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[Palumbo On USPAP] Common Sense Not Perfection: Can You Block Tackle And Pass?

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Palumbo On USPAP is written by Joe Palumbo, SRA, a long time appraisal colleague and friend who is also an Appraisal Qualifications Board (AQB) certified instructor and a user of appraisal services. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP].

…Jonathan Miller

Appraisal is far from a perfect science. My favorite line in USPAP is one I wish more appraisers and users of appraisal services would take note of. The comment to Standard 1-1 (c) reads:

Perfection is impossible to attain and competence does not require perfection.

Over the past 12-18 months I have heard the current real estate climate described many different ways: depression-like, recession-like, anemic, soft and turbulent just to name a few. Suffice it to say that the national market is generally much less favorable than it was several years ago when the fraternity party atmosphere prevailed. Credit flowed like wine and all involved were happily attending the party. Buyers stuffed as much home as the could into “creative financing”, sellers cashed out or traded up and investors risk was mitigated by the rapid appreciation that even in a short time period paid dividends and made just about every deal worthwhile. The “you can’t go wrong in real estate” cliché’ became the staple notion.

One thing is for certain: today the market is clearly different.

For practitioners such as brokers agents and appraisers the normal market indicators are more important than ever. If these indicators are ignored or misread the likelihood of accuracy will fade. The good news is that what it takes to read and interpret the “good” market is also the same for the “bad” market: supply and demand, absorption, the principal of substitution and good old common sense. Unfortunately it seems as though some appraisers and realtors have forgotten about the basics. Existing supply of homes in relation to demand and in-turn local absorption rates are the foundation for existing market conditions. Coupled with price trending, absorption rates are the backbone of a good “micro analysis”, but it does not stop there. The principle of substitution is fundamental in determining what options exist for buyers in your market. Historical data (closed sales) is relevant to confirm trends and extract adjustments, but the recent and more current indicators of active and pending sale data is where the gold is.

It seems to me that this is not so much a real estate principle as it is common sense The reason is simple: why would a buyer pay your estimated ANTICIPATED SALE PRICE for the subject property when a less expensive alternative exists? Maybe you’re in a sub-market that does not yield a lot of very “truly” comparable listings, still if these are the only alternatives the market sees than it is all relative. Although ERC guidelines do not call for “adjustment” of competing properties, it can be a sound practice as a high benchmark “check” and some relocation companies have asked for such. The trend of requiring and adjusting listings is also becoming more common place in the lending environment.

Clearly the times have changed. As they say though, “the more things change the more they stay the same”.

At Weichert Relocation Resources [2] Inc, we require that the competing listings be adjusted. For the most part our appraiser panel is diligent and understanding in that exercise. I have been personally involved in cases where it is evident that this very basic concept is misunderstood. On those few occasions when I have questioned appraisers whose final value is well above all adjusted listings, I have received responses that concern me very much. “They are just listings” I am told or “they have not sold so they mean nothing”.

They mean nothing? Actually, they mean something: that you, the appraisal professional do not clearly understand the principle of substitution [3].

Believe it or not football can be like real estate. No matter how complex the situation is winning a game can come down to the execution of the very basics: blocking tackling and passing.

I had a mentor who once told me “don’t be smarter than the market, let it tell you what is happening”. I have tremendous confidence in the appraisal profession. I see hundreds of appraisals via my current job responsibilities and speak with hundreds of students giving classes. Sometimes you have to offer something other than pearls of wisdom to make an impression so I will offer no such thing here. Just a plea to my fellow appraisal professionals: get back to the basics in real estate appraisal: the principle of substitution [3], your block tackle and pass concept.