Tag Archives: #appraisalindustry

Add Histograms to Your Appraisal Tool Kit

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.

Gross Living Area Histogram

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.

Sale Price Histogram

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:

Year Built Histogram

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:

Table or Histogram, which is better?

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!

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%.

First Not Ugly Histogram

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.

Default Bin Width

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

100 sf Bin Width

Here’s bin width equal to 500:

500 sf Bin Width

Here’s bin width equal to 200:

200 sf Bin Width

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.

The Subject’s Position in a Market Area

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.

Find My Appraiser

FindMyAppraiser.com

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.

Why You Should Join An Appraisal Organization Especially Now

Is history doomed to repeat itself?
Is history doomed to repeat itself?

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.

AppraiserFest 2018 Impressions

I want to add to the praise for the first AppraiserFest held last week in San Antonio. Kudos to Phil Crawford, Lori Noble, and Mark Skapinetz for a great first event! I’m very glad I made the decision to attend.

I was struck by how positive everyone was at the event. Even though the residential appraisal business is under threat from changing client needs and reduced loan volumes, AppraiserFest speakers gave us many ideas for how to grow our business.

I greatly appreciate that this was an appraiser-centered event with a distinct lack of client presence.

Attendees were younger than typical for industry events, a refreshing change. Also, a larger percentage of attendees were women.

I spent much of my time at AppraiserFest with George Dell and Steve Smith at the Valuemetrics booth discussing data analysis with attendees. Hanging out with George and Steve for several days was like a master’s seminar in appraisal. I’m so fortunate to have mentors so willing to share their experience like these two.

Tom, Ryan, Jamie, and Bill with yours truly at AppraiserFest

Meeting online friends in real life was the best part of AppraiserFest. I was fortunate to break bread with some of the best appraisal bloggers in the country including Tom Horn, Jamie Owen, and Bill Cobb. And Ryan Lundquist, a long-time friend in real life (!), was kind enough to put up with my snoring. Thanks for sharing the room Ryan.

This was my first trip to San Antonio so I had to visit the Alamo and the Riverwalk.

It was great catching up with Diane, John, and Teresa from the Excel class I gave in Portland two years ago. Can’t wait to see you again.

Takeaways:

  • Positive vibe throughout
  • Great networking with people I actually wanted to meet
  • Very professional event with great speakers and topics relevant to my day-to-day business

I will be back next year!

 

The Outsize Influence of Sacramento on the Appraisal Industry

Sacramento area appraisers stand large in the appraisal industry. We have much more influence than you would expect from a sleepy state capitol halfway between San Francisco and Lake Tahoe. Here are four locals you might know.

Ryan Lundquist might be better known by his website http://sacramentoappraisalblog.com/. He is one of the leading real estate appraiser bloggers in the US and is widely quoted in national media. Here’s a link from quoting Ryan in Ken Harney’s national real estate column from yesterday. Locally, Ryan is famed for his monthly regional market summaries and for being named the 2014 Affiliate of the Year by the Sacramento Association of Realtors. Realtors voting an award for an appraiser? Really? See Ryan speak at the Appraiserfest this November in San Antonio about his expertise in leveraging social media to increase his business.

I’ll be at Appraiserfest too if you want to grab a beer.

Next up is John Brenan. John is the Director of Appraisal Issues for The Appraisal Foundation (TAF). He’s the appraisal point person for the Appraisal Practices Board (APB), Appraisal Standards Board (ASB), and Appraiser Qualifications Board (AQB). Or, in English, he’s the guy helping to set the standards, qualifications, and practices for our industry. John was the author of TAF’s letter urging that the Appraisal Subcommittee reject TriStar Bank’s request for a temporary waiver of appraisal certification and licensing requirements. Every appraiser with lender clients should be grateful for the support. Here’s more about how our industry dodged a bullet.

Don Machholz is another local appraisal industry star. When Fannie Mae required the 1004MC form added to residential appraisals in 2009, Don stepped up and created the 1004MC Calculator and released it free of charge. Don created almost 50 different versions for use with different MLS systems around the country. I went from an hour before Don’s spreadsheet to 5 minutes with it. Don went on to create a host of tools for appraisers to use and now that he’s retired, you can download them all on Don’s website for free. Photos from Don’s retirement party below….

Vicki Keeler may not be known as well outside of the region as Ryan, John, and Don but she deserves to be recognized. She’s one of the founders of the Real Estate Appraisers Association (REAA). REAA started in Sacramento as a local appraiser association and has grown to five chapters across California with approximately 300 members. REAA hosts monthly or bimonthly meetings for practicing professionals and is a model for other state appraiser organizations. Vicki has devoted countless hours to providing education to her fellow appraisers and is one of the unsung heroes of our industry.

Not too bad for a sleepy little town in the middle of the Central Valley….

Multiple Listing Service Reporting of Private Sales from an Appraisal Perspective

 

Today I was asked to comment on the issue of reporting private sales to my local multiple listing service (MLS) by a friend who works for Metrolist, the MLS for the Sacramento region. Today, Metrolist and most other local MLS systems do not allow for sales not sold through the listing service to be included in the sale databases maintained by these organizations. There’s a push within the residential real estate community to include this data. Here’s my response for why, from an appraiser’s point of view, I think it’s a bad idea:

As appraisers, data is our lives. We want available as much data as possible to help us value properties. By rule, we’re required to consider all competitive sales when valuing a property. The vast majority of assignments are for some version of market value. Here’s FNMA’s definition of market value:

“Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  • buyer and seller are typically motivated;
  • both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
  • a reasonable time is allowed for exposure in the open market;
  • payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  • the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.” (FNMA Selling Guide, Section B4-1.1-01)

This definition requires us appraisers to confirm some information regarding every sale used as a comparable in our reports. We must analyze each comparable we use in the sales comparison approach, the primary method for determining the market value of single family residential homes in the US. We must understand that both buyers and sellers do not have unusual motivations and that the comparable sale was properly exposed to the market so that all interested parties could bid on the comparable sale. The most widely used marketplaces in most of California are the various multiple listing services. Exposure on the local multiple listing service gives the widest viewing to potential buyers and allows for market mechanisms to arrive at the market value for any given home. Without this exposure, there is significant uncertainty whether the agreed-to price is market value or something else.

In addition to the value of having a central marketplace with mechanisms to arrive at a market value, the multiple listing services serve as a central repository of data. Most of the time, we can look at one central database and see all relevant property characteristics and data. Additionally, we have record of listing agents and buyer representatives who we are required to contact as part of due diligence. Some of the markets we cover have a significant percentage of sales not reported to the local multiple listing service. In general, we do not use these transactions in our appraisals because of the uncertainty of whether they sold at market value or not. For example, the for sale by owner that puts a sign up on his lawn may attract offers from people driving by but most likely he missed all potential buyers and may have sold his home too low. The “pocket listing” of one agent only marketed to agents in his office misses a huge pool of potential buyers. As appraisers, we can’t rely on these sales as primary data-we just don’t know if the sale price was market-derived.

I have worked extensively in Solano County over the past 15+ years. BAREIS, the multiple listing service for this area, has accepted sales data not sold through the MLS and reported it as “Sold Off MLS.” In the handful of years since this data has been offered, I have used it once in approximately 300 appraisals in Solano County. The sale used was included as secondary evidence for a very difficult assignment because this sale was not clearly a market value transaction. In more than 95% of assignments, I do not bother to check the “Sold Off MLS” sales. Even when similar sales are very difficult to find, the “Sold Off MLS” sales are not very helpful.

Does your local MLS system allow for agents to enter non-MLS sales into the database? Is this good or bad in your opinion? Why or why not?