patrick.net

How do you quantify changing market conditions? By Case or change in monthly median sales prices? Nope.

You quantify change by an initial sale and subsequent resale of the same, or an identical property with identical characteristics, at two points in time. Typically somewhere from 1-5 years. This gives you a FLAT rate of change, you won't know if it is 12% one year, 36% the next, and 24% the next. You only get the change at that particular point in time for that period of time.

For you guys/girls (or whatever) to take that historical FLAT rate of change and compound it results in an overstated level. I think that's pretty simple. How are you determining your market condition rate of change. This isn't the stock market that you can watch daily, weekly or even monthly.

Calif:

You have to compound it, and here is why:

Lets say a house is worth $100 today. Lets say prices double tommorrow, to $200. Then lets say the next day prices go down 50%, back to 100. Net 0% appreciation.

Using your arithmetic method, you would have an average appreciation of (100%-50%)/2 days = 25% per day.

Using the correct geometric method, you would have (1 + 100%) * (1-50%) = 100% -1 = 0%, the correct answer.

And by taking two sales prices of the same house over a certain period of time, you do not get a flat rate of change. You merely get the average of a continuously compounding rate. How is that average calculated? Not by simply adding the rates at any given number of periods and dividing by the periods. Using your example, the average rate of three years you stated (12%, 36%, 24%) would be 24% using your method. If you had a house worth $100 and experienced these increases, it would be $112 after year 1, $152.32 after year 2, and $188.88 after year 3. What if you just said 24% per year? Year 1 - $124, year 2 - $153.76 and year 3 - $190.66. Close but different. The more perios you have, the more the error.

I understand your methodology, and thank you for taking the time to spell it out.

What I'm saying, is if you take that methodology and discount those comps at present based on your future compounded rate, you are adjusting at a level over and above the present market rate of change based on your historical analusis and will overshoot your adjustment big time

David: You state in your rant, "but I just hate the fact that $450 of my hard earned money went into the pocket of this moron just because she took a night school class on real estate appraisal...."

And then you added your additional research in comments two days later, ie, you initially spoke out the left side of your neck, didn't you? I'm a big person though, so your apology, even if it is sarcastic, is accepted.

By the way, if you really think that the job done was poor, have your state board review it. Won't cost you a thing. I still don't think you have the basics down enough to comprehend what your talking about, disregarding and completely ignoring the compounding or flat rate % change argument. Aside from your "expert" research, have you ever had even one basic appraisal course?

Calif says

What I’m saying, is if you take that methodology and discount those comps at present based on your future compounded rate, you are adjusting at a level over and above the present market rate of change based on your historical analusis and will overshoot your adjustment big time

Let me spell it out for you again. I took the amount that a comparable sale was adjusted for "market conditions," which was 2.5% and 4% off the price, then looked at the time of the sale, and calculated a correct annualized rate of return based upon that adjustment. If she would have done the adjustment correctly, she would have taken the 1.15^(2/52) -1 to find the accurate amount to adjust down. (based upon her stated 15% annual rate of decline) She didn't and that is what I was pointing out.

Calif says

And then you added your additional research in comments two days later, ie, you initially spoke out the left side of your neck, didn’t you? I’m a big person though, so your apology, even if it is sarcastic, is accepted.

I don't think I was speaking out of the left side of my neck. The comment "took a night school class in real estate appraisal" was a simplification of the overall process for licensure. Of course, 62.5 weeks of training in the business and 21 hours of college credit, with at least 13.33 hours of the college(loosely) credits being in an approved course of study is more than "a night school class in appraisal." But not much more. That's how I feel. Did I know the exact requirement when I originally spoke? No. But I felt I was pretty close..and it turns out I was.

Calif says

By the way, if you really think that the job done was poor, have your state board review it. Won’t cost you a thing. I still don’t think you have the basics down enough to comprehend what your talking about, disregarding and completely ignoring the compounding or flat rate % change argument. Aside from your “expert” research, have you ever had even one basic appraisal course?

I won't contest it, because the house appraised for above my purchase price, so I have no real reason too. I feel I should be able to come on a real estate crash blog and point out inaccuracies in a report and question the current real estate hierarchy...perhaps vent and bitch a bit. Especially paying the $450. I have no problem defending my position to you.

I have never taken a basic real estate appraisal course. Honestly, I am more qualified to teach such a course. I am not going to disclose what I do because it is really not important, just as you haven't disclosed your profession.(though I can manage a guess or two) But I will say that I am highly practiced in various asset valuations on pretty much a daily basis.

