Why do appraisers make adjustments?

Have you ever asked yourself why appraisers make adjustments? It’s not something you think about everyday, but whenever you get an appraisal back from the appraiser or the bank,  it’s something you may think about and that may make you scratch your head.  Why did they make a positive adjustment for this, and a negative adjustment for that? How did they come up with the amount?  These are all questions I hope to answer for you here.

Why Make Adjustments?
An appraisal is an opinion of value. The value is estimated by looking at what other similar properties have sold for. While the method for picking comparables sales is a whole other topic and not the focus of this article, I will say that properties are chosen by using homes that are considered inferior, approximately similar, and superior to the subject.  This is called bracketing.  When I say inferior, approximately similar, and superior I mean that the comparables may be smaller, similar in  square footage or larger.  In addition, the sales may have some features that the subject does not have but that would be considered beneficial, or they may lack a feature the subject has.  Appraisers make adjustments to bring the sales more in line with the subject property. After the adjustments are made the resulting value range will give a good indication of the subject’s value.

How Are Adjustments Made?
If a sale has a superior feature to the subject then a negative adjustment is made to that sale.  If it has an inferior feature then a positive adjustment is made.  Sales that have a feature approximately equal to the subject would require little or no adjustment.  In a perfect market, after all adjustments are made, all of the “adjusted” values would be the same and this would be the subjects estimate of value, or appraised value.  Since there are many things that effect value, and most real estate markets are not perfect, each sale will have a different “adjusted” value.  The subject’s final value estimate is reconciled from this range of value based on such things as the condition and quality of the subject as well as the local real estate market, including current supply and demand.

How Do You Know The Amount of Each Adjustment?
The amount of each adjustment is determined by various methods.  For example, in a matched pairs analysis the appraiser would find two homes that were equal with the exception of one feature.  The difference in sales price between the two homes would most likely be attributable to the one difference.  This adjustment amount would then be used in the appraisal assignment when the subject and sale differed due to this one feature. Various other methods exist to determine adjustment amounts, however the general premise of each method is that they measure the market’s (buyer’s) reaction to various differences or features of a home and answer the question: “How much would a typical buyer pay for this feature”.  The cost of an improvement will not always equate to how much that feature should be adjusted for. Cost does not always equal value, and that is what we are really making an adjustment for: value.  Pools are the go to example in this regard.  Just because it may cost $30,000 to install a pool, the actual adjustment for this feature may be less.

I hope my explanation about adjustments in this post helps answer the why and how questions of this often misunderstood part of the appraisal process.  Do you have any other questions about this topic? Please leave me a message below, I would like to hear from you.

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