Minding the Valuation Gap: The Underused Tool of Time Adjustments

When home appraisals conclude values below the contract price for a sale - a recurring outcome affecting 7-15% of deals yearly - unforeseen headaches ensue for securing the purchase. Why do these valuation-below-contract gaps happen? Essentially, appraisers depend on lagging comparable sales figures that fail to reflect an evolved and current landscape where the housing value trajectory has materially changed course. Here's why "time adjustments" matter - and remain underutilized - in making stale data relevant.

Comparable Selection Causes Lagging Values

Appraisers source valuation benchmarks from earlier competing sales. During spans of quick price acceleration, those older sales often understate where current market values are settling. This often leads to sellers having to renegotiate when the appraised values fall behind their sale contracts, or even results in the sale falling through entirely.

Time Adjustments Intended to Capture Value Changes

Appraisal guidelines direct appraisers to apply "time adjustments" - mathematical price increases tied to the elapsed months since the comparable went under contract. This adjustment is made to rectify outdated historical sales that may not accurately reflect current market conditions. It aims to determine the value that the market would assign to the property if it were being sold in the present.

Infrequent Time Adjustments Despite Necessity

An analysis reveals appraisers rarely elect to employ time adjustments despite their significant impact potential. Even amidst 2018-2021's rising valuations, fewer than 1 in 4 comparable cases saw the application of time adjustments. This held even as annual gains reached up to 18% nationally, signaling significant time adjustments were warranted in many cases.

Small Adjustments Further Mute Market Alignment

Digging deeper, appraisers highly constrained the actual adjustments when applied when compared to the indicators tracking local appreciation levels. At 10% index gains, average adjustments ran only 5% - halving the probable amounts needed to be considered. Applications of the adjustments worsen for the smaller sub-5% index shift areas.

How Do Appraisers Improve To Become Masters Of Market Valuation?

While it is important to understand the reasons for caution in applying adjustments in general, the lack of consistent time adjustment application reveals shortcomings in accurately valuing properties on a macro level. Poor valuations can create discomfort for both buyers and sellers during transactions. Appraisers who disregard the different valuation methods meant to enhance appraisal accuracy can have a negative impact on all parties involved, particularly in dynamic housing markets where conditions are constantly shifting.

Adjustments within appraisals are often a hot topic. Check out these blogs for similar discussion topics:
An Appraisal Blind Spot: Adjusting for Seller Concessions
Verifying Comparable Sales: Best Practices for Appraisers