What’s in a Foreclosed Home?

October 20, 2008 at 3:46 pm | Posted in Uncategorized | Leave a comment
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That’s a weird question. i’d like to think that a Foreclosed home has the same stuff as a non-foreclosed home. You know, doors, windows, toilets, carpeting, kitchen, lights. Well in most of the ones I’ve appraised, everything’s there. And everything is in decent shape- no different than any other house that’s sold. But we live in an age with a lot of foreclosed homes that are so because of the screw financial situation we’re experiencing. And with that comes a lot of anger. And with anger has come some very vengeful and destructive behavior that’s downright shameful.

Over the past 5 years or so, the housing market has been booming- particularly in places like Phoenix- where I appraise. The ridiculous rise in home prices wa fueled by cheap money, relatively inexpensive homes and the mindset that homes were ATMs. Couple those factors with the phenomenon of multiple investment homes for oftentimes out of state owners, and the “demand” was more a demand for investments- not the need for
owner occupied homes.As an appraiser, I can do a little research and have done so for an example. I live in a master planned community of about 1700 homes- surrounding a golf course, with a community pool, clubhouse, parks, school, etc. On my street alone of 34 homes- built in 2005, we have “investment” homes which are owned by people who don’t live there, and “owner” homes which are owned by the occupants.  I can break it down to the following:
  • 9 bought as owner occupied and still owned and occupied by those original owners
  • 2 investment homes subsequently sold to owners who still live there
  • 13 investment homes that are still investment homes
  • 1 investment home that was sold to an owner that was then foreclosed and was bought by another investor
  • 1 investor home that was sold to an owner that was then foreclosed and was bought by another owner
  • 4 investment homes subsequently sold to other investors.
  • 1 investment home sold to an owner which is currently in foreclosure
  • 3 that I categorize as unknown since tax records show that the mailing address is the same as the physical address.
I won’t even go into analysis of their mortgage amounts compared to market values. It’s quite depressing. So the point of my breakdown hopefully demonstrates exactly what the situation is in many neighborhoods- not just mine.But getting back to the topic at hand, as you can see, there are a lot of investment homes out there and a majority of those homes are used as rental properties. Now I don’t want to knock on renters as a group- after all, we’ve had a few great renter neighbors who were good people, took care of their rental and cleaned up when they left so they could get their security deposit back. But there are a LOT of renters who really don’t care that much.When renters pay their rent on time that’s great for the owner, but what happens when the rental income doesn’t cover the mortgage? And what if the mortgage payment is increasing each month because they got an adjustable mortgage- and the rent amount is the same? Well, you get an owner who stops making his mortgage payments, and unbeknownst to the renter, the house goes into foreclosure and then all of a sudden the tenant gets evicted because the bank now owns the home- the tenant who has been faithfully paying his rent each month. Sucks for him doesn’t it?

Well some of these upset tenants, and sometimes owner occupied residents all of a sudden lose their home, then it becomes a scene from The Jerk, where Steve Martin leaves his mansion with an armful of stuff. And how they leave varies depending on the type of person we’re talking about.

Neglect: The obvious is letting things go. Pools evaporate (after they turn green), weeds grow, black widows breed. Typically nothing intentional here. One extreme version is when a leak occurs and nobody knows about it til it’s too late. I had one of those recently where a toilet leak at the supply line seeped out into the bedroom and then you get what you see below- a virtual forest of mold:

Rapture: These are the sad ones. Toys in the backyard, clothes in the closet, food in the pantry, DVDs on the floor, pictures on the wall. Incidentally, I’ve always wondered what happens to all this stuff that is left behind. I recently did a house where some guys were putting in a pool pump and it was a company who does foreclosure home cleanup. According to them, they take that stuff to the Salvation Army as directed by the bank. So actually that’s reassuring. I’ve always wondered if these companies simply take whatever they want. (but I wouldn’t be surprised if some of that happens)

