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How do you provide forecasting analysis on active listings?

By Sara Goodwin

Real Estate Appraiser with Estimation Nation Corporation

July 12, 2008 05:49 AM

As the industry collectively bite their nails these days, I find more and more odd requests coming from underwriters. This last request I just can't seem to wrap my head around and so I thought perhaps my peers and other underwriters out there could assist.

This is in regards to relocation appraisals. I am quite accustomed to adding an absorption rate adjustment forcasting adjustment to the sales in the sales comparison grid, but now one client is asking for absorption rate adjustments in the active competing sales grid. Now, at first I just rolled my eyes and thought ... ‘whatever' .... and then I started thinking about all of the extraordinary assumptions that would have to made on active competing sales. Basically the appraiser would have to assume that 1) the seller is willing to adjust their sales price to the market over time and 2) the seller actually intends to sell their house (ie: they didn't just list it on a whim because they were approached by a Realtor who told them they could get $xxx,xxx amount for the property) and 3) the seller is willing to ride out the market for the entire formula of the absorption rate time period that the appraiser has derived.

Those are three big assumptions.... Too big for me to justify making absorption rate adjustments forcasting adjustments on these competing active listings...

Appraisers, have you run across this yet? I am rolling around ideas for a new standard addendum statement as to why this new concept is so fallible it is a moot point. But perhaps I'm missing something. Underwriters, if you ask this of appraisers, what answers are you hoping to gather from it?

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Kim Sellers

Lake Arrowhead, CA Coldwell Banker - Lake Arrowhead, CA

Lake Arrowhead Realtor - BRE#01412099 - Lake Arrow

This is the second time this week I have heard this question... seems they are wanting you to have a crystal ball too.

Jul 12, 2008 05:54 AM

ARDELL DellaLoggia

Better Properties Seattle - Kirkland, WA

I have to say, I don't understand your question. Absorption rate is all about Active, competing listings as far as I know. I don't know how to do absorption rate without active competing listings.

100 on market (active, competing listings), 10 sell in a month equals a 10 month supply.

How can you do "absorptin rate" without active competing listings? I'm confused.

Jul 12, 2008 05:55 AM

Dick Betts

TOUCHSTONE REAL ESTATE - The Villages, FL

REALTOR® The Villages, Florida

Go to www.RossiSpeaks.com and he has all kinds of information on his web site. Be sure to tell him I sent you!

Jul 12, 2008 06:08 AM

Sara Goodwin

Estimation Nation Corporation - Portland, OR

Portland, Oregon Appraiser

Kim - That is interesting that you have seen this as well. Do you know of any resolutions?

Ardell - The process of determining the absorption rate does include active pending and sold similar sales, however I am referring to making adjustments on active sales on the sales comparison 'adjustment grid' (adjustment grid is in quotes as the ERC form does not supply a grid for active sales, only sold and perhaps pending sales that the appraiser has used in the sales comparison grid).

Dick - Thank you, I will have to see if Mr. Rossi has the answers.

Michael - That was not very fair of me not to give a full explanation of the absorption rate analysis. I found this link which explains it pretty well. In short, the formula goes something like this:

Absorption rate calculation: 24 actives/(11 solds + 2 pendings/12) = 24/(13/12) = 24/1.08 = 22.22 months supply.

Jul 12, 2008 07:37 AM

Kenneth M Rossman

Appraiser, Ken Rossman - Boynton Beach, FL

FL Certified General Real Estate Appraiser #RZ3504

By an absorption rate adjustment, do you mean a forecasting adjustment or is this another adjustment in addition?

I have been making forcasting adjustments on sales. None of my 3rd party clients are asking for any adjustments for listings on the (ERC) form they want the adjustments computed to an indicated value in the workfile and just an indicated range of value on the form.

Are you using the ERC form?

Jul 12, 2008 02:11 PM

Kenneth M Rossman

Appraiser, Ken Rossman - Boynton Beach, FL

FL Certified General Real Estate Appraiser #RZ3504

Michael -

I always include sales under contract/pending in my absorption analysis.

In a weak market there will be very few which will not have much of an impact. In an improving market moving towards stabilization, however, there will typically be a large increase in pendings.

To not include them would skew the results, IMO.

Jul 12, 2008 02:21 PM

Kenneth M Rossman

Appraiser, Ken Rossman - Boynton Beach, FL

FL Certified General Real Estate Appraiser #RZ3504

Also FWIW, while we are on relocation appraisals, I find it quite annoying that they rate you on a percentage of variance (anticipated to actual sales price) when the homeowner list significantly above the anticipated SP$ and then the property sits for many months in a declining market eventually selling (after huge reductions) for much less and throwing you way out of ratio.

Arrghh!

Jul 12, 2008 02:27 PM

Sara Goodwin

Estimation Nation Corporation - Portland, OR

Portland, Oregon Appraiser

Michael & Kenneth - Oops, I meant 'forecasting adjustment' and I see I did not write that once in the original post.

Kenneth - Yes, it is an ERC form. Also, I was under the impression that the percentage of variance was between one appraiser's final estimate of value verses another appraiser's estimate of value. In my experience there are always at least two appraisers and then if their variance of values differs more than 5% a third appraiser is called upon to perform one more appraisal to settle the difference.

Jul 12, 2008 02:33 PM

David Hintz

Accurate Appraisals & Consulting of AZ - Maricopa, AZ

AZAppraiser

Sara

The link you provided explaining Absorption Rate is good. But the author states in the last sentence of the 3^rd paragraph "To sell your home quicker, you need to price it lower than those below it on the list."

