On Time Adjustments

Measuring and analyzing changes in market conditions are critical and fundamental elements in real estate appraisal. Indeed, they are the foundation of an accurate opinion of value. This is simply because such a value conclusion has as its base a specific date in time, the effective date of appraisal. So, from within the neighborhood boundaries appraisers delineate at the beginning of the appraisal report, they must analyze sufficient sales data to determine if there have been any changes in market conditions over the passage of time. Typically, this time starts when the comparable goes under contract, then ends on the effective date of the appraisal. If the market has measurably changed over that period, that change means the appraiser should market-adjust the comps up- or downward, as the market demands¹.

However, this raises the question of which time period should the appraiser measure? As you’ll see below, the GSEs assume the appraiser will measure the subject’s relevant market(s) over at least twelve (12) months. However, it is the appraiser’s call to conclude 12-months, 18-months, 24-months, and so forth.  So, there is no black-and-white answer to the question, “How far back should I go for time adjustment data?” Again, that’s the appraiser’s call, but 12-months is a minimum.

This analysis reveals yet another dilemma. For example, to conclude prices went up twelve per cent (12%) per year is a simple average increase of one percent per month, or a daily factor of (0.12 ÷ 365 =) 0.000329. This simplistic analysis means that for a sale that went under contract at $400,000 42-days ago, the increase factor would be $400,000 X 0.000329, or an increase of $131.51 times 42-days or $5,523. This rationale is mathematically correct. But our training must govern here and force us to ask the question, “Does this adjustment protocol reflect current market verities?” If not, then following this protocol is, in effect, to guess at a time adjustment. To guess at the time adjustment is to fail to reflect market trends truly and correctly. To fail to reflect them truly and correctly in the final value opinion is to mislead the client. See the dilemma?  

Does USPAP² offer any advice on this issue? No. USPAP does not even use the word adjustment (or any of its derivatives) until AO-13. Are there any other sources of information on this topic? Yes. Please see the citation below³.  

Do the GSEs offer any advice on this issue? Citing Fannie Mae’s Selling Guide, p. 575ff, “[a] specific time adjustment to a comparable sale(s) may differ from the identified market trend…” Simply, this is because the market trend may measure more than twelve (12) months, but the comp may have closed escrow three (-3-) months ago. So, go to the GSEs for advice here (not Facebook®!). You can’t go to USPAP for advice, since it offers none.

In other words, assume a twelve percent (12%) net increase over that one (-1-) year period. Then assume prices increased twelve percent (12%) from January to August but went flat as of September 1st. (Note: This example is for illustration purposes only. In reality, if a market went to a zero (-0-) rate of change from a twelve percent (12%) rate of change over a period this short, there would be a major external obsolescence factor in the market (think the Zombie Apocalypse) for which the appraiser would have to account. It is not the purpose of this monograph to investigate such a cataclysmic change scenario, however.) Therefore, if a comp went under contract September 14th, closed escrow November 27th, and the effective date of your appraisal is December 23rd, your time adjustment would be zero (-0-) since the market went flat three (-3-) months ago. This is, therefore, the difference between the annual change per year and any current market trends.

Let’s go back to the Selling Guide to determine if it offers any more advice:

“… the determination of whether [a time]  adjustment is made to a comparable sale is based on market changes between the contract date of the comparable sale and the effective date of the appraisal. For example, the 12-month value trend may indicate a positive overall trend, however it’s possible the market was stable (or declining) between the time period of the contract date of the comparable and the effective date of the appraisal…[c]omparable(s) sales with a contract date that is recent in relation to the effective date of the appraisal will likely not have a time adjustment given the inability to identify a change in the market. The appraisal report must contain the market analysis that supports the indicated market trends, and any adjustments made for market conditions”  (ibid; italics added).

Fortunately, the Selling Guide does not stop here. Its advice continues in that “…[t]ime adjustments should be supported by other comparables (such as sales, [sic] contracts) whenever possible; however, in all instances the appraiser must provide an explanation for the time adjustment in the appraisal report” (ibid, p. 575; italics added).

