Chapter 11: Marketability Concepts
Chapter 12: Data Sources
Chapter 13: Statistical Analysis Tools
Chapter 14: Highest and Best Use

About the Author

Mark R. Ratterman, MAI, SRA, has been a real estate appraiser and broker in Indianapolis since 1979. He initially worked as a residential broker only but soon moved on to focus on real estate appraisals. He has written ten books about real estate and appraisal with a focus on both residential and nonresidential topics.

Additionally, Mr. Ratterman has written courses and seminars for the Appraisal Institute and has been a teacher of appraisal courses and seminars for over 35 years. He has lectured in 45 states and four foreign countries and has written over 20 seminars for both online and classroom presentation. He has been published many times in The Appraisal Journal.

Mr. Ratterman lives in the Indianapolis area with his wife of 36 years, Jeanine. They have four grandchildren who all live in their area. His contact information is listed on the Appraisal Institute website (https://www.appraisalinstitute.org/) and can be located by clicking on “Find an Appraiser.”

Early 2022 Sacramento MSA Rental Vacancy Rate

Davis, Woodland, and Arbuckle Market Update for April and a quick discussion of appraiser shortages

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I hope you’ve had your Covid-19 vaccine shots. If not and you’re in California, sign up now here.

Inventory continues to be low in the region with rising prices and competition for most properties. Sales volume is rising as shown below for Davis and Woodland:

Activity is up in Davis from the previous 12 months

Woodland sales volume continues to increase

Inventory has risen in Davis but is still on the low side. Woodland continues to run significantly below normal.

Prices overall are increasing rapidly in Woodland and moderately in Davis. Keep in mind that specific market segments may be trending differently depending upon demand.

Includes only single family homes in Davis city limits sold through Metrolist

Woodland sales reported to Metrolist in city limits of single family homes only

Multiple Offers

Everyone is talking about competing against 15 offers and prices 30% over initial list. Davis and Woodland are competitive, but not that competitive, as shown below.

Mean number of offers received trending up in Davis. Source: Metrolist

Woodland showing a significant increase in offers received

Arbuckle Market Trends

Arbuckle is an unincorporated community of approximately 5,000 people located about 45 minutes northwest of Sacramento along Interstate Highway 5 in Colusa County. It features homes built in the 1940-50s plus newer subdivisions built over the past 20 years and is surrounded by farmland.

Inventory is very low, not that unusual given how small the Arbuckle market is. Sales volume in 2020 was down 10% from 2019, not unusual for the area. Prices have increased significantly over the past 12 months as shown below.

Rapid price increases in Arbuckle during the pandemic per Metrolist

A longer look shows the effect of the pandemic on pricing:

Prices were stable heading into the pandemic but increased as most markets I cover did over the past 12 months

Arbuckle, CA is surrounded by farmland and split by I-5

Of the 37 homes sold in Arbuckle since 1/1/20 in Metrolist, 17 had one offer and 20 had more than one with a peak of 17 offers for one property. Competition has picked up in Arbuckle, following trends throughout the area.

Every day I receive calls and offers from lenders, agents, and buyers hoping I can help them with a purchase appraisal. I’m very fortunate to be busy and can’t finish anything quickly now because of my workload. I strongly suggest everyone to be patient if an appraisal is part of your transaction. This graph below from Freddie Mac will help explain the situation.

Source: The Effect of COVID-19 on Appraisal Volume – Freddie Mac Single-Family

Appraisal volume ties directly to interest rates. When rates fall, mortgage financing rises and drives appraisal volume up. When rates rise, appraisal volume falls. However, as shown above, the number of appraisers in the US who work with lenders has been relatively stable over the past eight years. The interest rate cycle rises and falls much more rapidly than the time it takes to develop a productive appraiser, causing appraiser shortages in times like now.

Good luck.

The Best Part Of My Job As An Appraiser

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I enjoy many aspects of my career as a residential real estate appraiser. I’m self employed so I have no one to blame but myself; I set my own hours; I get to see a lot of places in the region; I spend much of my time trying to find meaning in data then communicating my findings; I even get to use a laser.

The best part of my job is the great animals I get to meet every day. I grew up with dogs in the house and have always gotten along with them. After college in the first year of our marriage, a friend offered us a kitten, Damien, who enriched our lives for 21 years. Thanks Dave.

Being able to read animals and owners is a key skill. I have yet to be bit after entering more than 5,000 homes over the past 18+ years which shows I’ve been successful.

(So that means I’ll get bit on my next inspection, I know how it works)

Anyway, here are pictures of some of the animals I’ve met over the past year.

I even met some goats recently.

And this is Brooke, our rescue from the pound, and Cat, who showed up on our patio.

Brooke, the walker who loves to play fetch

Cat. My son gave him a name but it doesn’t work for me.

What has been your experience with animals while inspecting? Any harrowing stories to share? Or have you been lucky like me and not yet bitten?

