Mining for Data - Part 9 : The Finale

We began with the recognition that understanding trends in a real estate market involves data collected not only over a historic time period, but that also the most current data may be several months out of date. We also stated that knowledge of current listings, their marketing histories, and the typical exposure time in the market helps us interpret current market pressures. Such information is important to investors in order for them to make sound financial decisions.

In the second installment, we pointed out that an accurate neighborhood description is critical to maintaining the credibility of an appraisal report that has come under scrutiny. The third installment pointed out some of the general difficulties that would be encountered in trying to nail down an accurate neighborhood description. It also outlined some sources that can be used to help build a good neighborhood description; one that lends itself to gathering sales data on an objective basis and without ambiguity.

Session four dealt with the mechanics of searching the public records section of Realist.com in the CRIS MLS system for the recorded sales and exporting the data to a file for later analysis. Installment five walked us through the process of converting the Realist.com data exports into Excel spreadsheets and formatting the spreadsheet into a more useable tool.

Session six dealt with making certain the data in the spreadsheet fit some basic assumptions, and then presented the mechanics of finding the measures of central tendency for the data. The seventh installment tabulated and compared six years' worth of statistics from Realist.com and the CRIS MLS, for the same neighborhood, and session eight discussed the discrepancies in the two statistical sets.

The sad truth is that all of this has been tedious work. It has been an exercise that would be totally unappreciated (and possibly resented) by the loan officers who order the appraisals, and the findings would possibly be an irritant or inconvenience for the administrative reviewer or underwriter who had to deal with the appraisal report containing them. In most cases, the appraiser doing this kind of analysis would find that if he were searching out and using truly comparable sales for the appraisal of his subject, the neighborhood description would make no difference whatsoever in his opinion of value. Why, then, go to all this trouble?

Value is a subjective matter. The appraiser renders an opinion of value that is uniquely his own. The client then relies on that opinion to make a decision. It must be assumed that the decision is significant enough that the client has required an unbiased opinion of value. The credibility of the opinion rests on the trust that the client places in the appraiser, and in a modern marketplace, it is not usual that the client personally knows and trusts the appraiser. The appraiser's credibility is established in the truthfulness and internal consistency of his appraisal report.

The appraiser may say, "I know this neighborhood. Houses sell for $X,000 - $Z,000 and I believe my subject is worth $Y,000." He may have a well reasoned value opinion -- but what if the rest of his report was "Plucked From Air" to suit the comfort of his client?

We have reached a point in history where irresponsible lending practices, founded in the greed and carelessness of both investors and borrowers, are generating widespread economic tragedy. Homeowners are losing their homes to foreclosure, and investors are losing their hope of long-term gain. Litigation to fix the blame for this tragedy will drag many appraisers into the courtroom to testify in their own defense. The simple fact is that the data existed all along to establish the characteristics of a neighborhood with acceptable accuracy, and yet many appraisers bungled that part of their job.

Even if the appraiser in litigation can show that his comparable sales were valid, and can explain his reasoning for making adjustments to those sales, a clever attorney for the plaintiff can avail himself of the true neighborhood description for the subject property. It will come down to the heart-wrenching plight of a destitute borrower, who has become homeless, against the appraiser who was relied upon to be accurate in his reporting of the facts. Then, if the appraiser has no factual basis for the neighborhood description in his report, even though his value opinion may have been reasonable when viewed against the comparables, his credibility before a jury will have been diminished and he may be seen as a contributor to the plaintiff's woes.

Set against this, taking a bit of time to find the facts and report them, distasteful as they may be to the loan officer or real estate agent who simply wants a quick close to the sale or refinance at "whatever number it takes", is cheap insurance.