With that statement and the last paragraph, I read it as meaning all homes on the market will sell in the order in which they were added to the market, and the sample home will be last on the list, therefore will be sold last (end of 20 months). So to prevent the home from selling last in 20 months at a reduced price calculated at 1% per month, the seller should reduce the selling price now for a smaller amount compared to 20 months from now for it to be sold before the others - sort of cutting in line so not to be last.

On a relocation appraisal you are basically predicting what the property will or should sell for within a specific time frame - generally 3 months as a quick sale. Therefore, the advice from the link could be used to "cut in line" and sell quicker at a reduced price (perhaps based on the rate of decline per month).

I have never heard of making a "grid" adjustment to active listings for the absorption rate. I have made adjustments to the list price (in an addendum) for LPSP Ratio, and Time Adjustments (rate of decline per month for time on market - if no price adjustments have been made). Perhaps that is what they are referring to and are confused on terminology.

I am also some what confused - like Michael - with your "grid" adjustment to comparables sold for Absorption Rate. Please explain.

Michael - I do not include pendings either. They might close and they might not.

Jul 12, 2008 02:46 PM

Kenneth M Rossman

Appraiser, Ken Rossman - Boynton Beach, FL

FL Certified General Real Estate Appraiser #RZ3504

It is my understanding per ERC and RAC guidelines that the use of pending (under contract) sales is encouraged for both for use as comparable sales on the sales grid as well as in developing an absorption rate...

An excerpt from client guidelines -

There is a ton of good relocation appraisal info here:

http://www.rac.net/index.cfm

Jul 12, 2008 11:31 PM

Sara Goodwin

Estimation Nation Corporation - Portland, OR

Portland, Oregon Appraiser

I've never heard of a grid adjustment for absorption rate, but then again I've never done a relocation appraisal. As David mentioned above, is the client looking for the list price to sale price ratio to be applied to the active list prices? I've had clients ask for that in the past. Just a guess, but I could be totally wrong here.

07/13/2008 11:59 PM

by John Fariss - Appraiser Bakersfield, CA (Fariss Appraisal Services)

Jul 14, 2008 04:02 AM

Sara Goodwin

Estimation Nation Corporation - Portland, OR

Portland, Oregon Appraiser

Thanks guys, but I'm still unsure of how to make forecasting adjustments (sorry for the huge termonology communication breakdown earlier) on active sales without making over the top extraordinary assumptions.

Kenneth, could you repost that screenshot from above? I'm unable to view it.

David - Yes, relo companies do completely concur with the statement on the link, "To sell your home quicker, you need to price it lower than those below it on the list." In fact, that might be their mantra.

Michael & Kenneth - Unless necessary, I do not enter pending sales into the initial report either, but at least 50% of the time now, I am asked to add more comps after the report is turned in. This is when I generally use pending sales (with no weight to the report) as that seems to satisfy underwriters in regards to the current market. It seems to give solice that the market trends are generally more stable here than in many areas in the country.

John - I had to delete and re-enter your post above due to text wrapping issues... sorry about that.

Jul 14, 2008 04:23 AM

Kenneth M Rossman

Appraiser, Ken Rossman - Boynton Beach, FL

FL Certified General Real Estate Appraiser #RZ3504

Jul 14, 2008 04:28 AM

Kenneth M Rossman

Appraiser, Ken Rossman - Boynton Beach, FL

FL Certified General Real Estate Appraiser #RZ3504

FWIW, my experience with 3rd party (relocation) clients is they don't want high or low valuations - they want them on the money. You are penalized just as much for being too low as for being too high.

I have never been asked to make forecasting adjustments on listings on relocation appraisals.

Jul 14, 2008 04:33 AM

Adam H. Wise

Real Estate Valuation Group - Portland, OR

I'm a little confused as well the more I read the comments the more I get confused. LoL. Anyway are you talking about an adjustment to listings to express (if any) the amount below list price that homes are selling for in the area. For example if the LP to SP ratio is say 90% for the area. They are asking you to make an adjustment to all listings of -10% as that is the difference of the LP to SP for the area?

Jul 14, 2008 08:16 AM

Sara Goodwin

Estimation Nation Corporation - Portland, OR

Portland, Oregon Appraiser

Ken - My guess is that the screenshot you provided is from the same company who presented me with this request, so you might be running in to the same issue.

Adam - I know... I flubbed up the wording, but I think it was due to my initial confusion on the what is being asked of me/other appraisers. What I understand from this is that the lender is looking for across the board adjustments on active listings (as well as comparable sold properties) to determine a final value estimate. My argument is that there are so many variables in active listings that you can't just assume an 'across the board' adjustment will work.

Say that there are three active listings 'identical' to the subject in a neighborhood. The asking prices on these houses are $90,000, $100,000 and $110,000. Each sale is circumstancial. The property listed at $90,000 might be a FSBO and has little open market exposure, the sale listed at $100,000 might be a short sale, the property listed at $110,000 might be an owner that is just curious to see if they can get $110,000 for their property.... The ERC form itself is not even set up for any sort of adjustments on active listings much less forecasting adjustments.

Clear as mud?

Jul 16, 2008 07:13 AM

Kenneth M Rossman

Appraiser, Ken Rossman - Boynton Beach, FL

FL Certified General Real Estate Appraiser #RZ3504

They have been providing that instruction sheet for many months. I have completed at least 8 appraisals for them with no written listing adjustments on the report (since introduced & w/o any negative feedback) - just a range of indicated value for the listings.

Also, FWIW while the company I do 3rd party relo work for may have the same "parent" company as your AMC, they are completely seperate divisions...

Jul 16, 2008 11:00 AM

Sara Goodwin

Estimation Nation Corporation - Portland, OR

Portland, Oregon Appraiser

So I was right... they really are just picking on ME? :-D

Actually, I've been told this is a new thing that they're implementing Aug 1st... if this is in fact the same company.

Jul 16, 2008 12:08 PM