Add Histograms to Your Appraisal Tool Kit

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It was my pleasure to speak at the Sacramento chapter of the Real Estate Appraisers Association last night at the Story of Value class with my good friend Ryan Lundquist. I discussed ways to explain markets in residential real estate appraisals and focused on using graphs and was surprised to see that maybe half of the crowd didn’t include graphs in their reports. This post is the first to offer advice and instructions on how to create meaningful graphs for residential appraisers.

Four appraisers out of 50 in the room reported using histograms. The histogram is a great tool for analyzing residential real estate markets that all appraisers should use.

What is a histogram?

For our needs, a histogram is a graph that shows the distribution of one continuous variable. The histogram splits the variable into equal-sized bins and counts the number of occurrences. It works well for important residential real estate variables like gross living area, lot size, age, and sale price.

Bin size is key to creating a useful histogram. Bins too wide loses meaning as your data is clumped together. Bins too narrow spreads the histogram out too much.

The graph above shows the sales of homes in a market area with homes of certain sizes. There is one sale less than 1000 sf and one more than 3500 sf. The most frequent size of home sold recently is around 2000 sf with the bulk of the homes in the 1400 sf to 2000 sf range.

Every report prepared for a lender asks the question “Is the subject conforming?” At a glance, any home sold in this neighborhood with between 1300 sf and 2600 sf is reasonably conforming in size. There are no sales in the 4000 sf to 5000 sf range so any homes in the neighborhood of that size are likely non-conforming. The two extreme sales, at 800 sf and 5000 sf, are unusual and likely non-conforming.

This next histogram examines the frequency of sale price in the market area. The most frequent sale price is in the $240,000 to $280,000 range with $360,000 to $400,000 the second most frequent range. A home in contract at $375,000 is fairly typical. A contract price of $700,000 is very unusual and is indicative of a non-conforming home.

The first two graphs were generated using ggplot2 in RStudio. Here’s an example from Excel 365 showing the year built for homes of sales in a market:

Most homes sold in this market area (Placerville, CA small residential acreage) were built in 1970s and 1980s. A couple of homes were built in the 1800s and there are a couple of newly built homes.

The lender forms used by appraisers ask for similar information in a table format:

Which describes the market better, the two histograms or the table?

Make A Histogram in Excel

Here’s how to use the latest version of Excel to make a histogram. This page has instructions for the latest version and older versions.

Start with your data in an Excel workbook with the top row field names and rows below sales data.

Starting with the field name, select the data to generate the histogram (ctl + shift + down arrow will select all consecutive data down)

Press F11 to insert a graph. Then chose Change Chart Type

Select Histogram then press Ok

You’ve made your first histogram!

However, it’s really ugly. Standard formatting for histograms is to have no space between the bins (columns). To fix that, double left click on one of the bins to activate the Data Series editor. Select the bars to active Series Option

Change the Gap Width to 0%. Notice how the columns come together. If you like having gaps between the columns, set the Gap Width to 6%.

To change the bin width, double left click on the x-axis labels (GLA in this case). Using the Format Axis Axis options, select the Bin Width control and type in what you want. Play with it until you’re happy with the shape of your histogram.

Excel defaulted to a bin width of 370 sf. Below is what the histogram looks like with bin width equal to 100 sf:

Here’s bin width equal to 500:

Here’s bin width equal to 200:

Which one appears most useful to you?

Context

I use histograms to understand some aspect of a market. How big are the homes? When were the homes built? How big are the lots in the neighborhood? What do homes sell for in the market area?

Then consider where the subject fits in the market. Is it bigger than typical? If so, you have support for concluding market value is higher than typical. Is it smaller? Well, now you can show a reason why the price is lower.

Let’s consider the histogram above. The subject is one of the larger homes in the neighborhood but still relatively common in size. I would expect, without knowing anything else, that the subject’s market value is on the higher side for the neighborhood but with a reasonable number of homes larger than the subject. Take a look at the graph below.

The Subject is one of the bigger homes….

What if the subject was one of the largest homes in the neighborhood? The subject’s market value is likely on the upper end of the neighborhood range. Also, there are fewer directly competitive sales, implying market value may be less reliable in this market area than for a smaller home. Now let’s look at an extreme case.

Charge big bucks if you get this subject

I pity the appraiser asked to appraise a 6500 sf house in this market. However, you do have sales either smaller or larger. Here’s the time to really open your eyes to what is a competitive sale. Throw this graph in your report and your client will immediately see your data difficulty.

After you arrive at market value and as part of your reconciliation, consider using a histogram to support your market value.

Support for your market value conclusion

“The subject is newer than typical, above average quality custom home on a larger than typical lot. As shown above, the subject’s market value is on the higher side for the greater market area, as expected based on its superior characteristics.”

I hope you agree that histograms can be a powerful tool for appraisers.

Ways to use histograms:

Exploratory analysis to understand characteristics of a market area
Assist in determining reasonable search criteria for sales comparison
Visual representation of the subject’s position in a market area
Support for market value conclusions

I learned about histograms from George Dell. Thanks George. Get smart by taking his Stats, Graphs, and Data Science classes or at the very least, sign up for his blog. More info on George’s website.

