In this article, we continue our discussion from Using Recognized Methods and Techniques - Part I published previously, as we explore the use of recognized methods and techniques to develop adjustments when using the sales comparison approach for a residential appraisal, answer a frequently asked question, and identify resources available to assist an appraiser.

First, let’s review a couple of examples. Please note these examples are meant to provide general guidance to appraisers when applying recognized methods and techniques. It is impossible to address every consideration and/or exception in this article.

Example One:  Garage Size

After selecting the most comparable properties available, you find that adjustments are necessary for differences in the size of the garage. However, you do not have sufficient sales to extract an adjustment from paired sales.

Looking at the other techniques along with the available data, you determine the technique that would produce the most credible assignment results would be “cost, less depreciation.” The subject property has a three-car garage, while the comparables have two-car garages.  Referencing a reliable cost service, you find that two-car garages for the quality of the subject property cost $28.07/sq. ft. versus $24.53/sq. ft. for three-car garages. The chart below explains the analysis and application of this technique:  

Difference Between Two and Three Car Garages
Cost New	Size	Cost/sq. ft.	Total Cost New
	400 sq. ft.	28.07	$11,228
	600 sq. ft.	24.53	$14,718
	Difference Cost New / sq. ft.	$17.45/sq. ft. times 200 sq. ft. equals	$3,490
Depreciation	Effective age	10 years
	Economic Life	60 years
	Remaining Economic Life	50 years
	50/60 =		83%
	Adjustment (Contribution)	Additional car storage	$2,897
Adjustment	2,897	Rounded to	$3,000

 

As with the application of any method or technique, an appraiser must consider the data limitations and the built-in assumptions when applying the analysis.  In the example above, one key question would be: Is the lack of sales with three car garages attributable simply to a lack of current sales, or might a three-car garage be an over improvement in this market? If the latter is true, this method or technique might not result in a credible adjustment.

Example Two: Pool v. No Pool

Consider another example in which the subject property has a pool, but the comparables do not.  Knowing this amenity would affect market value, you choose to capitalize on the rent difference attributable to pool versus no pool to develop an adjustment. In measuring the contribution of the pool you perform the following analysis for several pairs of properties (only one analysis is illustrated):

Contribution of Pool
Market Rent		Rent Per Month	Calculation
	Without Pool	1,100
	With Pool	1,250
	Difference Due to Pool	$150	$150/Month
Gross Rent Multiplier (GRM)	Extracted from Market	106	106
	$150 month rent difference times 106 GRM		$15,900
1st Pair	Contribution		$15,590
Similar analyses performed with other paired rentals
2nd Pair			$14,250
3rd Pair			$16,780
		Mean	$15,540
		Median	$15,590
Adjustment	$15,590 (median)	Round To	$15,600

 

As with the cost less depreciation technique previously discussed, an appraiser must consider the limitations and assumptions built into the analysis.  While there are several assumptions when capitalizing rent differentials, one key question would be: Are the reactions of the rental market reflective of the property being appraised? If not, the adjustment could lack credibility.

As shown in the above examples, every technique may not necessarily produce credible results when developing adjustments for that particular amenity.  Fortunately, as discussed in the previous article, appraisers have many different techniques to utilize and should use their judgment when determining the appropriate technique.

A Frequently Asked Question

Given the variety of methods and techniques an appraiser can use when developing adjustments, it is common to ask, “Which technique would be best?”  The simplest answer is to use the technique that will produce the most credible assignment result. In many cases, the choice of which to use will depend on the quality and quantity of the data available, as well as the applicability of the techniques for the particular market being measured (See USPAP Standard 1-6).

In every instance, the appraiser should consider: What is the evidence available (from the market)?  And what market logic is being applied?  In the first example using cost, less depreciation, the evidence includes the estimates of cost new and the amount of depreciation applicable. The logic being applied is that cost new, less accrued depreciation, is equal to contribution. In the second example using capitalization of rent differences, the evidence includes that market rents being charged and their relationship to the sale price (GRM).  The logic being applied is the relationship between rent and the contribution for the amenity being analyzed. In both examples, the appraiser must exercise judgment to ensure it produces the most credible assignment result.

Resources

As noted in Part I, there are many resources available to appraisers that give guidance on the use of recognized methods and techniques.  Additionally, there are even specific publications for special property types addressing aspects pertaining to their unique characteristics. These resources are available from professional organizations, industry members, and in education courses, and new resources continue to be published. With a little research, appraisers can find and access these valuable resources.

Conclusion

As shown in these two articles, there are a number of methods and techniques available to appraisers for determining the reaction of the market regarding a particular appraisal problem.  No one size fits all, and there is no substitute for the appraiser’s judgment as to which works best.  As long as the appraiser employs a recognized method or technique and is able to support that decision with evidence and logic, there would be little cause to second guess that decision. Happy appraising.