Appraisal News and Business Tips

Collateral Underwriter and price per sq.ft. adjustments

Fannie is using this to show that appraisers have been using adjustments that are too low, resulting in less reliable values. They are often low “legacy” adjustments. Also, GLA adjustment is one of the few factors that work well in regression.

I suggest using replacement cost new less depreciation. For replacement cost you can use local builders or cost service such as Marshall & Swift, whichever is more accurate in you area. Then take off depreciation. The result is depreciated cost. Divide by GLA. The result is depreciated cost per sq.ft.

Fannie uses price divided by sq.ft. which does not consider land value or depreciation, information which Fannie does not have available.

For example, builders cost on a property is $100 per sq.ft. Your estimated physical depreciation is 30%. Obviously, $25 per sq.ft. adjustment is not correct. There may be functional or external depreciation, which you can include. Be sure to include how you determined your GLA adjustment in your appraisal.

Market based GLA adjustments are better, such as matched paired sales but the method above will work as a guideline.

Why are adjustments low? To comply with the 15/25% adjustment guideline, which Fannie has removed. It was never a requirement. Fannie has never had a 10% per line adjustment guideline. Of course lenders and AMCs can still require the use of the 15/25% adjustment which could be a big problem for appraisers which can result in less reliable values. I never considered the 15/25 guideline in any of my appraisals, but I never worked for lenders or AMCs who required that appraisals conform to it.

Check out the graphs on GLA and 15%/25% adjustments in the FAQ document below. I included 4 of them in this month’s paid Appraisal Today newsletter.

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https://www.fanniemae.com/content/announcement/ll1502.pdf

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7 Comments
  1. “I suggest using replacement cost new less depreciation. For replacement cost you can use local builders or cost service such as Marshall & Swift, whichever is more accurate in you area. Then take off depreciation. The result is depreciated cost. Divide by GLA. The result is depreciated cost per sq.ft.”

    NO! NO! NO!

    This adjustment is supposed to represent the marketplace, use linear regression, it is easy. The concept behind the adjustment represents the difference of how much a buyer will pay for a larger or smaller property. For example, a 50-year-old neighborhood with zero available vacants lots has an average GLA of 1,200 SF with an average sales price of $500,000. How much do you think a buyer will pay to get an extra 200 SF? Replacement cost has nothing to do with it. Chances are that a buyer in this neighborhood will pay significantly more to get a larger size home. Another example is in a community of ultra luxory homes where the average home size 8,000 SF with an average sales price of $8,000,000. How much extra do you think a buyer will pay for a 10,000 SF home? In this neighborhood, after 8,000 SF the extra square footage has limited utility and as a result, no one cares.

  2. I agree that the adjustments for gla are tricky. What I have done is to use a formula to compute the adjustment in order to minimize the maximum minimum spread with the following verbiage: “Comparable are adjusted by $___ ‘ per square foot gross living area. This value was selected to minimize the maximum-minimum spread among the comparables. The iterate formula that finds this inflection point is based on the sales price of comparables with the smallest and largest gross living areas after adjusting for all other factors as follows:
    =(compn sp +(compn sf – subj sf)*x) where compn sp = the adjusted sales price of compn, compn sf = gla of compn, subj sf = gla of subject, and x = amount of adjustment”
    Using this formula, the excel spread sheet shows an inflection point where the difference between the highest and lowest adjustment changes directions. The input for the formula is after other adjustments that include adjustments for # of baths and room count in order not to adjust twice for these amenities). I got this formula from a posting on the Appraisal Institute appraiser forum some time ago and cannot, unfortunately, recall the source.

  3. Mike Foil is correct, If you do a 1500 sq ft house with one kitchen and 2 bath and 2000 sq ft house with one kitchen and 2 baths that extra 500 sq ft is not worth $ 100/sq ft less depreciation. ‘Secondly depreciation is very subjective and can vary on the “Condition” of the home. This a lot of variables in the this process. The key is find homes of similar size which only require minimal adjustments.

  4. What is the definition of a R.E. Appraisal?? I don’t understand how the definition below has been stripped away from the appraiser and Fannie is making all the rules! How are they getting away with dictating our industry and nobody is questioning any of this new process! CRAZY

    Fannie is using this to show that appraisers have been using adjustments that are too low, resulting in less reliable values. They are often low “legacy” adjustments. Also, GLA adjustment is one of the few factors that work well in regression. I suggest using replacement cost new less depreciation.

    Real estate appraisal, property valuation or land valuation is the process of valuing real property (usually market value). Real estate transactions require appraisals because they occur infrequently and every property is unique (especially their location, a key factor in valuation), unlike corporate stocks, which are traded daily and are identical (thus a centralized Walrasian auction like a stock exchange is unrealistic). Appraiser reports form the basis for mortgage loans, settling estates and divorces, taxation, and so on. Sometimes the report is used by both parties to set the sale price of a property.

    Most, but not all, countries require appraisers to be licensed or certified. Appraisers are often known as “property valuers” or “land valuers”; in British English they are “valuation surveyors”. If the appraiser’s opinion is based on market value, then it must also be based on the highest and best use of the real property. For mortgage valuations of improved U.S. residential properties, appraisals are generally reported on a standardized form like the Uniform Residential Appraisal Report.[1] Appraisals of more complex properties (e.g., income-producing, raw land) usually include a narrative appraisal report.

  5. I find it amazing that so many home have sold with the “low” GLA adjustments we have been using. If this adjustment was low, shouldn’t all the homes that have larger than average GLA have been undervalued in the appraisal? I don’t mind Fannie assigning a risk factor to a loan, however that score has nothing to do with the quality of the appraisal or appraiser.

  6. I will have to disagree on the replacement cost, less depreciation method of coming up with a GLA adjustment. That method would distort the value for the difference in home sizes and use a figure that would be too large. The reason is, we are only adjusting for more or less “area or space”. Once you have the basic home with the high cost items, such as the kitchen and bathrooms, heating and cooling systems, plumbing, etc.; adding more space has much less cost per square foot than the basic house with all of the necessary costs associated with the house. Using your method, the adjustment includes a proportional share of the kitchen, bathrooms, etc.; even if there are no added differences in most of the basic home features. Adding space to a home is much less per square foot than the average of the total cost per square foot.

    • Fannie uses price per sqft based on the total sales price in their analysis, which is used for comparison purposes with thousands of appraisals all over the county. They don’t have access to depreciation, land value, etc. I suggest the above method as a very simple way to easily determine a more accurate GLA adjustment. Matched pair sales is much more reliable. It is better than what many appraisers do – guesstimates.

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