I may have come off as an arrogant prick, but some of your comments were personal attacks towards me. Bottom line is I was right, you were wrong and no matter where you try to move the argument or hone in on semantics that does not change. Call me or think of me what you want but I never personally attacked you, and you cannot say the same.

david1 says

I don’t care what that appraisal says…its not the point of all of this. I was just complaining about the whole system really…I determined the value of the house and resent having to pay $450 for a fallacy to validate it.

Davey,

If you determined the value of the house then you should have paid cash for it. It was your lender who required the appraisal to verify if the property you are purchasing is a sufficient risk to lend you a couple hundred thousand dollars. Blame your lender not the appraiser. The lender most likely ordered the appraisal through a national appraisal management service who then selected a local licensed appraiser and then paid the appraiser 50-60% of the invoice.

You created your own fallacy in your argument. Fancy that.

My guess is this is your first rodeo.

Tex,

Touche, though I think your point it obvious.

Guess again cowboy.

David: Fair enough. But I did and do feel that you attacked not only the appraiser, but an entire "profession." Points we agree on: 1. "Profession" is used loosely, there has been and likely will continue to be crappy appraisals. Residential is where most start out 2. The system has problems with corruption (eg. Appraisers will constantly be led one way or the other dependent on wishes of those ordering/requiring appraisals). You may have PMI removal, tax consequences someday, mtg. refinance, want a review of an appraisal you feel is too high/low, and if you are desperate or feel strongly about it like the lady above, you may attempt to indicate a direction in value (lead) the appraiser also. Hell, I may too if I felt they may miss something I think is important. Have to be careful now though, its a Misdemeanor in my area under conditions.

What I think can be said about accountants, engineers, mathematicians, is that they all have exact answers (and USUALLY can prove them), but when it comes to reviewing appraisals, want to fit that square peg into a round hole. I can’t argue for her math, but the way you wrote the rant (or the way I took it, eg. there were holes with some of your examples that couldn’t be filled without more info) was that you annualized into the future at a compounded rate assuming it would continue on a straight line basis with no change, (like a return on a fixed asset investment) is wrong. Still do. At best you can look back and report what you find and adjust accordingly, but not compound that adjustment backward or forward, or you will be wrong. I think you and Persian Kitty are wrong in that respect, would love to see how your appraisal with those adjustments was received by those in the business. I’ve taken both Income Capitalization and Advance Income Capitalization thought the Institute, and honestly, those two courses are about the best I think it has to offer. Anyway, time for me to go fishing. I do appreciate you responding and will give you the last word if you want since you started the topic.

It's a loophole. One of many in real estate industry. If you think about it, there's not much you can do about it.

I think more trouble some is the conflict of interest in appraisal. That we can address just a little bit better.
There's supposed to be a guideline but it boils down to individual appraiser's moral, basically, IMHO.

Compared to realtor's 6% commission and other fees and charges, $450 flat charge is very small amount.

Technology is now mature enough to change all these non-senses. Social, legal and political change are the ones that are slow. In fact, there are now tools and companies to solve this nonsense. People are just not comfortable with new way and go with traditional human realtors and appraisers when it comes to buying/selling home. People (and legal system, of course, by lobby and so on) still prefer traditional human realtors (and their ever so prescious MLS listings) and human appraisers.

This parasite industry will be doomed by technology eventually. It's actually us, buyers/sellers, who resist to change, IMHO.

ps. You also claim to be right by compounding weekly, why not daily (wouldn't your argument play out better that way?), or monthly? Changing that variable would change your "correct" answers, no? PPs. I thought your "rate of return" was an interesting point. You treat it as a fixed rate asset rate of return? At least you compound it out that way.

I'm not compounding weekly, only compounding in the predetermined periods that the appraiser uses (that is 2 weeks and 6 weeks here) When you ANNUALIZE a rate of return, this is how you do it.

I don't disagree with your points that in the real world, assuming that an asset will continue to change at a certain rate over a year is most often going to be false. I was merely stating that the appraiser had discounted for market conditions 2.5% for 2 weeks, and 4% for 6 weeks. If you annualized those rates of change, they are 90% and 40% respectively. That these rates are not equal further illustrates that the rates are static. I am questioning how someone could state the annual decline in a certain area is 15%, and have data to support such, then pull seemingly arbitrary decline numbers that do not correlate to a 15% annual decline. It certainly is possible that if assets in an area have declined 15% of the past 52 weeks, they have declined 2.5% in the past two weeks and 4% in the past 6 weeks. Without having any data that supports this though, it is worth questioning in light of the fact that these rates vary greatly from the only support given.

