What’s Average?

I’ve been obsessing lately about the rating scale I’ve used in my appraisal reports for the past 20 years or so. For many years I adhered to the “Good, Average, Fair, Poor” scale when describing markets, sites, improvements, utility, and anything else that requires a qualitative rating.

A few years ago I added a fifth descriptor, “Excellent,” as a way to account for new buildings and other situations that were markedly better than “Good.” Here’s what that scale looked liked:qd1

Last year I started thinking about the meaning of “Average.” What does it mean? Does it just describe something that’s better than “Fair,” but not as good as “Good?” That’s how I intended it. But let’s look at building condition. If all of the buildings in a given category (say small industrials) in a market are in poor condition are they rated as “Poor” or “Average?” After all, “Poor” is “Average” in this case.

So, starting in 2013 I’ve eliminated the “Average” rating, condensing the scale to “Excellent, Good, Fair, Poor.” Here’s what the new scale looks like:qd2

It’s important to note that any scale is a continuum; that is, one property rated as “good” may be somewhat inferior to another property also rated as “good.” Ratings such as “Good to Fair” and “Good to Excellent” smooth that out somewhat.

So, what difference does all this semantic hand-ringing make? Not much. It just makes it clear that each rating relates to a specific property and not to the market in general. Appraisers don’t compare properties strictly to the overall market, but to individual properties selected from the market. The idea is to account and adjust for differences between the subject property and the comparable sales and rentals.

I’m not aware of many appraisers who stick to one scale from one appraisal to another. I’ve seen some appraisals in which the appraiser seems to use the brokers description from the multiple listings. That can be problematic, as brokers want to describe a property for sale in its best light.

I think it’s important to stick to one scale as much as possible. It makes what I call “property scoring” possible. By “property scoring” I mean assigning ratings to all of the sales in a given market for a given property type and size so regression analysis can be used to find adjustments for differences in construction quality, condition, location, and many other elements of comparison. This is time-consuming and often cannot be performed during the usual appraisal preparation time span, and often there are not enough sales to lend confidence to the analysis. But in some cases it can be compiled and easily maintained. Regression analysis allows the appraiser to make adjustments extracted directly from the market, and not just from “knowledge and experience.” It makes the adjustment process transparent to the report reader; it makes the adjustments “provable.”

So, will I change my mind again and change the scale? I hope not. And what will I do when updating an old appraisal in which I used the old scale? In most cases, I will use the scale used in the original report.

 

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About Gary Snowdon, ASA

Commercial Real Estate Appraiser in New York State's Hudson Valley, Capital, Saratoga, and Adirondack Regions.
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