Messy: Everyone has different definitions of cleanliness. I’ve been in plenty of non-foreclosure homes that feel, look and smell like model homes. And I’ve been in plenty where I wished that I had a gas mask and some booties. so this is by no means a foreclosure phenomenom. But the most prominent thing I see is carpet that is covered with pet stains- and sometimes ones with actual pet droppings still there. You see that in a house, and you know you’ll see plenty on the outside as well. How about a shopping bag full of feces? Not sure what happened there “we’ll collect it, but we won’t put it in the trash can”

Removal: You buy a house, you add some stuff to it like ceiling fans. Well the foreclosure consensus is that those are yours to take. Technically those sort of thing are fixtures once attached just like over the range microwaves and garage door openers. But once they are gone then who’s to say they weren’t there in the first place? After all, garage door openers aren’t standard on many new homes. About 90% of the foreclosed homes I do have the exposed wires from where the ceiling fans were.

Destruction: Ahh, the good stuff. Some of it could be accidental, some of it could be intentional and in most cases I simply assume that it was due to a rushed exodus from the premises. We’re talking drywall holes, maybe a broken window or a stair rail that’s not mounted anymore. I’ll let you be the judge on the cause of these things.

But then there’s the obvious intentional destruction, and destruction doesn’t just mean damage. As you’ll see in the following photos, I’m talking about water heater taken, air conditioning system taken, kitchen cabinets, faucets and countertops taken. I’ve even seen examples of homes with graffitti inside the house.

So yes, these situations happen, and they happen in nice looking houses, in nice neighborhoods. It’s a shame.

Here’s the next question, which I’ll save for another article: Where does this stuff go?

Visit our website at www.advantageappraisalsllc.com, and if that doesn’t roll off the tongue, just try www.appraiserdude.com. Give me a call at 480-544-1217 if you have any questions. I look forward to working with you.

Sincerely,

George

Required Repairs and Inspections for an FHA Appraisal

October 20, 2008 at 3:46 pm | Posted in Uncategorized | Leave a comment
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With the popularity of FHA loans recently come a lot of questions from my clients. Basically, they want to know what home issues are cause for further inspection or repairs. Since the appraisal is what it is, I can’t help if the house has an issue that needs to be repaired or addressed. In cases like these, I do what HUD tells me to do. But even with their guidelines, I’ve encountered plenty of other situations that are not or may not be as clear cut.

There are a ton of reasons why a loan could be rejected by HUD, and an Appraiser might disclose any number of those issues, but that decision is not up to the Appraiser. His job is to simply state the facts and observations so that HUD can make that decision. BUT, the Appraiser is required to call for additional repairs or inspections for certain observations.

From a 10,000 foot level, an FHA appraisal is done in a very similar way to non-FHA ones. But there is definitely a lot more attention paid to the home and a lot more judgment placed by the Appraiser. As an example, for a non-FHA loan, I might find that there is a broken window. I would mention the broken window and in my appraisal I would put an estimated cost to fix that window. Adjustments are made accordingly and that’s that.

But with FHA appraisals things that require an added inspection or repair typically fall into three categories that are known commonly as the “Three S’s”

Safety– Is the home going to preserve the safety and health of its occupants?
Security– Are there conditions of the home that will preserve the continued marketability of the property?
Soundness– Is the home structurally sound?

Now with this simple guideline come a ton of “what about” questions because no two properties are the same, but here are some no-brainer required repairs:

Inadequate access/egress from each bedroom directly to the exterior- so security bars on the windows, or no window at all on a bedroom are definitely bad things. If it’s 2AM and there’s a fire- can people get out of the house quickly?- Automatic repair required

Leaking or Worn out Roof- roof leaks cause water damage, cause structural integrity issues, cause mold, cause termite infestation, etc. If the roof is leaking, it needs to be repaired. Also, if the roof already has three layers of asphalt shingles and has problems, then the old roof needs to be removed instead of patched. If the roof has less than 2 more years of life left, then don’t be surprised if the Appraiser calls this out too

Evidence of Structural Problems- is the foundation lifting because of a nearby avocado tree’s roots? That’s a perfect example of evidence. The Appraiser would call for a structural engineer or home inspector to determine if it’s really an issue.

