Real Estate Appraisal Insight From the Expert

Life Cycle of a Home’s Value (2005-2009)

As we all know, the real estate boom of the past decade is over as we knew it.  Like many, I was fortunate to have bought my first house in 1999.  And 2005/2006 was the beginning of the end.  I mean, we all knew that things were out of control, but like dot coms and tulips, you just had to buy or you were labeled an idiot by those who were already making loads of money.

And similar to buying, people were able to custom build their dream homes- they’d get a construction loan from a local bank, buy a lot for a quarter million and then go nutso gonzo as they built the end all be all of custom homes- not personally for most, but we’re talking essentially a home built from step one with owner direction.

A few years ago, I was fortunate enough to work with a few local banks that were helping people build their dream homes.  And what they’d do is get an appraisal based on the finished product.  This is called a “proposed construction” appraisal.  And essentially it’s the same thing as a normal one, but it’s based on the hypothetical assumption that the home will be built as described in the blueprints and any other documentation that shows the finish of the home.  So even though the home wasn’t even started, I’d use current comparables to estimate the value of the finished product.

Now when it takes a year to build a home, the assumption (and bank business decision) is that the market values will stay the same or continue to go up…

Case in point:  I got an assignment to do an appraisal on a home that was just completed- this was in July of 2007.  It was a custom home on an acre in Queen Creek.  I go out there, do the normal appraisal and based on the closed sales from July 2007 or thereabouts, the home was worth $875,000.  Now the original construction appraisal had it pegged at right around a million dollars, so losing $125k in value is a big chunk of money.  Either way, based on what the owners put down, the loan went through.  And please keep in mind, I don’t know if every deal goes through.  It’s not the Appraiser’s job to care if a deal goes through.  This was more of a curiosity thing and I was friends with the loan officer.

Custom home I appraised July 2007

Literally 3 months after this- we’re talking October 2007, the same loan officer called and said that they owners now wanted to take out a home equity line so that they could do their yard, put in their pool, etc.  Ironically, the owner owns a landscaping company so I figured he’d have an in- at least with the landscaping.  But anyway, I did the new appraisal and unfortunately, all the now new comparables painted a different picture.  Let’s describe this era as “the beginning of the end” or the “world of wishful thinking”.  Now, only 3 months later, the home appraised for $780k- that’s right, almost $100k lost in 3 months.  Needless to say, the homeowners did not get their home equity line.

And now is where I go into the mindset of that era.  Back then, I would get calls from loan officers- and I’m talking about the ones that I knew, and they would be in the process of taking a loan application for a borrower.  I would do a limited desk appraisal based on county records and present the loan officer with the applicable comparables in the neighborhood and invariably, the loan officer would ask if there was anything else (as if I’d be holding out the “good comparables” just to upset them).  When they realized that they couldn’t get a 80% loan, they would ALWAYS take the attitude of holding off for better comps…  Now my gut- based on my insight of the market, told me that there would not be any better comps, but it’s not my job to influence or predict.  So a month later when that same loan officer would call for the same property, let’s just say that my “told you so” news wasn’t always taken so well.  After all, it’s the Appraiser’s fault that home values were dropping right?  Shoot the messenger, etc.

So anyway, beyond seeing that deals aren’t going to happen (based on appraised value and my limited knowledge of either what they were hoping their home was worth coupled with what county records shows as their original mortgage amount), I simply move on with my life.  I’ve got enough of my own things to worry about to be concerned about every homeowner- that would drive a person insane.

So, let’s flash forward to 2009- November to be exact.  I just got an appraisal request for this same property that I’ve described to you above.  First off, let’s just say that that is such a statistical improbability that images of being struck by lightning- twice, come to mind.  Now back in the heyday of refinancing, I’d appraise the same home 3 or 4 times in a 2 year period.  But that was because the homeowner was refinancing with the same loan officer while rates went down and values went up.  But in today’s world of foreclosures and declining markets, it is now a statistical anomaly.

When I pulled up the county records of the home, I recognized the street name and neighborhood and wondered if by chance it was the same home, and  then I saw the owner’s name and it all came back to me.  As it turns out, the owners of said home couldn’t get their home equity line and have lived in the home for the past two years.  But now they are short selling the home.  Even though it’s not in any way my fault, I know that it was my appraisal that stopped their “progress” back in ’07.  So when I called the Realtor to go see the home, of course I asked if the homeowners still lived there- and of course they do.

Long story even longer… his mother was there when I inspected the home, so no uncomfortable conversation.  And at least I didn’t have to remeasure this bad boy as custom measures tend to take a little while.  But as you can see by the photo, nothing has changed- in fact the house is already a tad run down and neglected with uneven pavers, some of the stone accents missing, etc.

Same Custom Home November 2009

So that’s my story.  Any questions you might have are welcome… oh wait, did you want to know what the home is selling for right now?  Do you really want to know what that “million dollar home” is worth today?  Alright, I’ll tell you- but you need to leave me a comment!

$342,000.

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