Don't be a "Spaghetti Appraiser"

                                                                                             By R. Steven Bond, IFAS

I enjoy eating at a variety of restaurants with different cuisines.  One of my favorites is Italian, a well prepared spaghetti pasta served under a thick and rich marinara sauce, completed by a glass of vino and some tiramisu, wow!  Unfortunately, if the cook doesn’t pay attention to the pasta, it can easily ruin the entire meal.  Pasta that is overcooked is slimy and falls apart.  It doesn’t hold the sauce.  Undercooked pasta is just as bad.  It is stiff and can even be crunchy in some cases.  One way to avoid this issue is to toss a piece of the spaghetti against the wall.  If it sticks, it is cooked just right.

Sometimes when reviewing appraisal reports it feels as if the appraiser has used the “spaghetti test” for his comps.  Throw some data at the report and see if it sticks.  Unfortunately what is delivered for review is then a picture of the wall instead of the finished “plate” that has been artfully assembled to make an inviting presentation.  The report is a complicated mass of strands that go in all different directions and do not provide a clear picture of the value influences for the subject property.  An adjusted range of values for the comps that varies 40%, or more, hardly provides a reassuring estimation of value.  Typically the cause is one or two outliers that stretch the variance amount beyond a realistic level.

What was it that caused that outlier to “stick on the wall”?  Was it a unique architecture similar to the subject even though it is half the GLA on twice the lot size?   A dramatically different Quality of Construction rating that is well outside of the subject’s neighborhood or even sub-market?  Is it the only example of a new construction home in a 100 year old neighborhood that has nothing else similar to the subject property?  Is it the only recent sale of a poor condition residence that is located on a vastly inferior site?  What factor caused the appraiser to think that this particular sales data could be used as a comparable?

Add to this issue the question of how many comps does it take to establish a value.  Does USPAP tell you how many comps you need?  FNMA/Freddie Mac would suggest that at least three are necessary by virtue of the design of their forms.  Sometimes the Letter of Engagement will dictate a specific number.  The software companies make it easy to add as many comps as you want through “Additional Comps” pages.  There is no set regulatory answer to this question.  While some lenders may joke that they do not pay “by the pound” for an appraisal report, there are some reports which seem to be prepared with that method of establishing a fair fee in mind.

USPAP requires a clear report that is not confusing.  I would submit that a 40%+ variance in adjusted values is confusing.  I would even go a step further and argue that as much as a 25% variance could be confusing especially if the majority of the variance is due to a single outlier “comp”.  While a particular sale might be a good representation of some feature of the subject improvement or site, it does not automatically follow that it is a good comparable.  If the particular aspect is impactful to the marketability or value of the subject, that sales data has earned a mention in the report to support the developed value of the subject.  A mention could be a brief paragraph in the narrative portion describing the sale and how this sale supports the value/marketability (i.e. size, utility, view, condition, etc.) of the subject even though the property is itself not a true comparable for the subject.  The appraiser has now given recognition to the prominent feature without providing a confusing report to the intended user.  The mention of the sale has demonstrated that the research for this assignment was complete and thorough as well as establishing why that sale is not in the sales grid.

Good appraisers know how to present a report that is clear and concise with sufficient evidence to support the estimation of value and not confuse the user of that report with superfluous data that may be misleading.   The keys here are concise and sufficient evidence.  We cannot ignore a piece of important information that supports what we are reporting.  That would be a disservice to the client and most likely end in a reexamination of value due to omitted data.  We cannot just throw data at the wall to see what sticks.  USPAP specifically prohibits that course of action.  As the professional that we present ourselves to be, we must deal with the pertinent issues of the assignment and leave our client feeling satisfied that the answer provided to the valuation question was well researched, thought through completely and presented in an understandable manner.

Steve Bond is a 30+ year veteran appraiser.  He has been a subcontractor, business owner and is now, for the last 7 years, a corporate review appraiser for a major lender in a position that specializes in unique properties.  As a Certified General Appraiser he furthered his credentials by earning the IFAS, senior designation of the NAIFA.   He has served on the Chicago Chapter Board of the NAIFA which further fueled his desire to help appraisers focus on the main point of the report.  He is passionate about the concept of reliable and meaningful appraisal reports that serve a needed function.