When was the last time you, the appraiser, thought about what placing a comparable sale on the 1004 form’s sales grid really communicates to your client¹ (and to a state appraisal board investigator)? We appraisers tend to think the reporting form is just that – a way to report the results of the appraisal to the client. This is true. However, it is not complete. Because it is not complete, it shows that many appraisers do not fully understand the purpose of any reporting form, be it one from the GSEs, a restricted appraisal report, or a 200-page narrative appraisal on a 100-unit apartment complex. Therefore, let us take the time to clear this up so that we understand exactly what it means when we place a comp on the sales grid.
Placing a sale on the grid means we have concluded it is a comparable sale. While there is no formal definition of a comparable sale, the best description² is that a comparable sale has the same highest and best use as the subject³. If this is not true, then that sale is just that – a sale; it is not a comparable sale. This is important to remember when filling out the spaces on the top of page two of the 1004 form. This calls for the appraiser to list the number of comparable(4) sales in the subject’s neighborhood within the past 12 months. It specifically does not call for merely the total number of sales in the past 12 months. The reporting form makes it clear the appraiser is to place only comparable sales in this space.
Assume there were fifty sales of properties in the subject’s neighborhood in the last 12 months. Further, assume that seven of them are candidates (similar GLA, similar age and condition, similar bed & bath count, etc). In other words, these are the seven sales the appraiser is going to verify to ascertain they have the same highest and best use as the subject. But, during the verification process, the appraiser discovers that of these, two were not arm’s-length transactions, so the appraiser rejects them(5). Therefore, the five remaining sales would be the comparable sales the appraiser places on the analysis grid. These are also the comparable sales the appraiser adjusts for their salient differences with the subject to conclude a final value opinion.
Therefore, it should be clear that to place a sale on the adjustment grid communicates(6) to the client that this comparable (1) has the same highest and best use as the subject and (2) was an arm’s-length transaction, meeting the definition of market value. In turn, this implies that the appraiser is aware of the subject’s highest and best use, both as if vacant and as improved. It is logically impossible to conclude a sale is a comparable sale, in other words that it has the same highest and best use as the subject, if the appraiser is not already first aware of what the highest and best use of the subject is. Further, placing a comp on the grid communicates that these analyses are already in the appraiser’s workfile if, for whatever reason, it is necessary to revisit them.
But similarity of highest and best use is not all the placement of a comparable sale on the adjustment grid communicates to the client. Such placement also communicates the certainty at which the appraiser has arrived through the analyses of relevant market data. This certainty is a requirement of USPAP’s SR2-3(7), the Certification Standard. When the appraiser signs the certification, the appraiser certifies that every statement of fact in the appraisal report is both true and correct(8). Thus, the appraiser must, via proper verification(9), be certain those data are both true and correct before certifying them. Therefore, to place a comparable sale on the adjustment grid is to make a statement of fact. That a sale the appraiser places on the adjustment grid is not the appraiser’s opinion that the property is comparable. Rather, because the appraiser has formed this conclusion based on the verification and analyses of market data, such a placement is therefore a statement of market fact.
That statement of fact is that (1) this sale has indeed taken place, (2) it took place at the price the appraiser states on the grid, (3) this sale and purchase is both arm’s- length and comparable, and (4) the adjustments the appraiser made to it are those the market both requires and supports. These are all statements of fact the appraiser communicates to the client by doing nothing more than placing a comparable sale on the adjustment grid.
Another statement of fact the information on the comparable sales grid communicates to the client is the accuracy of any adjustments the appraiser applies to a comparable sale. Because the adjustments should have as their base market support, an adjustment is not an appraiser’s opinion. Rather, an adjustment is a fact the appraiser uncovers via the collection, verification, and analyses of relevant market data.
Fannie Mae (see https://singlefamily.fanniemae.com/media/15271/display) and its Lender Letter 2015-02 make clear that the appraiser must have the market as the foundation of any adjustments to a comparable.
There can be no other source than the market. When relevant market data are the foundation of the appraiser’s adjustments to the comparable sales, the appraiser reports to the client only market-based facts the appraiser has verified and analyzed. It is this verification that shows the appraiser the data are true and correct. Thus, the appraiser communicates these adjustments, these market facts, to the client with the knowledge of assured credibility and reliability.
Note that the GSEs all have their own lists of unacceptable appraisal practices. While the language in each may be different, all of them require the appraiser to exclude inaccurate or incomplete data about the subject property, the subject’s neighborhood, or the comps. Accurate is the opposite of inaccurate. And accurate is synonymous with “…true and correct…,” which is USPAP’s standard. Therefore, when an appraiser places a comparable sale on the reporting form’s adjustment grid, the appraiser communicates that (1) the sale is truly comparable since the subject and it have the same highest and best use; (2) it truly sold for the sales price the appraiser indicates on the grid; (3) the adjustments to the comps are necessary, relevant, and exclusively from the market; and (4) the analyses behind the adjustment are accurate, thus reliable.