Defective Paint Surfaces when home was constructed prior to 1978. We’re talking lead based paint. If the tax records show that the home was built prior to 1978 and there is flaking, peeling or other signs, then it will be called out for repair. Of course the next question is- “What exactly needs to be done? Does the whole house need to be painted?” The quick and dirty answer is NO. But the repairs must be good enough where the Appraiser will not see any signs of defects.

Pretty simple stuff so far, but what about all the “What About” questions. Here’s a list of some that I’ve encountered and the course of action:

Swimming Pool is empty, or green or otherwise not up to swimmable condition- We’re talking about a safety issue here on several fronts- a green pool is a breeding ground for mosquitoes. A green pool is a place where people can fall in and not be seen. An empty pool is one where a person can fall in and break their neck. The swimming pool must be filled and functional or it will be called out to be repaired or otherwise rectified. But what is “otherwise rectified”? They can fill it with dirt.

What about a pool barrier? That’s more of a city code requirement. If it’s required locally, then it’s required by HUD. The Appraiser should know if it is required and report it accordingly and require necessary repair.

Fence missing or broken between neighbors when a pool is present? Wow, now we’re getting complex. Two issues here- most importantly is that the subject home isn’t very secure if someone can go through the neighbor’s backyard to get into the subject’s backyard. Also, despite the pool barrier, the missing fence is simply another step a person would have to take in order to get into the subject yard, get in the pool and drown. Sounds depressing, but drowning is a bad thing and HUD doesn’t like the idea of homes being potential death traps.

Possible Termite Damage- We’re talking about Soundness here. Any signs of termite damage require a termite inspection. If any structure on the subject property have wood that is touching the ground, then that requires a termite inspection. Or if the site isn’t graded properly and water can pool by the base of the house, that’s another obvious structural consideration.

Power is Not on in a Vacant Home- Well if it’s not on, then that’s a pretty significant system that can’t be tested. So either way, the home needs to be inspected when it’s on. That’s basically going to be something that the Appraiser can check himself.

Broken Windows or Exterior Doors- Security and Safety concern here for obvious reasons.

The Biggie- With so many foreclosed homes, it’s not uncommon to find a home with no kitchen… I mean yes, there’s a kitchen room, but the room has been gutted- cabinets, countertops, sink, appliances- just flat out gone. Well this falls into the whole Security blanket as marketability. You expect a kitchen in a house so it needs to be there. But what is required? The rule of thumb is “market standards”. You basically have to fill the space with what is typically found in a kitchen- which includes sink, countertops and cabinets. Same goes with the bathroom. If you have a 2 bathroom home and one is completely non-functional, then the appraiser would be “As Is”, but if you have no functional bathroom, then the house is not livable as you need a bathroom.

Hopefully this exercise has cleared things up a bit, but we all know that it probably only opens the door to more questions. Remember, each locality is different, so this is by no means a definitive list, nor does it mean that there is only one solution to each of these situations. Check with your underwriter to see what they specifically require as it may be very different from state to state.

Give us a call at 480-544-1217 with your unique FHA question or visit our website at http://www.advantageappraisalsllc.com/. I look forward to working with you.

Sincerely,

George

Should a Realtor Meet the Appraiser?

October 20, 2008 at 3:45 pm | Posted in Uncategorized | 2 Comments
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The Appraiser is an objective party in the real estate transaction. There should be no outside influence on his opinion of value. So what’s the point of a Realtor meeting the Appraiser when he does an inspection?

Well, to be honest with you, it all depends on your knowledge of appraisal practice, your confidence in the Appraiser assigned to the home, and your own knowledge of the market of the home.

