What is the real estate market doing in your area? While a seemingly simple question, the answer is often anything but simple. The reason for this is that the market is ever changing and rarely moves in a uniform manner. So while some segments of the market may be appreciating, others may be stable and even others may be depreciating.
Understanding these nuances is critical to completing an accurate appraisal report. This involves an ongoing comprehensive review of active listings, expired listings, pending listings and closed sales data. When viewed together, this information provides the perspective needed to spot trends, to quantify the direction of the market and to determine how each of these segments are changing in relation to each other.
Because this information may lag the market when values are changing, additional market indicators should also be regularly monitored for signs of change. These supplemental points of measurement provide important insight into the real time movement of the market as they are often the first indicators of change. Examples of those that are present when a market is showing signs of improvement include but are not limited to the following:
Similarly, metrics indicating the opposite of the above may be indicative of a market that is in transition and/or declining. Either way, when change is observed to be occurring, caution should be exercised and further research should be conducted.
This holistic approach to studying the market provides you with the knowledge and perspective needed to ascertain the direction of the market and when applicable, the knowledge needed to develop credible, market derived time adjustments.
Regardless of the direction of change, if values are observed to be changing, proper time adjustments must be applied to the comparable sales as necessary to account for any difference in time that exists between the date that they occurred and the effective date of the appraisal. The purpose of which is to ensure that the opinion of market value contained within the completed appraisal reflects what the subject is worth on the effective date of the appraisal as opposed to what it would have been worth back when the sale of the comps occurred.
This is critical in changing markets as failure to properly apply time adjustments may potentially result in above market appraisals in declining markets and below market appraisals in appreciating markets. Neither of which are acceptable. Similar to any other adjustments that are warranted and supported by the market, if values are changing and time adjustments are warranted, they should never be omitted from a report out of fear of having to potentially explain them.
Instead, when time adjustments are warranted and utilized within an appraisal, we recommend that you provide commentary within the appraisal as necessary to thoroughly describe the changes that are occurring within the subject’s market and the data that was used to calculate them. This will help the reader of the report to better understand the changes in value that are occurring within the subject’s market and the rational for making these adjustments.
So while the closed sales may lag the market, care must be taken to ensure that your opinions of market value do not. By studying the market as a whole, you can document trends and ensure that your appraisals are accurate and reflective of current market conditions.