When is no adjustment the right adjustment in an appraisal?

A zero is an answer, not a blank

People think of a zero on the adjustment grid as the appraiser doing nothing. It is the opposite. A zero says, "I checked, and buyers in this market did not pay a measurable difference for this." That is a claim, and claims need proof.

Fannie Mae's Selling Guide (B4-1.3-09) puts it simply: ideally, the best comparable would need no adjustment at all, but that is rarely the case. The same section says time adjustments, or the lack of them, must be supported by evidence. A missing adjustment is held to the same standard as a big one.

In my files, zero is a positive statement that has to be earned. A blank line with no test behind it is not a zero. It is a shrug wearing a necktie.

The floor: differences too small for the market to measure

Some differences are real but too small to matter. I call that the de minimis floor, a plain idea with a fancy name: below a certain size, a difference is worth less than the market can measure.

The floor is not a habit or a round number. It comes from the rate itself. Here is a made-up example from a Fremont tract.

• Paired sales put lot value somewhere between $10 and $18 per square foot of land.
• At that range, 100 square feet of lot is worth $1,000 to $1,800.
• On a $1,500,000 sale, that is about one-tenth of one percent.
• In this tract, two identical models that sold the same month landed $20,000 apart for no reason anyone could find.

A $1,500 adjustment inside $20,000 of normal noise is not precision. It is decoration. So in this example, a lot difference under 100 square feet takes no adjustment.

The floor has to cut both ways, too. Say Comp 3's lot is 540 square feet bigger. That is past the floor, so it keeps its adjustment, about $7,600 at the middle of the measured rate. Naming the comp just outside the line shows the reader the floor is a rule, not a convenience.

Three zeros that have to be tested

These are hypothetical, but they are the kinds of lines where zeros show up most.

Take the half bath. Say six pairs in a Pleasanton tract show three gaps above zero and three below, and they average out near nothing. If a half bath really added money there, the pairs would lean one way. Then I run the same test across a much bigger set of sales. If both say zero, the zero is earned.

Age works the same way. In my experience buyers price condition, not the birth certificate. A 2004 house and a 2005 house in the same tract usually do not differ by a year. If one is remodeled, that is a condition difference, and it goes on the condition line, the row that names it.

When zero is the wrong answer

A zero can also be a mistake hiding in plain sight. Watch for these:

• Zero to keep the totals small. Fannie Mae has no net or gross adjustment limits and expects market-based adjustments without regard to arbitrary limits. Shaving a real adjustment to look tidy is wrong.
• Zero on a moving market. Fannie Mae notes that a comp with a recent contract date will likely not need a time adjustment, because no change can be identified. Recent is the key word. I test the shortest window the data supports, like the last 30 or 45 days, before deciding nothing moved.
• Zero because every comp matches. If none of the comps have a pool and the subject does, the line shows zero only because the question never got asked. I try to bracket every feature, with sales above and below the subject, so the adjustments do not all run one way.

Fannie Mae's Collateral Underwriter, the software lenders use to check appraisals, has messages that flag when an appraiser did not make an adjustment when one may have been warranted. Fannie Mae also tells lenders not to simply instruct the appraiser to match the model. The question is whether the appraiser's choice is supported. That works for zeros too.

One zero needs no test: a comp on the subject's own street never takes a location adjustment. Same street, same location. My post on the neighbor's sale explains why.

How to check a zero on your own report

1. Find the blank or zero lines where the comp clearly differs from your house.
2. Read the comments. A supported zero comes with a reason: paired sales, a measured rate, a floor.
3. Check consistency. If one comp gets no adjustment for a half bath and another gets $15,000, ask why.
4. Check the size of the gap. A 40 square foot lot difference taking no adjustment is normal. A 4,000 square foot difference with no comment is a question.
5. Check the dates. A zero time adjustment on a comp that went under contract months ago needs evidence.
6. Bring sales, not feelings. If you think a zero is wrong, show paired sales that prove buyers paid for the difference. That is what a reconsideration of value is for.

For the basics of how the grid works, start with how appraisal adjustments work.

What I see in the field

I see both mistakes. Some reports leave lines blank where the houses clearly differ, with no word of explanation. Others adjust $400 for a slightly bigger linen closet, which is precision theater. Both tell the reader the same thing: nobody measured.

The fix is the same in both cases. Measure the rate from real sales, check it against the wider market, figure out the smallest difference that rate can see, and write it down. Then a zero means something, and so does every number next to it.