To make this clear, consider the contract’s date and data as the resale and the original purchase price as the sale. Therefore, this sale/resale scenario gives you a way to measure changes in sales prices over time. For simplicity, we’ll assume the property sold for $395,500 49-months ago and is now under contract for $435,700. Assume no further capital improvements over that period, merely proper maintenance and repairs. So, the property increased $40,200 over those 49 months, or an average of ±$27 per day, which is one indication of a time adjustment. (It is possible to apply this protocol and logic to other properties in the subject’s neighborhood which are under contract, but which would otherwise not be comparable. However, apply those results judiciously since their lack of true comparability renders the results of such analyses open to question. See footnote #3.)

At this point, is the appraiser finished? Since USPAP does not address the issue, it is necessary to return to the Selling Guide. On page 575 is the admonition that:

“…[t]he appraiser must provide fact-based and objective comment(s) that detail the work performed and data sources utilized for the market supported adjustments used, especially for the characteristics reported in the appraisal report form between the Sales or Financing Concessions and the Condition line items. A statement only recognizing that an adjustment has been made is not acceptable” (ibid; italics added).

In other words, a sentence such as, “…the adjustments are as shown…”, which is common (and mindless) boilerplate in many appraisal reports, in addition to being painfully obvious, thus unnecessary, is also vapid and unresponsive. Rather, appraisers must explain (i) by what metric(s) they concluded an adjustment was even necessary; (ii) the market data they chose to use to derive the adjustment(s); (iii) the protocols they used to derive the adjustment(s); and (iv) from the range of adjustments they derived in (iii) why and how they chose the quantity of any particular adjustment(s) leading to the value conclusion.  

Here it would be wise to emphasize that the two protocols this monograph presents to derive a time adjustment are not the only protocols by which appraisers can conduct this essential step in the appraisal process. (Via your favorite search engine. On YouTube, please search “making a time adjustment in a real estate appraisal”.) There are numerous videos on this topic (some of which feature the author of this monograph).

One of the hallmarks of a competent professional appraiser is the ability to use the proper tool(s) to get the job done correctly and on-budget the first time, without any “do-overs”.  

In the spirit of avoiding do-overs, our carpenter friends advise us to “…measure twice to cut once…”. Otherwise, we waste wood and time (and potentially fingers). We appraisers are responsible for our measurements, be they those of the subject improvements, or changes in value over time. Since these measurements are facts to be found (since they exist independently of our analyses; they are not the results of our analyses), not opinions to form, they fall under SR-2-3’s certification that “…the statements of fact contained in this appraisal report are true and correct…” (Ibid, italics added.) 

Therefore, we appraisers must market-support any adjustments. There are always ways to accomplish this. They may not be easy, quick, or inexpensive, but they are there. (This is not the venue to discuss AMCs and the fees they offer appraisers. However, AMCs understand there is a negotiation process available in any business transaction. Appraisers need to understand the best negotiation tactic there is consists of walking away from the negotiating table, which lets the AMC stew in its own failure to persuade you to accept a low fee. An appraiser’s fee must reflect the complexity of any particular job. It is the appraiser’s job, therefore, to advocate for themselves.) As competent professional real estate appraisers, our challenge is to find them, market-support them, and then use them to form credible value opinions.

¹Some appraisers advocate this change be measured over the time from the close of escrow to the appraisal’s effective date. This monograph assumes the protocol Fannie Mae indicates, above.

²This monograph assumes the 2024 ed. of USPAP (bibliograph citation by reference).

³The Appraisal Institute published Time Adjustment Research Contains Multiple Flaws on December 13, 2024 (see here by reference). This article defends the need for a time adjustment (when the market supports one). Its thesis, however, was that a study by the FHFA on time adjustments and how appraisers apply them, was seriously flawed, thus not reliable to draw conclusions about appraisers’ use of time adjustments.

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