And this is precisely my point. The appraiser, in my opinion, eyeballed the house, looked at the contract, thought the sales price was fair, and added a few thousand to it to get her value. Then she used arbitrary comps, with arbitrary adjustments to those comps based upon "market conditions" to support that price.

I have no problem with attempting to determine value using this method. What I do have a problem with is using this method to determine value, and then trying to fudge concrete calculations and elaborate analysis, (which was either done mathmatically incorrectly, or without the support documentation to validate the adjustments) and then charging $450 because it had the higher level "research."

In short, you are correct in stating that an asset is not likely going to continue to compound at a constant rate over 26 periods in a static environment such as house values. This is not what I was ever stating, however. I only pointed out that the report stated 15% decline over the past year, and I found it suspect that a 2.5% decline for a two week period did not seem to jive with that, because if you annualized that rate of decline it would be 90% in one year. Where is the support for the 2.5% decline in the past two weeks? There isn't any, the adjustment was arbitrary.

But you were 100% wrong in annualizing returns by using an arithmetic formula (your .025/2*52 formula). Be a man, admit it, and understand that you lecturing me on credibility and telling me to go down to the math lab at a local elementary in light of this error was one of the funniest things I have seen on patrick.net.

david1 says

I may have come off as an arrogant prick

"YES!! You are correct, sir!!"

david1 says

I only pointed out that the report stated 15% decline over the past year, and I found it suspect that a 2.5% decline for a two week period did not seem to jive with that, because if you annualized that rate of decline it would be 90% in one year. Where is the support for the 2.5% decline in the past two weeks? There isn’t any, the adjustment was arbitrary.

Where do you come up with the idea that 15% is completely inaccurate because the 2 week trend doesnt EXACTLY match the rate of depreciation stated annually? If that were a requirement, then me saying, "Home prices are up 40% in the last 10 years, but are down 20% in the last 2 years." Would be a completely fallacious and ridiculous statement. Surely a man of your intellectual stature can see the foolishness of that conclusion. Just because the "proof" was not provided directly in the report (it's not required to be furnished, yet she probably still has it) doesn't mean "there isn't any."

Look, three things are painfully obvious here:

1) Your opinion of yourself borders on megalomaniacal
2) You have absolutely no idea what methods are used to complete and appraisal, and just like the "idiot appraiser" you hate so much....are pulling numbers and calculations out of your ass just to make your case.
3) Your opinion on this matter will not change. You are pissed, you want everyone else to join the pity-party, and have no intention of actually educating youself on the matter.

Schizlor,

I never said 15% was inaccurate, only mentioned that C-S doesn't support that - and the two week trend isn't even close. Thats the question. I would think if a two week trend really was SIX times the annual trend it may be worth mentioning.

Come on, you know as well as I that there is no 2 week trend if only five comps have sold in the past three months. With such a small sample size there is barely a 3 month trend. Tell you what, I'll bet you a nickel she doesn't have "proof" of a 2 week trend of 2.5% decline.

On second thought, you're right. I am making it all up. Appraisers are infallible professionals and this report is worth its weight in diamonds.

See you guys later. I'm going to go have my pity-party all by myself.

And BTW...for all of you out there who are dumbfounded that the appraiser is not eager to "take the full tour" from you when they arrive...let me explain why this is the case.

They are not previewing the home to see how "desireable" it is. They don't give a shit about your cabinets, or granite countertops, or what shade of white you've painted the baby's room. They aren't interested in how you rewired the den so you have 7.1 in there...they don't care about all the little nuances that you feel makes the home so special. So don't get offended, nor think they are being negligent, when they ask you to leave them alone and let them check the home out.

What they are looking for is simple stuff:

-Room count (does it say 3 BR but you only have 2, or have turned one into 2 so you now have 4?)
-Does the liveable square footage jive with what's been reported before? To that point, anything even partially below grade (ground) level is NOT considered in the square footage or room count. So if you have a basement apartment, it won't be included on the report. (People who finish basements often accuse appraisers of "not counting" the new space. They are not allowed to if it's below ground)
-Are there any glaring deficiencies in the home which, if not fixed, would cause me to downgrade the value of this house because were they not fixed the liveability of the home would be affected. Things like open holes in exterior walls that can let the elements in. Rotting window sills. Extensive mold. Noticeable cracks in the foundation. -These things need to be reported and noted on the report as needing to be fixed prior to that appraised value being certified, or they'll have to adjust the value downward.

This is why they can do an 8 minute appraisal. 98% of the work they do is done with county records, and a caculator. Research and math is the majority of the actual appraisal. Granted the quality of this research and math varies wildly across the industry.

But this isn't Antiques Roadshow. It's not like, If only the appraiser had just spent more time analyzing my window treatments, he'd have picked up on that minor detail that clued him in on that hidden "value" we have here!! But he left after 10 min. We got shafted!"

