AZ Real Estate Commentary

Trend Analysis and Graphing

What is it, why we need it, and five basic rules

Anthony Young

Anthony A. Young is a Certified Residential Appraiser and principle of Young & Associates Real Estate Appraisal Company in San Ramon, California, where he specializes in the valuation of complex and “high-end” residential properties and housing market trend analysis.  He enjoys showing Real Estate professionals graphing and charting techniques for studying the buying behaviors to conclude adjustments in valuations and has developed a “How-To-Do-Trend-Analysis DVD” that teaches professionals to measure (and visually graph) the behavior of the Real Estate Marketplace over time and to provide supported and credible results within the appraisal report.  Anthony is an affiliate member of Real Estate Appraisers Associates (REAA).

The market data we use is not as perfect as the “paired sales” examples from our textbooks. Are you finding it hard to prove your adjustments? Are you still using a list of block adjustments that your supervising appraiser gave you? Would you like to be more of an expert for your area?

If you said yes to any of the above, we have something in common, along with perhaps the majority of appraisers in the industry. I remember (as a trainee) asking my mentor, “Why do we use $10,000 for every pool adjustment or $15,000 for every location adjustment”? For a moment, silence, then the standard “because…that’s what the market reaction is in this area...”

Not knowing different, I carried the tradition (and the boilerplate we used) with me once I received my residential license. That was my moment; I knew it all and yet, “I did not know what I did not know.”

I was in for an awakening. Just months after licensing, a veteran appraiser called me on the carpet, and asked for supporting documentation for my adjustments.

That evening, I fumbled through a crash course in adjustments. The next day, the review appraiser showed me that I could not prove what I did and that my adjustments and value opinion were far from reality. Lesson learned.

Fast forward to a few years later, after I left that shop and gained the tools required to support my conclusions. I am challenged once again. This time, there is no courtesy call, and my appraisal (along with my ego) is rejected.

Apparently, a Texas reviewer (grading my California report) was unaware of USPAP “geographic competency requirement” and rejected my report based on comp location. I thought I was clear when I stated that there was no discernible difference in the north or south side of a major dividing street. Obviously, he did not agree and my statements on his “competency” were of little comfort to my client. I had a bruised ego and the lender had a dead deal.

It took hours to prepare my rebuttal, after which I was reading posts on an appraiser’s forum and happened across a graph that showed market trends. It occurred to me that the same technique could be used to measure and display the difference (or lack thereof) between geographic locations.

With a little practice, I was able to show less than 1.0% difference between one side of the street, compared to the other.

I won the rebuttal, and have since then been hooked on graphs. Armed with a new skill, I set out to become the “expert” when it came to using graphs to uncover the differences, display them in the report and prove my adjustments.

What is Trend Analysis?

From the Dictionary of Real Estate Appraisal 4th edition:

“A quantitative technique used to identify and measure adjustments to the sale prices of comparable properties; useful when sales data on highly comparable properties are lacking, but a broad database on properties with less similar characteristics is available. Market sensitivity is investigated by testing various factors that influence sale prices.”

In the past, it was time consuming and required a trained eye (and a lot of analysis) to spot trends in the marketplace or a specific neighborhood.

Technology, MLS data, spreadsheet programs, the ease and speed of “point and click” and “cut and paste,” removed the barriers to entry for most of the common trend analysis tasks. Once the information is cleaned and sorted to the “subject’s market segment,” producing an accurate and convincing “snapshot of the market” for your appraisal report can be accomplished in minutes.

Under difficult market conditions, underwriters and review departments are handing out “appraisal conditions” like “Larry the loan officer” gives out comps checks. Today, clients are “subsequently requiring” us to provide that which should be provided in every report in the first place: Support for our conclusions.

“Money moves on motivation”

If there is a “market reaction” to a location, feature, view, or other “big-ticket” item, you can make it apparent with graphing; the graph provides the client with the “smoking gun.” Appraisers can’t just say “it’s so because...”. We are required to support our words with the facts and nothing does that better than a “picture of the data itself.”

With Pivot table charts you can graph adjustments for location, view, amenity, condition and other variables, along with displaying sales trends or other movements in the housing market. You can graph any data set. However, what should and should not find its way into the numbers? I am referring to “segmenting the data” and removing factors that skew the output. If you do not, it’s “garbage in and garbage out” and you might as well toss it because a skilled analyst will identify the flaws immediately.

5 rules to follow for credible results

1. Define the appraisal problem, and then define the market. Are we examining market or the neighborhood trends?
2. Let the data talk to you, think with you, but not for you — limit variables. Allow the data to show the trend. The data will confirm or dispute your initial thoughts and findings.
3. Market segmentation/delineation are keys to credible adjustments/trends. Segmentation is key to answering the trends and relating them to the subject property.
4. It’s a tool, not a substitute. Graphing supports, but does not replace common sense.
5. If it wouldn’t be in the market grid, it shouldn’t be in the graph. If the data selected is not relevant, it will negatively affect the credibility of your analyst.

Data can be graphed to illustrate “money moving on motivation”. They key is to develop the techniques, correctly employ them and clearly communicate your findings to the reader.

Are you ready to learn how? For a free instruction video on “Introduction to Graphing” go to http://thegraphguy.com and click the “Free Video” tab