Now, let us close the logic loop to end at the beginning. When an appraiser submits the appraisal reporting form to the client, the appraiser is not merely providing the client with a stack of paper. Rather, the appraiser is communicating with the client. This communication to the client implies the appraiser is sure the value conclusion the report communicates has its foundation in properly verified and analyzed market data rather than rules-of-thumb, guesses, a 30-year-old schedule of adjustments, and/or Facebook® polls. While a value opinion(10) is just that – an opinion – that status does not absolve the appraiser of the legal and ethical requirements of competence, independence, impartiality, and objectivity(11) in forming that value opinion.
Indeed, when the appraiser provides the client with the appraisal report, in that report, the appraiser certifies that they have complied with USPAP, state appraisal statute(s), and applicable federal law(s)(12). Therefore, to provide the client with the appraisal report is to communicate to the client the appraisal is credible, and the report is not misleading.
So, when was the last time you thought about what placing a comparable sale on the 1004 sales grid really communicated to your client? And when was the last time you thought about what placing a comparable sale on the 1004 sales grid really communicated to a state appraisal board investigator? If we are doing our jobs, we communicate a great deal to our clients with every report we submit.
(1) This essay assumes the appraisal of a single-family residence, sold from a retail seller to a retail buyer, fee simple estate, which the buyer will use solely as its primary residence. It assumes a property in which the highest and best use is the present use, thus does not consider a residence the buyer purchases solely for the vacant site value.
(2) See Ratterman, Mark A., MAI, SRA, Residential Market Analysis and Highest and Best Use, p. 17. ©2022, The Appraisal Institute. Chicago, IL.
(3) The verification model for this is, first, to make sure it complies with the definition of market value and its salient points. Then, it means we have looked at it in light of the four components of highest and best use in the 15th ed. of The Appraisal or Real Estate. Finally, it means we have run it through the model of highest and best use in USPAP’s SR1-3(a)(i-v).
(4) This does not mean the appraiser must verify each sale the appraiser includes on the top of p. 2. What it means is that if the subject is a 3/2, there are no 2/1 or 4/3.5 houses there. In other words, what go here are the sales that are otherwise comparable to, as well as competitive with, the subject. Then, from this list, the appraiser chooses, verifies, and analyzes the remainder to choose comps that have the same highest and best use. It is likely that, assuming the subject is not a custom-designed and -built residence on an atypically large or small site, the highest and best use analysis will be a slam-dunk, requiring little extra analysis.
(5) It is important to keep these analyses in the work file since a proper scope of work includes a record of the sales the appraiser rejected as comps, as well as how and why the appraiser chose to reject them.
(6) One definition of “to communicate” is “to convey knowledge of or information about: make known.” From the same source is the alternate definition of “to transmit information, thought, or feeling that it is satisfactorily received or understood” (see https://www.merriam-webster.com/dictionary/communicate). Thus, the sales grid, indeed the entire appraisal report, is a communication device, in addition to being a summary of the processes in which the appraiser engaged to arrive at a value conclusion.
(7) In relevant part, SR2-3 certifies that to the best of the appraiser’s knowledge and belief “…the statements of fact in this appraisal report are true and correct…”
(8) How many opinions are there in an appraisal? At least two (-2-) come to mind: (1) highest and best use, and (2) market value (potentially including rental value and the GRM). Everything else is a fact. Thus, everything else must be both true and correct, i.e., accurate. Opinions are credible. Facts are true and correct.
(9) USPAP has no verification standard or accepted verification protocol. The GSEs have no such standards or protocols, either. However, the GSEs do present recommendations of the parties with whom the appraiser can verify the data (recommendations here by reference).
(10) Again, USPAP’s definition of an appraisal is “…the act or process or developing an opinion of value; an opinion of value” (ibid – emphasis added). Note there is nothing here about a value estimate, which means “…to judge something with respect to its worth or significance” (see https://www.merriam-webster.com/dictionary/estimate). Appraisers do not judge the worth of something, which is why it is proper to avoid the word “estimate” as part of an appraisal. The market judges. The appraiser merely reflects the market’s judgment as to the value of a parcel of real property. Thus, an appraisal is an opinion of value, rather than an estimate of value.
(11) See USPAP’s definition of appraiser (here in its entirety by this reference).
(12) The latter of these, while receiving little emphasis in the past, are coming to the fore and are another standard by which the client, state appraisal boards, and (potentially) the federal government will judge appraisers and appraisals.