If you:

  • know enough about how appraisals are done
  • know that three model matches sold within the past few months within a mile of the subject
  • know that those sales closed for prices that are higher than your subject property contract price
  • know that your house is nicer than those aforementioned comparable properties
  • know that all three closed sales were listed in the Multiple Listing Service
  • know that all three closed sales were listed correctly in the Multiple Listing Service
  • know that all three closed sales were arms-length transactions

…then you really don’t need to mee the Appraiser. This is what’s known in the industry as a “lay-up” or a “slam-dunk”. Not sure why they are basketball references, but oh well.

But if you answered no to any of these questions above, then you have to start thinking about things. If you answered no to more than one of these questions, then you have what could be called a complex appraisal.

What that means is that the Appraiser will have to really earn their pay by finding appropriate sales, considering the local market and recent transactions. Now there might be three sales but one is a bigger home, one is a smaller home and one has a swimming pool (while the subject doesn’t). And the Appraiser will use those sales and make adjustments accordingly to determine market value. But as your transaction gets murkier and murkier, then the Appraiser will have to pull out more experience and knowledge in order to find appropriate comparables.

Say there are no sales within a mile. There are no sales within 3-6 months. The subject is 2000 square feet and the most recent sale is a 3500 square foot house from 7 months ago. Well, now we’re getting into a situation where it’s a good idea that you meet the Appraiser. You’re not going there to try and influence him or strongarm him or act like he’s an idiot. You want to meet him to help educate him on the transaction and how it came about.

Assuming that the buyer loves the home, has done his research and the seller is agreeable with the contract price, then obviously there is some sort of meeting of the minds. That’s where you as a Realtor comes in. Here’s a little insight- I cover Maricopa AND Pinal county. That’s a lot of land. And I can honestly say that I’ve appraised homes in every city or town within those counties. But that doesn’t mean that I have intimate knowledge of each and every one. One of my clients does a lot of business in Fountain Hills- which is about an hour from our office. So I know that area pretty well. Of course when clients look me up online they typically find me because of where my office is based, so you bet that I know my own town. But there are some cities that I might do an appraisal in once a month. And with so many neighborhoods within each city, it’s even less frequent that I do the same neighborhood more than once per year.

The Realtor on the other hand usually sells within a certain area, or takes buyers to a certain area, so they know their neighborhood very well. Is the school district way better than everywhere else? Did they just open a new shopping center which everyone loves? Are most listings sold within a few weeks while neighboring cities might sellin 3-6 months? Those are factors that the Realtor should have good knowledge on. Don’t get me wrong, the Appraiser should know enough about the neighborhood to do the appraisal, but you never know.

So, if you feel that there might be a value issue with the appraisal based on any factors mentioned above, or any other ones not mentioned, then tell the Appraiser that you have prepared some information that he could use. Don’t say it in a way like he’s an idiot- because he just might tell you to not bother (yes we have egos too, and nobody likes to be told how to do their own job). But then bring printouts of the comparables that the buyer considered. Bring printouts of the closed sales that you best feel represent the market- and hand write notes about the property- someone died there, rental property that was trashed, major remodel, etc. Bring printouts of recent newspaper articles that might show great hightlights of the community. Bring data that shows why this neighborhood is one of the rare pockets that is not declining in value. Bring your business card. Bring a bottle of water (if the Appraiser refuses, then guess what- you have a bottle of water to drink!).

Here’s the worst case scenario- you leave, the Appraiser leaves, and when he’s at Starbucks, he throws your data away without even looking at it. But a good Appraiser will appreciate this rare jesture and he will compare your data to his, and he will throw away the ones that he’s already found- heck, he might have the exact same data that you have. But I’ll tell you from my personal experience… Every once in a while the Realtor provides me with a sale that I didn’t find. Either the zip code was wrong in MLS, or it was listed in the wrong grid, or maybe it just closed the day before. Every once in a while I find that I’m in one of those Twilight Zone pockets where there is a waiting list to buy a home and people ARE still paying a premium (very very very rare).

