The 1004MC or Market Conditions form is a new addition to residential appraisal. It is a standard form that must be included with all residential appraisals that involve mortgage lending. It is not perfect in every respect but is a useful way for appraisers to understand markets. This article offers some perspectives and tips.
I personally agree in principle with the 1004MC concept. Real estate appraisers have long needed a standardized methodology for determining market trends. This new form was implemented on April 1, 2009 after being amended to compensate for differing levels of available data from local sources such as MLS. Not all MLS services across the country provide enough analytical tools and information for the appraiser to be able to give a complete analysis, while some other MLS services are highly sophisticated. It depends on where one lives and works. The 1004MC also provides transparency to the appraiser’s conclusions about the market and gives the appraiser a much better perspective on past and present market activity.
The use of the 1004MC form is still very new and it will be some time before those who fill it out and those who review the results truly understand how to do it. Even though it looks simple to fill out (and it is) interpretation of the raw data is much more difficult. By example, the results may show a large increase in the number of available homes on the market and a corresponding increase in the number of months of inventory. This can be as simple as the beginning of the summer buying season, or may be more complex such as a large number of foreclosed homes coming online, a new subdivision with dozens of available homes for sale, or perhaps a large layoff that is causing an unusually large number of people to want to sell. It’s up to the appraiser to understand what the market and the economy are doing to know the cause.
I would caution both private reviewers and state enforcement reviewers to allow a reasonable amount of time (about 1 year or so) for the industry to adapt to and understand the 1004MC form, and private reviewers should realize that attempting to reproduce the appraiser’s results may produce variations from what they got., even when using the exact same parameters and spreadsheet formulas. It will take some time until all the bugs are worked out in the source materials, and is it well known in the appraisal industry that in some MLS systems, two identical data searches even moments apart will provide different data results. This can be faulty databases, faulty database retrieval software, or perhaps just changing data due to the input of many thousands of MLS users throughout the day. 1004MC review will be far less challenging (and potentially less damaging) if a degree of variation is accepted as normal.
Some MLS services provide an easy to use spreadsheet with the necessary formulas already built in, along with a special MLS search function specifically for the 1004MC form, where the appraiser uses a paste function to apply the raw data to the spreadsheet. I want to provide a few useful tips for those appraisers fortunate enough to have this tool..
One tip is to always make sure to scan the list of prices in the raw data run before you analyze it. Some agents include both sales and rental listings in the same category. In other words, rental listings of homes for say $800 a month may be mixed in with active, pending or sold homes for say $100,000. The 1004MC form uses median (in the middle) prices but those $800 rentals don’t belong in the analysis and may drag down the true median. Appraisers can use average (mean) prices when necessary and those $800 rental listings will certainly affect the average prices. I have also seen prices that were improperly input into MLS where the agent or their assistant got the price completely wrong or tried to input a sale price that included both dollars and cents, which many MLS systems will interpret wrong. This doesn’t affect the median but will impact the average. Use caution with your raw data and filter out information that doesn’t belong there.
Another tip is to do a double analysis when filling out the foreclosure section of the form. If your MLS allows this, narrow your second search to include only foreclosed homes however your MLS describes them (foreclosures, foreclosed, REO, etc.) and then paste only those results into a separate spreadsheet for analysis. This will quickly give you the REO/foreclosure trend information and takes just a few minutes.
Another tip is when defining your neighborhood, unless you are absolutely sure of the boundaries, try surfing up sources on the internet. Many cities feature voluntary or involuntary neighborhood associations that have their own websites and often describe their territories. A little time spent doing this and marking them out on a wall map will be very helpful to you, not only for 1004MC purposes, but in understanding your city better.
Another tip is to pay attention to the statistical aspect of your data. If your defined neighborhood produces only a handful of data (samples) to work with, be cautious because too few samples can easily produce distorted results. A good minimum number of samples is at least 100. But if you cannot find more than 50 you will need to either reconsider your neighborhood boundaries or carefully explain analytical results that are distorted or confusing.
Another tip is to never “template” your 1004MC form. In other words, don’t pull up an older one, insert the new data, and move on. It’s too easy to forget to examine and correctly mark the Overall Trend boxes and amend other sections. Always do a complete new form.
Another tip for Windows users is to create a shortcut to your specially designed 1004MC blank spreadsheet in the task bar at the bottom of your screen. This makes it easier to call it up without having to close or minimize other windows.
Many appraisers do not have, or cannot afford the Microsoft Excel software. An alternative is the Calc program, which is part of the free suite of software at OpenOffice.org. Calc is an Excel clone and has most, if not all the same functionality as Excel. So another tip for Windows users who use Open Office Calc is, after you do your first spreadsheet , save it, then use Windows Explorer to find it. Before you open it again, left click once on the file name to highlight it, then right click and select “Properties” from the popup menu. Now look for “Opens With” and choose “scalc” or follow the prompts to find and choose the “scalc” program and be sure to check the box that says “Always use the selected program to open this kind of file.” OK the change. From now on Windows will use Calc as the default program to open your 1004 MC spreadsheets and will save you a few steps.
One last tip is when your MLS 1004MC data run comes as a separate file (text, etc) that you paste into your spreadsheet, always save your data run along with your spreadsheet. Never depend on your spreadsheet software alone to store your data. It’s too easy to make a mistake saving spreadsheet data. It’s part of your work file and must be saved.