What is bracketing?
The Dictionary of Real Estate Appraisal, Fourth Edition, Appraisal Institute, defines bracketing as “a process in which the an appraiser determines a probable range of values for a property by applying qualitative techniques of comparative analysis to a group of comparable sales. The array of comparable sales may be divided into two groups – those superior to the subject and those inferior to the subject. The adjusted sales prices reflected by these two groups limit the probable range of value for the subject and identify a bracket in which the final value opinion will fall.”
Okay, so what does that actually mean?
Basically, it means that for a given feature of a property, there should be one property that is similar or inferior with respect to that feature and one property that is similar or superior with respect for that feature. This helps to set a high and a low. For example, if a house is 1,500 SF, ideally, you would want to see homes that are both larger and smaller in the appraisal. This is the concept of bracketing. If you think of property features as being a continuum, the subject should fall within the continuum, not above or below all the other data.
Why does bracketing matter?
Bracketing is a good practice because it helps to establish upper and lower limits, and it also helps to support whether a certain feature (or lack thereof) is acceptable in the market. If all of the comparable sales used are inferior or superior to the subject, this is a red flag that the subject may be an under- or over-improvement or that the comparable sales used may not be truly similar. Imagine a two-bedroom house. All of the comparable sales used have three bedrooms. Why would this be? Perhaps the subject has a den without a closet so while it may have the utility of a three-bedroom home, it is classified for reporting purposes as a two bedroom. Is this an indication that the subject is an under-improvement or that the sales are not good comparables? Probably not. However, imagine you are in a market that clearly favors three bedrooms, and three-bedroom homes sell higher than two-bedrooms. Selecting all three-bedroom homes may lead to an inflated appraised value. In this case, perhaps these are not the best sales. Or, maybe there are a lack of two-bedroom sales, so these are the best sales available and an adjustment for bedroom count is necessary.
Is bracketing mandatory?
In a perfect world, everything would be bracketed. However, as well all know, real estate is not a perfect market. There is always going to be the best house on the block, or the worst. Or maybe pools are common and accepted in a certain market but there just happen to have not been any sales with pools recently. Also, you would not want an appraiser to choose an otherwise dissimilar sale to bracket a particular feature. Bracketing is not always possible, and it does not affect the credibility of the appraisal or of the value conclusion.
What do I do if a feature is not bracketed?
When I look at an appraisal and I see something that is not bracketed, I look for an across the board adjustment. An across the board adjustment is just what it sounds like – same-direction adjustments to all comparable sales. If all comparable sales are adjusted significantly up or down, this is a red flag. That is not to say that the comparable sales are bad or that there were better sales available, it just tells me to look in the report for explanation about the lack of bracketing and support for the adjustment. There are many cases where bracketing is not possible. However, when that is the case, I look for the appraiser to explain why and establish that the feature, or lack thereof, is accepted in the market. Additionally, since I have no upper and lower limits to help establish the reasonableness of an adjustment, I often look to make sure that the appraisal has explained and supported that adjustment.
What is the takeaway?
In conclusion, bracketing is a best practice when it is reasonable. However, be mindful that there are many times that it may not be practical, and this does not reflect on the quality of the report. Rather, bracketing can be used as an analysis tool to help look for places in the report that more commentary may be needed for the reader to understand the value conclusion.