And if you are able to meet Appraisers like this without coming across as a know it all Realtor who’s too busy and is too important and too good looking, then you will gain the respect of someone who meets a lot of homeowners. Who knows, you might even get some business out of establishing that relationship with an Appraiser whom you might never see again. We’re all a team in the real estate industry so it baffles me when I encounter a loan officer, an escrow officer, a Realtor, or even a homeowner who just can’t help but make things difficult for the rest of the team.

Visit our website at http://www.advantageappraisalsllc.com/, and if that doesn’t roll off the tongue, just try http://www.appraiserdude.com/. Give me a call at 480-544-1217 if you have any questions. I look forward to working with you.

Sincerely,

George

Get Me a Good Appraisal

October 20, 2008 at 3:43 pm | Posted in Uncategorized | Leave a comment
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So you have a client that needs their home appraised. You can’t exactly have them remodel their kitchen within the next week- or move their home away from the highway, so what advice can you give them before we go inspect the home? Of course presentation is a big factor. But unlike when trying to sell a home, the appraiser isn’t making a yes/no decision. He’s assessing the market value of the home- regardless of if he likes it or not. So here’s my newly created “Vowels” of a smooth inspection.

Accessibility- nothing is more frustrating than an inspection that doesn’t go smoothly due to: the homeowner not being there, vicious dogs, locked gates, bougainvillea covering half the house, blocked doors, etc. Make sure that the home is ready to have free and clear access to all parts of the building- inside and out.

Energy- a home is meant to be lived in, but some homes are too lived in. I’d say that one out of every fifty homes we visit are immaculate, model home knockouts. Of course many of those stand out in my mind, but don’t be on the other end of the spectrum where the home stands out for the wrong reasons. Specifically, I don’t like inspecting dark homes. When it’s too dark inside, it just plain feels spooky. Is it too much to ask the homeowner to open the blinds and perhaps turn on some lights before I arrive? And especially in the summer in Arizona. If they have A/C, is it too much to ask for them to turn it on? I’ll still do the same quality work if it’s not on, but you should know that I’m thinking about my air conditioned car the whole time I’m in a house like that.

Improvements- it’s my job to observe the improvements on a home, but remember that I can only note what I see. Stuff like new carpeting, ceiling fans and cabinets are obvious, but especially with a home that has a lot of improvements, have the homeowner prepare a written list of improvements done in the past 5 years. I’ll cross reference his list with my inspection notes and maybe I’ve missed something. It’s always better to have too much information rather than not enough.

Olfactory- lets face it, smell is very important. It’s how we determine the foods we like, the people we like and the flowers we like. Is your homeowner a smoker, an owner of an unpotty trained animal… or child, a gym rat? It’s really not that hard to spend a few bucks on some air fresheners and open the doors a few hours before I arrive. Plus, after being in so many homes, I can smell “musty”- and that’s a big warning sign that might affect the appraisal.

Underwear- working off the Energy theme above, an appraiser is appraising the house, not the owners stuff. But our stuff tends to define who we are. Some homeowner stuff just doesn’t need to be out in the open. Why? Because it’s too distracting and can make the appraiser feel a little uncomfortable- hence breaking the rhythm of the appraisal. Call me conservative if you want, but here’s some examples of “stuff” that I’ve personally seen out in the open during inspections: hash pipes, bloody underwear on the ground, unflushed toilets, a layer of cat poo on the carpet, a gun on a nightstand, pig head on a countertop, a closet full of porn on the walls. Have your homeowner put all that stuff away before I get there.

Now please remember, if ignored, this list of tips do not necessarily affect the value of the home, but they typically give me an indication on pride of ownership, which sometimes reflects on the condition of the home.

