Mining for Data - Part 2

A knowledge of the subject property's market area is essential to providing a credible opinion of value for the property. The second section of the 1996 URAR Form and the third section of the 2005 FNMA URAR Form deal with the characteristics of the neighborhood. It is sad but also a bit amusing, when reviewing appraisal reports, to see how frequently appraisers appear to use PFA (Pluck From Air) as their primary data source for neighborhood information. Much of this nonsense is lender-driven, because underwriters set guidelines for neighborhoods and housing that is acceptable for their lending portfolio, and the loan officers then pressure appraisers to make sure the report does not contain information that would cause a loan application to be rejected.

It is uproariously funny to read an appraisal report for a house in the City of Akron (a major metropolitan area), done by an appraiser from Cleveland, which states that a home in central Akron is in a "suburban" neighborhood. This helps allow the appraiser to explain why he used comparables located more than a mile away to support a value opinion that nearby sales of similar homes would simply not support. It is also good for a chuckle to see an appraiser from just about anywhere, (for example -- I have reviewed work from Texas and Montana where the population density was perhaps 10 people per square mile, and even from Wayne County, Ohio, the second largest dairy county in the US in terms of milk production), describe a rural neighborhood as "suburban" simply because there are lenders who shy away from lending in rural areas. Because some lenders require a specific explanation when the subject's value is more than 10% above or below the predominant neighborhood sales price, some appraisers will simply plug in their final value opinion for the subject as the predominant price. Whatever makes the client happy (and generates repeat business), or whatever is fastest (because the pressure is on to provide speedy turnaround) has been the prevailing business model for many appraisers.

There are several places to get neighborhood information, and census.gov is a good one, albeit in 2007 the data collected in 2000 is somewhat old. The appraiser simply needs to take care in disclosing where he got the information, especially if change is taking place in the neighborhood. Land use patterns can be developed by accessing regional planning commissions, or local municipal planners, or, if databases like Metroscan or Realist.com are available, through searches based on land use codes.

The process of developing accurate descriptions of neighborhood characteristics is often tedious, and will consume much time for which the appraiser will not be paid by any client. Lazy appraisers may simply copy from other appraisers' reports without verifying the information, or may simply guess at what they hope will pass scrutiny. The chance that the appraiser will be held accountable for the neighborhood description is very small, since most of the emphasis in review and litigation centers around the description of the subject and the sales comparables. There is, however, that old saying in real estate that the three most important factors are location, location, and location; inaccuracy in describing the neighborhood will result in a deceptive value opinion. Further, if the appraisal is challenged in court, the credibility of the entire report may suffer if the neighborhood data section can be shown to have insupportable information.

The neighborhood boundaries must be well defined. FNMA prefers that they be defined by physical characteristics, such as streets, bodies of water, land uses, or even types of dwellings. Every real state agent knows that buyers are strongly influenced by school system boundaries, and a good example is the Ellet market in Akron. Traditionally, the area served by Ellet High School has been highly regarded, and a portion of the East Akron (East) CRIS MLS market area is within the Ellet district. It can be shown, statistically, that homes in that portion of the market tend to sell for more than homes of similar age, size, and design in the portion of the market served by East High School. The boundaries for the high school districts are readily available from the Akron Public School system.

However, there is a strong possibility that use of a school system boundary can open the appraiser to a charge of violating civil rights laws, since schools are associated with children and children are associated with familial status, which is a protected class. It is fortunate that in the case of the Ellet district, the boundaries also very closely correspond to census tract boundaries, and if those are used as search criteria, there is much less chance of a civil rights violation being charged as long as the demographic data does not enter into the description. Because the Ellet area is so prominent, mention of the school system cannot be avoided, but the use of the school boundaries alone is probably not defensible.

With some data services, the number of search parameters is limited, but the data provided can be further sorted by using spreadsheets and then analyzed via the built in statistical procedures. In the end, however, the appraiser must have a grasp of what is statistically significant and what is not, and that generally means that he must be familiar with his target market area.

Again, the time consumed in building a neighborhood description means that it is best to build a good one and stick with it, regardless whether the subject property "fits" the client's guidelines. It is safer to provide an explanation for a property that is not "typical" than it is to redefine "typical" in terms of the subject simply to provide a quick turnaround time or make an underwriter happy. It may not be good for business -- clients tend to shoot the messenger when they get bad news -- but it is legal and ethical and if your bills can be paid somehow, you will sleep better at night.