You're house is not telling him what it's worth. The other houses that just sold are. He is just making sure that yours are up to par with the one's that sold, which, having already been appraised, are certified "not shitboxes" by the reviewing appraiser. When they walk through your home, they are looking for deficiencies. They are looking for things that would LOWER the value of your home. Those of you who got the 5 minute breeze-through should be happy....it means your home was perfectly up to snuff and he had seen enough. It's a good thing. Now he's off to figure out the market value of the home.

..."was one of the funniest things I have seen on patrick.net."

Happy to amuse you, that's why we’re here, right? No skin in the game. Now, go take your principles class. Real estate and commodities are two separate entities. Also, you didn’t wish me luck fishing, that was rude !

david1 says

Come on, you know as well as I that there is no 2 week trend if only five comps have sold in the past three months.

I agree that this data probably is flimsy at best, seeing as how most numbers on "current" trends are at least a month behind. I'd guess the only place they'd be able to pull numbers like that is the MLS.

david1 says

Tell you what, I’ll bet you a nickel she doesn’t have “proof” of a 2 week trend of 2.5% decline.

I'll concede that is a likelihood

david1 says

On second thought, you’re right. I am making it all up. Appraisers are infallible professionals and this report is worth its weight in diamonds.

I'm not saying that. I'm just saying, you picking on the appraiser seems a bit odd. I think it's because you're obviously in a "numbers" field and feel insulted that someone with 1/15th the training as you gets paid $450 to service you. That's all well and good. It just seems odd that of all people on your list, the appraiser made #1, above say:

Real Estate Agent
Appraiser
Seller's Agent
Seller themselves

Usually the one who bitches about an appraiser is someone trying to refinance and doesn't "get the value" they wanted (ie, sorry dude..you're underwater) OR it is someone who is trying to sell, but again gets "shafted" by the appraiser who ruins the deal with a low appraisal. I've never heard of someone getting a great deal on the home, the appraisal supporting the deal perfectly, and then bitching about the malfeasance of the appraiser. Usually it's alls-well-that-ends-well. If you showed me the HUD-1, I guarantee you I could point out half a dozen fees you paid that were far more outlandish and unjustified than the appraisal.

But if you want to run with it being a travesty of justice, have at it.

I think that's a good thing to amen this thing to Schizlor !

It is not very important, but I just wanted to correct your math david1. A 2.5% decrease in 2 weeks does not correspond to a 90% decrease over a year. Similarly a 4% decrease in 6 weeks does not correspond to a 40% decrease over a year. Your math:

1.025 ^ (52/2) = 1.90

1.04 ^ (52/6) = 1.40

shows yearly increases. For the yearly decrease you should do:

(1-0.025)^(52/2) ~= 0.51775 (a YOY decrease of 48.225%)

(1-0.04)^(52/6) ~= 0.70203 (a YOY decrease of 29.797%)

Your math shows how much they appreciate YOY given appreciations in 2 and 6 weeks, respectively. The first appreciates 90%, the second appreciates 40%. That can be used to approximate the depreciation (won't be exactly same) as:

(1.90-1.0)/1.90 = 47.368%

(1.40-1.0)/1.40 = 28.571%

And appreciation of 90% won't be reverted by a depreciation of 90%. Simplest case, an appreciation of 100% will revert with a depreciation of 50%.

You are right.

Actually, why stop at appraisers, realtors, etc.? As an appraiser, I can tell you what the main problem is. Our wise and generous government has reduced the appraisal industry to a few newbies who are willing to tell their client anything for $200. I use to take pride when I saved the bank or the buyer a lot of money because they were too inexperienced to recognize they were getting screwed by the seller and their realtor. Now with mandatory appraiser rotation, why should the experienced and ethical appraiser try any harder than Skippy who last week was flipping burgers but now has his appraisal license?

So, now where do you go for an honest deal? I can't buy a car, hire a plumber, electrician, lawyer, etc. I can't buy anything because everything made is cheap and expensive. Can't get insurance because I don't work for the government and not on welfare (yet). I can go on, but since you are obviously the only honest (and possibly smartest) guy left, I would only bore you.

David: This is now the funniest thing I've read on Patrick.net and I'm laughing w/ya.

I'll buy the pie for both of us. Where do you want to eat it?

ps. Hope you all are doing okay back in NC. Those were some hard punches !

This is exactly the "catch a falling knife" feeling.
Don't blame the "Appraiser" because you overpaid.

If you want to feel good, buy a house when the price is raising.
Currently, the house price is still falling.