If you’d like to discuss how to better educate homeowners on preparing for the appraisal, give us a call and we’ll be happy to work with you on what’s really important for the inspection.

Visit our website at http://www.advantageappraisalsllc.com/, and if that doesn’t roll off the tongue, just try http://www.appraiserdude.com/. Give me a call at 480-544-1217 if you have any questions. I look forward to working with you.
Sincerely,
George

Property Taxes- How are they Determined? (ported from Blogger)

October 20, 2008 at 3:42 pm | Posted in Uncategorized | Leave a comment
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Response to a question posted by Loralei:

A reader had a question about her property taxes. She purchased her home 12 years ago and has refinanced twice and has a 2nd mortgage on the home. Do appraisals affect the property taxes?

The quick and dirty answer is: No. Refinance appraisals do not affect your property taxes. But when you buy your home and the transaction gets recorded in county records, then your property taxes will definitely be affected. Actual market purchased set the baseline that is used to assess property taxes.

Property taxes are assessed annually by your local assessor (usually at the county level). Your property and every one of your neighbors is appraised using the same appraisal principles utilized for mortgage purposes. Now the assessor is not physically measuring each property and going inside to check things out. They typically rely on tax records which show your property’s characteristics- sort of like what we call a “Drive By” appraisal. But do they actually visit your property in their car? I’m sure some of them do, but I would guess that most homes are not viewed in person by the assessor or thier staff. So if your tax record shows that your home is 2300 square feet and you know that it’s actually 2800, then you should be pretty stoked (for tax purposes). However, if you refinance your home and your lender only orders a drive by appraisal, then you’ll only get credit for that 2300 square feet- Catch 22? Perhaps.

Your actual property tax is then based on a cumulative analysis of services that we all use- police, fire, schools, library, city hall, etc. Yes, this is how our teachers and mayors get paid. If you are a tax paying homeowner, you have a right to get mad at that police officer who gives you a rolling stop sign ticket at 2AM- that’s your employee! But anyway, once they figure out how much it’s going to cost to run all these services and how many properties are in the municipality, they do some simple long-hand division and your county tax rate is determined accordingly. That rate is then multiplied by your property’s “Full Cash Value” to determine the actual amount you owe. So if you have more property, you pay more taxes. If you have a 700 square foot home on a 4000 square foot lot, then you might not want to start yelling at that officer who’s writing that aforementioned ticket. You have 8 kids living in your 1000 square foot home? Well you’re getting a smoking deal on your kids’ education.

Now the big question is how accurate the county’s appraisals are. And to be honest with you, I’ve seen their values spot on and I’ve seen them way off- sort of like Zillow. Some assessor websites sites allow you to pull up a specific property and then click a link for “similar properties” which in the case of my own primary residence turned up 5 sales- all from between 2005 and 2007… of which 3 are over a mile from my house (and I live in a tract home) If you want to learn more about how your particular value is determined, ask your assessor.

You can see your “Full Cash Value” by which your tax assessment is based simply by visiting your county assessor’s website or visiting their office. If the assessed value is close to reality, then there’s nothing you can really do to reduce your property taxes.

The big issue nowadays is of course homes that have declined in value substantially over the past few years. So if you think your assessed value is too high, you should check with your own County Assessor’s office to get an appeal form- again, usually available online. If you know of recent sales that support a lower value for your home then you’ll want to itemize those for the assessor to review. But remember, the assessor is using the same basic appraisal principles as an appraiser is. If you really want to make your case, hire a reputable appraiser who can professionally demonstrate the value of your home in the “language” that the assessor will understand.

Visit our website at http://www.advantageappraisalsllc.com/. Give me a call at 480-544-1217 if you have any questions.

George

How Much Does That House Cost?

October 20, 2008 at 3:41 pm | Posted in Uncategorized | Leave a comment
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… Well, it all depends on what you mean by “cost”.

