Understanding Appraisal Adjustment Guidelines
Have you ever wondered why the appraiser picked certain comps and didn't use others? The guidelines we discuss below are common to many lenders, Conventional, FHA, VA and other Federally regulated loan programs. These notes pertain to residential form reports which are the most common in use for residential home loans.
Sales Comparison Grid Example
Typical guidelines for maximum adjustments (as a percentage of comp purchase price)
10% Individual Line Adjustment
15% Combined Net Adjustments
25% Combined Gross Adjustments
Line Adjustments are applied for specific characteristics such as condition, lot size, location, view, pool, age, etc. In the example below there are line adjustments to comparable 1 for site size, condition, GLA, and parking. There are no excessive line adjustments because all line adjustments are less than 10% of the comparable 1 sale price.
Combined Adjustments are calculated at the bottom of the sales comparison grid. In this example below, the combined net adjustments are 10.8% and the combined gross adjustments are 20.3%
Ideally no adjustments applied will exceed guidelines, however in some instances excessive adjustments are unavoidable. Larger adjustments are generally present when homes are not as comparable to the subject as would be preferred. Appraisers will avoid comps that require larger adjustments if possible and seek comps that do not have significant variances that drive the larger adjustments (individually and in total).
Line Adjustment - A private home sale that has a resort style pool which cost $70k to build, but is located in a sub market where the vast majority of homes are selling for less than $200k. The appraiser will have to determine the value associated with market reaction to the pool, but it is pretty safe to assume that the resulting line adjustment would be larger than $20k which is 10% of the sale price.
Combined Net Adjustments - A subject home is landlocked and is compared with a home backing a salt water canal (with boating access to the ocean). The two homes most likely do not directly compete and if adjustments were attempted, they could be something like $50k for the superior view and another $25k for the boating amenity. If the total adjustments are $75k on a sale of $400k that would result in more than 15% combined adjustments (and also the line adjustment for the view would exceed 10%).
Combined Gross Adjustments - Usually the total gross adjustments are larger than combined net adjustments when the two properties have significant differences with some being positive and some being negative. For example the subject might have a pool but a poor view. If that home is compared to a non-pool home that has golf course views, the combined net adjustments might not be excessive but the combined gross adjustments probably will be. Let's estimate using a $400k comparable home sale price with $50k upward adjustment for lack of pool but also with a $50k downward adjustment for the superior views. The combined net adjustments are 0% but the combined gross adjustments are 25%.
Suggestions For Comp Selection
If you are selecting comparable sales to review with your appraiser, make sure that you consider adjustment guidelines in your research. There are many situations in which the appraiser will use comps that exceed guidelines, however when possible it is better to find sales that support the value you are trying to reflect without exceeding guidelines.
Experienced Appraisers Inc has over 300 appraisers in our network of Florida appraisers. We have specialists and long term professionals experienced with residential, industrial, commercial and special use properties. If you are in need of an appraisal we have LOCAL independent and unbiased market experts that are second to none.
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