June 20, 2018
Bracketing Unadjusted Sales Price, What’s the Deal?
I see posts every day on social media about bracketing. It seems that many AMC reviewers and lenders have grabbed hold of bracketing to prove adjustments as the most important thing to do. The posts are normally scathing and just short of wanting to tar and feather the clients. I get the chagrin, appraisers are put under so much scrutiny anymore, and to have clients be so pushy about this topic shows the misunderstanding that many underwriters and non-appraisers have about it.
A process in which an appraiser determines a probable range of values for a property by applying qualitative techniques of comparative analysis to a group of comparable sales. The array of comparables may be divided into three groups—those superior to the subject, those similar to the subject, and those inferior to the subject. The adjusted sale prices reflected by the sales requiring downward adjustment and those requiring upward adjustment refine the probable range of values for the subject and identify a value bracket in which the final value opinion will fall.
It can be a handy tool to utilize, but it is just a tool in a toolbox with many options. In many cases, clients are starting to misunderstand why it’s a good tool and how to use for a reliable result. Many of the client’s out there have preferred guidelines that have adopted bracketing as one of the most important things that an appraiser can offer for an analysis. In some cases, I understand what they want, and I agree it can be a reliable way to look at things. But it isn’t the best method out there in every situation.
Where I tend to have my own heartburn with it is with unadjusted sales prices. Many clients want there to be enough comps in the report or analysis to bracket either side of the opinion of value, with the unadjusted sales prices of the comps being used. This is not always possible, but some of these clients require the appraiser to add in an additional sale that will meet this preference no matter what. Seems harmless enough, right?
There is a major concern that I have with this myopic way of looking at data. Appraisers know, instinctively and expressly, that selecting comparable properties based just only on sales amount is not a good thing. If the only reason you select a property as a comparable is price, then you are ignoring what selecting comparability is all about. In any other situation, if I told a client that I am selecting comps because of how much they sold for, I would get in some hot water, and fast. You see, there is a certification in the 1004 that preempts appraisers from selecting sales like this. The Fannie Mae 1004 form has a required Appraiser’s Certification printed on it:
- I selected and used comparable sales that are locationally, physically, and functionally the most similar to the subject property.
Fannie Mae wants the appraiser to use judgment when selecting comparable alternatives. Judgement that rests on soundness and long held valuation theory. We need to use properties that are comparable to the subject. Not select a comparable based on something as arbitrary as what price it sold for when it closed. Why then, do clients (AMCs especially) require this type of preference? I wish I could answer that, because the logic escapes me.
Bracketing is a relatively safe methodology to utilize when dealing property characteristics such as gross living area or bathroom counts. It can act as a method to isolate market preference easily and can show that a property characteristic is typical or even ideal. If you have a subject property that has all of it’s salient features falling squarely in the middle of the comps selected for the analysis, then you have a property with a relatively safe that it is neither inadequate or super adequate to market tastes.
I use bracketing when I can for property characteristics but expecting an appraiser to use it solely for pricing is not just bad technique. It is possibly requiring the appraiser to not follow the spirit of what Fannie Mae, FHA, VA, USDA and Freddie Mac want the appraiser to do. I often hear colleagues state that it’s Okay to follow such requests. “You don’t have to give that comp any weight”. That seems like harmless advice, but it still doesn’t make it sound technique.
I would love to hear back from the clients that require this and understand the basis in economics or property theory that support it. Maybe there is a good reason for it, but I have yet to speak with anyone that works at a lender or at an AMC that offer any insight into what it is about. It seems like most AMCs simply require it because the lenders that hire them and say this is a requirement. The AMCs simply obey and enforce it on appraisers.
I am not writing an anti-AMC post, but I am writing a pro-appraiser post. This is one of many things I see in the day-to-day life of many appraisers and it is a worthwhile topic to inquire about. Since so many of my clients require it, and I have yet to understand why this is such an important thing to do. I would love some insight into it. This becomes an especially difficult thing to accomplish on many of the assignments that I do because I do odd and unusual properties as a specialty. In these types of assignments, I am often dealing with the only house like it and bracketing, even the simplest of property characteristics is hard to use bracketing on the analysis.
Whether it is in my case, a property that is unusual, or another appraiser’s situation where they are valuing a property in a four-model subdivision, it is simply choosing a sale to use as a comparable based solely on sales price. Whether it is a directly or even indirectly competing property is irrelevant. It is simply asking an appraiser to appease a guideline that makes little sense at all. If adding something to a report adds little to no credibility to an analysis, should it be added at all?