As an Appraiser, it’s my job to determine market value of a home based on three “approaches” to value. And this is determined in most cases for the purpose of securing a mortgage on the home. Of course there are always unique situations, but this summary is pretty much the rule of thumb.

First and foremost, for mortgage purposes, estate planning, divorce settlements, etc., there’s the Sales Comparison Approach whereby you use recent similar sales to help narrow down what your house is worth. If a 3 bedroom, 2 bathroom, one story, 2 year old house with plain upgrades just sold next door for $200k, and you have the exact same house, then your house is worth about the same amount. Find a few more recent sales to show consistency and so much the better. What if your neighbor has the exact same house except he has a pool and his sold for $212k? Well, we’ve just established the approximate value of a pool in your neighborhood (and if you haven’t figured this one out yet, a pool is typically NOT a great idea for adding value to your house). As far as appraising goes for most homes- whether they be tract or ranch or custom estates, this approach to value is really all that matters.

Now if you live in California and you want to invest in rental property in Arizona, then your motivation is more driven by what your cash flow situation would be. That analysis is called the Income Approach. Why buy a rental home where your mortgage payment will be $2000 per month when you can only rent it out for $800? Well that’s not for me to determine- it’s all based on your individual situation as a borrower. Your lender will look at your personal financial situation and decide if they’d be willing to loan you money for such a purchase- even if your incoming rent would be less than your outgoing mortgage. If the rental income makes sense then an investor might buy the home and not really care too much about getting the best price. But besides verifying if there will be an acceptable cash flow, the lender still first and foremost wants to know if the house is priced appropriately, so we go back to the Sales Comparison Approach. The Income Approach in this case is there as very important supportive data.

The third approach to determining value is called the Cost Approach, and for appraisal purposes, that’s typically leaned on if we’re talking about a unique property- like a school, or a fire station, or a church. I’m not sure how many Crystal Cathedrals are in your neighborhood, but how exactly can you be expected to base value on recent sales of similar properties- which may be from 8 years ago, 10 states away. In these situations, the thing to do is figure out how much it would cost to build that property from scratch. Figure materials, labor, permits, land value, etc. and you’ve got an estimated cost. But if your property is 20 years old then you have to figure that it’s depreciated. But over the past 20 years, the current owners might have added new flooring, new paint, new appliances, etc. so it doesn’t look like a 20 year old house anymore. Let’s assume that the new Yankee stadium is the exact same dimensions and materials as the old one and built the EXACT same way. Take out the historical significance of the house that Ruth built along with sentimental value, and the new one is worth more than the old one because it’s new and hasn’t depreciated. How reliable is the Cost Approach? Well the older a house gets, the less accurate the cost estimate is because the degree of depreciation is an opinion- one appraiser might say that a house has depreciated by 10 years while another one might opine that it has depreciated by 20. That’s all a factor of the upkeep, improvements and estimate of how much longer the house has before it should be torn down. It’s a little confusing, hence not very reliable for houses.

It used to be that appraisers were required to apply two approaches to value so that one sort of substantiates the other, then he would explain which one was given the most consideration and why the third wasn’t developed. But in 2005 Fannie Mae (the one who approved the standard appraisal form requirements) decided that the Cost Approach really wasn’t that important when talking about single family homes- and they were absolutely correct. So they decided that the only approach that really mattered in these situations was the Sales Comparison Approach. However, individual lenders (and plenty of us appraisers) were a little leary of the fact that the Cost Approach section is still on the appraisal form that we use. So these individual lenders decided that it was still important for appraisers to work out the Cost Approach regardless of the situation and despite the fact that it is unreliable. So any good appraiser puts verbiage in the report that the Cost Approach was developed as a special request and that it’s unreliable and that it should not be relied upon fo stuff like insurance estimates. So now this takes us back to the original question… How much does a house cost?

