What is a predominant value? Is it the median, the mode, or the mean?
Or could the predominant value possibly be the geometric mean or weighted mean? As it turns out, there are a couple dozen different ways to calculate a measure of center in data analytics. None of them are called ‘predominant’.
Certainly our primary residential form would not itself use a ‘weasel word’! Of course not. It can’t be. According to the Fannie Mae Selling guide “published May 30, 2017” — tomorrow, as I write this on Memorial Day, May 29, 2017.
Isolated high and low extremes should be excluded from the range, which means that the predominant price will be that which is the most common or most frequently found in the neighborhood. The appraiser may state the predominant price as a single figure or as a range, if more appropriate.
Ok, got it. ‘Most common or most frequently found’. Well that seems to best fit the statistical definition of the mode — most frequent. All is well. Or is it?
Let’s make sure. What is this supposed to be a mode of?
The appraiser must indicate the price range and predominant price of properties in the subject neighborhood. The price range must reflect high and low prevailing prices for one-unit properties, two-to four-unit properties, condo units, or co-op units depending on the property type being appraised and the appraisal form being used.
OK, in the “neighborhood”. And of the property type being appraised. Getting closer now.
So, what is a neighborhood?
Most of our educations states that a neighborhood is a group of complementary land uses. So we will put aside the issue of exact boundaries and neighborhood characteristics.
My practical experience is that some neighborhoods are easy. The larger clump of prices for the neighborhood is near the middle, the mean, and the median. But for other neighborhoods, it is not so easy.
In the Valuemetrics.Info, Stats, Graphs, and Data Science class, one learning example we use includes four modes. Two are pretty equal, and two more are higher, but certainly not “isolated high and low extremes.” There are several sale prices in each of these two groups (modes) above the others. Hmmm… The two lower priced groups seem to vary around two “predominant” lot sizes, while the two higher priced groups vary around location on a golf course, and two different waterfronts!
So, readers — should I use a mode most similar to the group in which it belongs (say the bay front), or is it the ‘largest’ of the four modes, but considerably below the estimated value of my subject property?
If I report the mode which Fannie seems to require, my subject will obviously be ‘overvalued’. If I report the mode for which is the best competitive market segment — on the waterfront — then I am breaking the rule: “The appraiser must indicate the price range and predominant price of properties in the subject neighborhood.”
Am I in trouble either way? What is the problem?
What say you?
May 31, 2017 @ 5:57 am
There is so much of what we do could be considered “appraiser’s opinion”, however in this day and age of appraising that is no longer a factor to consider, the new rules that we are to abide by are attempting to make appraising an exact science. And to top it all off many of our reviewer’s have never been in the field.
May 31, 2017 @ 6:53 pm
Lol, and to top THAT off, many if not most state regulators have not performed a USPAP compliant real estate appraisal in over 20 years! Let THAT sink in for a few minutes. USPAP compliance is judged based upon what ones PEERS would do in similar circumstances. That regulators are neither peers nor competent increasingly makes no difference in todays appraisal world.
You are 100% right Norma. The artful application of scientific data and less distinct localized market preference ‘perceptions’ simply cannot be reduced to 1’s and 0’s for Big Data, so its easier to force us to change our professional standards to fit flawed programming and software limitations.
May 31, 2017 @ 7:46 am
The joys of trying to describe the real world on a form. The word “predominant” has a variety of synonyms (central, chief, foremost, key, leading, main, most important, paramount, prime, principal, etc.), and as far as I know has no technical meaning from a statistical perspective. FNMA’s description of the term as most common or most frequent probably didn’t envision the mode, but rather guidance to the appraiser to reflect something that is typical rather than atypical for the neighborhood.
We’ve all seen situations where an appraiser is valuing something atypical for the neighborhood, and somehow makes homes in that price range reflect the “predominant” value so as not to have to waste valuable time with a cogent explanation, or draw the attention of a pesky reviewer or underwriter. The example described would be a perfect instance where a comment – just a sentence or two – would clarify for the reader, without the appraiser having to sweat a possible violation (gasp!) of FNMA guidelines.
May 31, 2017 @ 6:55 pm
You Sir, are my hero of the day!
May 31, 2017 @ 7:55 am
Great discussion George. I say if the subject is above the mode or predominate value, who cares. It is what it is based on the analysis in the appraisal report. It is up to the underwriter to decide if being above the predominate value makes the property more risky to lend, etc… Let them deal with it and we can just report what we did to get the numbers.
May 31, 2017 @ 6:46 pm
George great observations. its what makes you such a respected ‘teacher’ to so many. I’m reminded that our profession is both an art; and it has elements of science without actually being a science in itself. Perhaps the root of the problems lies there.
The short answer is “mode” as you reported and the heck with it being lower than your subject property.
The erroneous belief that a subject must somehow be at the predominant is a myth born out of FNMA and other ‘reviewer’s’ ignorance. It merely needs to be explained. I don’t always appraise the predominant profile property. Sometimes I appraise the best and others the worst. Its not expected that the latter two would be ‘at’ mean, median or mode.
Im glad you didn’t confuse the issue with the current FNMA or their reviewer’s current UAD/1004MC idiocy that neighborhood trends must now be related only to “comparable” property and that should be reflected on page one of the form.
The regulatory micromanagers have forgotten that our neighborhood trends analysis is merely a tool to assist others in understanding the character of a neighborhood or competitive market environment. It’s not intended to be a self contained point specific reinforcement of a conclusion that (in the report anyway) has not yet been reached.