Monday, 2 August 2021 | The Latest Buzz for the Appraisal Industry

In Search of the Ever Elusive Predominant Value

Predominant Value

I’ve been around a long time and during my lifetime I’ve chased many elusive things like The Sandman, The Tooth Fairy, Leprechauns, The Pot-of-Gold at the End of a Rainbow, Unicorns and the The Bright Elusive Butterfly of Love (Bob Lind, 1966), but the most elusive of all things taunts me every day. I get little messages, “warnings” even, that my opinion of value is either above or below that most elusive predominant value! Oh my friends, I have searched and searched and have left no stone unturned, only to come up empty. I’ve looked for clues on a 1004, only to be left in the raw despair of disappointment! I know it must be there! I’m being told by my “Par”, who I love very much and look up to, and who is sometimes very “strict”, that my value is not equal to my predominant value. That must be so, or else it has to be above or below!  I cry out, “Oh why do thoust torture me so”?  “Where are you, oh demon value?” But alas, the predominant value remained elusive. Voila! I thought. It must be hiding on the 1004MC! How clever of that little elusive predominant value. So off I went into 1004MC land. And I searched in 0-3mo, 4-6mo and even 7-12mo, but lo, the predominant value continued to hide! I looked from corner to corner and all places in-between and could not even find the word “value” anywhere on the Form. Not even on the Line for median sales price!  So I am bereft with guilt! Have I not measured up as an appraiser? Have I not completed all of my CE? It is driving me mad. Mad, I say! I’m even beginning to question my core beliefs. “Is it possible that PRICE IS THE SAME AS VALUE?”  “No, No, begone thou foul thoughts!” Then I thought, “A-ha!” “They must want me to first appraise all 22 sales in my comp list CMA and then, when I have all 22 opinions of value, I can order them to find the ‘mode’ and then I’ll have you, my little elusive predominant value!” But wait! How will I convince 22 homeowners to allow me to come in and do a full appraisal? And how will I do all of that to meet the already ridiculous turn time of my current appraisal, for which I’m looking for the predominant value? And how will I keep from starving to death because I’m spending a month trying to complete this appraisal?  h, I am in the Pit of Despair. Not even paired sales or sensitivity analysis can help me now! So, in spite of my personal crusade, the predominant value remains elusive!

The above is my humorous way of driving home the point that there is no such thing as a “predominant value”. Yet I am certain that many of you have seen, from time to time, a warning from either your software PAR (Professional Appraisal Reviewer) or an outright stip being sent to you asking you to “correct” your report or “reconcile the difference”!  Knowing where this erroneous rule set came from and who was responsible for writing it is as “elusive” as the predominant value, itself! But nonetheless, they persist, even when there are Chief Appraisers who know better!

The neighborhood section of the appraisal report addresses the predominant “price” which is clearly not the same as “value”.  Nonetheless, it should be expected that the opinion of value for the subject property will likely be above or below the predominant price which is simply the price most closely associated with the statistical mode of the dataset of properties sold in the subject’s local market over the twelve months preceding the effective date of the report. There are no conclusions to be drawn from the relationship of the opinion of value to the predominant price because once you remember what a “predominant price” is and how it is determined, the comparison is meaningless.

An opinion of value is developed from analyzing specific properties comparable to the subject and adjusting them for differences. The value is then appropriately bracketed, when possible, by other closed sales included as comparables in the sales comparison grid. This provides comps that can be compared to the subject on a mathematical “apples-to-apples” basis from which a credible opinion of value can be developed. In contrast to the development of an opinion of value, the determination of a predominant price does not go through any analysis and adjustment. It is simply an estimate of the most frequent price of properties that sold in the subject’s market over the past 12 months, even though they may have many differences (inferior or superior features) as compared to the subject. So this raises an important question and that is “if an opinion of value is rejected, or deemed “unreliable or inferior” on the basis that it is above or below the predominant price, then what is the reason or necessity for preparing a sales comparison grid with adjustments if all that is necessary is to simply select the most frequent sales price from a list of sales over the past year and declare that price to be “the value” that is superior to a properly developed opinion by the sales comparison approach”? The predominant price indicated in the one unit housing data on Page 1 must not be confused with the idea that it is somehow the same as a “predominant value”.  There is no such number in generally accepted appraisal theory and practice that is identified as a “predominant value”. Furthermore, nowhere on any Fannie Mae standardized appraisal form will you find the words or a “field” reserved for a “predominant value” because it does not exist. Therefore, for the reasons mentioned, the comparison of an opinion of value to the predominant price is a meaningless comparison that has no value and should not be given any consideration in the analysis or review of the appraisal report.

It is important to remember that there is no equivalence between “price” and “value” and that they are not the same. “Price” is always a fact; “value” is always an opinion. Also, keep in mind that an appraiser’s use of the word “value” attaches all of the obligations under USPAP, not the least of which is “what type of value”.  Therefore, for an appraiser to actually provide an opinion of “predominant market value”, it would require a comprehensive workfile that includes source data that was used to develop an appraised value of each property sold in the subject’s local market in the past twelve months from which an appraiser can then develop a supported predominant value.  Obviously, this is not done, nor was it ever intended to be done and would be impractical and virtually impossible because access to the sold properties for inspection would not be granted. So to compare an opinion of value for subject property, that was developed under Standard-1 and reported under Standard-2 of USPAP resulting from analyzing and adjusting legitimate comparable properties after having measured and inspected the Subject, to some arbitrary “number” provided as a predominant price, not value, is meaningless. Furthermore, to insist that the predominant price is equal to, or carries the same weight as if it were a predominant “value” is irresponsible and violates multiple sections of USPAP because, as explained, the concept of a predominant “value” is not recognized and would be an unsupported value, lacking the development and reporting requirements of a “value” as required by USPAP.

The predominant price found in an appraisal report is the appraiser’s opinion of what price or price range appears most frequently in the market area defined by the appraiser in the report, based only upon the most comparable sales that closed in the past twelve months.  In statistical math, this is termed the “mode” (frequency) which is the number, for any given numbers in a defined set, that appears most frequently.  In the practical application of appraising, it is very rare, almost to the point of non-existent, that you will have multiple closed sales, all at the same price.  Therefore, an appraiser must look at all sales from the identified market and determine what the likely predominant price would be, which is why it is an opinion of the most frequent price. It is not an “average” price because that is not what Fannie Mae requested. In keeping with Fannie Mae’s preference for using “Median” data (see Form 1004MC and Announcement 08-30), where there are few samples in the data set, the Median (“middle”) value is acceptable because it is supportable. In addition, for any given appraisal assignment, the “opinion of value” is most likely to be either above or below the “predominant price”.  To expect otherwise is to assume that the predominant price should equal the opinion of value (which has never been established as any recognized principle of appraisal practice) and would only result in the rarest of coincidences.

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