As mentioned above, the cost value is the cost to rebuild the house from scratch minus depreciation. But arguably the biggest (variable) cost factor we’re talking about is the land that the home sits on. You put the exact home on two lots that are the exact same size, but one’s in Mesa and the other is in Scottsdale, and you have a difference in cost. And that takes us to real estate 101- location location location. But I digress.

So say a house cost $300,000 to build. There’s a boom in real estate, homes are being built like crazy and people are camping out to get on waiting lists for new homes. That house’s value is not $300,000. It’s whatever Dave and Wanda Homebuyer are willing to pay (as long as there are comparables that support the purchase price (Sales Comparison Approach) or they don’t get a loan and pay cash. But look at our market now- and I’m talking a large number of markets in America, but in particular places like Phoenix, Las Vegas and Orange County. We’re seeing home values declining by double digit percentages over the last 12 months (source, Freddie Mac Q1 2008 vs. Q1 2007) . Does that affect the cost to build a house? The answer is actually “yes”, but it’s not reflected directly in home values. It costs more to build because of fuel costs (to deliver materials, etc.), more (or less) to build because of materials costs, less to build because of labor (more workers to go around), less to build because of profit margins (or loses), but most importantly, less to build because of land values. Meanwhile, in this market buyers and banks who are now the sellers in many situations, don’t give a hoot how much it cost to build a house. They’re looking at the Sales Comparison Approach to determine how much is reasonable to list a house for or spend to buy a house based on recent activity. I’ve done plenty of recent appraisals where the purchase price was $160,000, but the Cost Approach calculated out to $325,000. So as you can see, nowadays, nobody really cares how much a house costs (unless you’re an insurance agent)

But the irony that I see all the time is that once the appraisal is complete on one of these distressed homes, the bank (who is simply checking the appraisal for completeness) ends up calling the appraiser to complain that the Cost Approach value is too high and that it should be “changed” to be closer to the Sales Comparison Approach value. They don’t say that it’s wrong, they just say that it’s not the same as the Sales Comparison Approach value. (Do you have wonder what good appraisers think about the people who review their work)

So in summary, there’s your appraisal lesson for now. It’s pretty complex, but not really. When you factor in those parties who look at the appraisal report, that’s when you get lots of “controversy”. The appraisal is done for a single purpose and that purpose is stated in the report whether it be for mortgage financing, estate settlement, or whatever else the client requests. When other “unintended users” start looking at an appraisal for their unrelated purposes, all bets are off.

Visit our website at http://www.advantageappraisalsllc.com/. Give me a call at 480-544-1217 if you have any questions.

George

Introduction

October 20, 2008 at 3:39 pm | Posted in Uncategorized | Leave a comment
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Hello,

My name is George Easton and I own a residential real estate appraisal company named Advantage Appraisals, LLC in the Phoenix metro area.

We cover all of Maricopa county as well as most of Pinal county for:

  • Reverse Mortgages
  • REO Assessments
  • FHA Loans
  • Divorce Settlement
  • Bankruptcy Valuation
  • Estate Planning
  • Proposed Construction
  • Million Dollar + Homes
  • Appraisal Review
  • Vacant Residential Land
  • Pre-Listing Analysis
  • Renovation-Return Consultation
  • and of course primary and secondary mortages

We were ranked in the Phoenix Business Journal Book of Lists- 2006, but not in 2007 since they decided that the new measure of success is the number of reported employees vs. quality or quantity of work. So I hate to admit it, but we’re what’s called a small shop.

We pride ourselves on excellent customer service, high quality work and fast turnaround. If you’re looking for a cheap appraiser, then you’ll probably have to look elsewhere. I’m not saying that we are expensive, but we don’t believe in undercutting our fees just to get business. You really do get what you pay for.

Visit our website at www.advantageappraisalsllc.com, and if that doesn’t roll off the tongue, just try www.appraiserdude.com. Give me a call at 480-544-1217 if you have any questions. I look forward to working with you.

Sincerely,

George

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