Postscript: I am working towards moving away from Excel to using R, the data analysis package. I’ll link to the R code used for the two graphs as a separate post/update soon.

Why does North Dakota want to waive appraisals for 5 years?

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Once again, the fine state of North Dakota has requested regulatory relief from mandatory federal appraisal requirements. Current law requires lenders to obtain independent appraisals when loan limits are above certain levels for federally related transactions. This law, passed in the aftermath of the savings and loan crisis in the 1980s, supports prudent risk management for a lending industry that has shown time and again an inability to manage itself.

This time, Governor Doug Burgum has requested a five year exemption on the argument that appraisers are hard to find in North Dakota. His argument for the waiver is that there is a shortage of appraisers in North Dakota. But is that really true?

I decided to test this. I downloaded a list of all active appraisers in the US from the Appraisal Subcommittee website and compared the number of active appraisers in each state to that state’s population. If North Dakota has a shortage of active appraisers, the population to appraiser ratio would be higher than in California, my state, where there is an oversupply in Southern California, right? I prepared the two graphs below to answer this for 1) residential clients (residential appraisals can be completed by any licensed appraiser); and 2) commercial lending clients (certified general appraisers only). So where does North Dakota fit in?

As of yesterday, North Dakota had 2545 people per appraiser. California, in contrast, has 4,194 people per appraiser. The US overall has 3,490 people per appraiser. North Dakota is in the top 15 for coverage for all appraisers.

North Dakota has even better coverage for commercial with 4,069 people per active certified general appraiser (US Coverage: 8,371 people per appraiser). It is top 5 for coverage in the US.

Do 35 states have a shortage of residential appraisers? Not that I’ve heard. Do 45 states have a shortage of commercial appraisers? No other state is asking for relief.

So why does North Dakota want undermine prudent financial safeguards?

I hope everyone who reads this will comment on the Federal Registry. Use this link. Comments close on 7/1/19.

Find My Appraiser

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I’m excited to join the nationwide network of appraisers Find My Appraiser.

The residential lending industry is moving away from appraisals after seven years of rapid appreciation when many markets in Northern California are showing signs of slowdown and stability. I joined FindMyAppraiser.com because of their strong advocacy for appraisers and consumer protection.

From the FindMyAppraiser.com website:

“FINDMYAPPRAISER.COM IS A NATIONAL REAL ESTATE APPRAISER DIRECTORY AND JOINT MARKETING CAMPAIGN

FindMyAppraiser.com serves as the link between local property appraisers and the public that needs these services.

Let the buyer beware! Now more than ever American consumers must protect themselves when purchasing a home, buying rental property or investing in a business. These decisions are “life changing” and can effect consumers for many years to come. Buying a home is the biggest financial investment one will make and getting an accurate property value from a qualified local appraiser is best way to make sure you are making a wise decision.

Many banks don’t order appraisals! That’s right. Many home buyers believe banks will order an appraisal when they apply for a mortgage but more and more banks are using AVMs (Automated Valuation Modules) or out-of-the-area “valuers” in the mortgage process. These valuations are not performed for your benefit, they are only used by the bank. You don’t own them and you should not rely on them to make your purchase decision. You need a properly trained market expert. You need an Appraiser.

FindMyAppraiser.com is dedicated to supporting professional appraisers and promoting consumer protection.”

Thanks to Phil Crawford and Lori Noble for putting this together.

Portland, OR this week

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I’m in Portland this Thursday to give a two hour talk on tips for appraising complex properties at the ASA-IFA Portland/Rose City Chapter Monthly Luncheon.

https://www.prccnaifa.org/

Hope to see you there.

The Appraiser Coach-Why Should an Appraiser Join an Appraiser Organization?

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Recently Brian Melsheimer and I spent time discussing the benefits of joining an appraiser organization with Dustin Harris, the Appraiser Coach.

http://theappraisercoach.libsyn.com/395-why-should-an-appraiser-join-an-association

I enjoyed the discussion. Thanks to Brian for the introduction and to Dustin for his insightful questions.

Much of what we discussed is covered in the article I wrote for Appraisal Today (link).

Are you a member of your local appraiser association? Or a national group? If so, what are the benefits? If not, what are your reasons for not joining a group?

Why You Should Join An Appraisal Organization Especially Now

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I’ve posted the full version of my article Why You Should Join An Appraisal Organization with links to the organizations mentioned in the article. Now is an important time for the residential appraisal industry to join together because of threats to our place in the US real estate market. We need to spread the word of the role of appraisers, especially to federal regulators who want to diminish our standing.

If you haven’t heard, federal financial oversight groups such as the FDIC, Federal Reserve, and others have proposed changing the de minimus for residential lending in the US from $250,000 to $400,000. This is exactly the wrong time to reduce oversight in residential real estate given widespread signs nationally of markets slowing and potentially nearing a peak. Did we learn nothing in the last market crash?

Ryan Lundquist has an excellent summary on his blog (link). I strongly encourage you to sign the petition started by Ryan and Jonathan Miller at change.org (link) and to comment in the federal register about why this is a bad idea.

Yolo Solano Appraisal Blog