2012 in Review- An Appraiser’s Personal Perspective

December 24, 2012 at 7:44 pm | Posted in Uncategorized | 1 Comment
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In November 2011, after a long search for our next home, my family was in escrow with plans to close by Christmas.  We told the kids that we wouldn’t decorate our current house but would make that the first priority in the new house- a week before Christmas.  This was a resale home in a neighborhood that we had been eyeing for some time.  It needed minor updates but was ideal for many reasons.  As an appraiser who had been looking to move for the prior two years, this was the end of a long and painful process.  You see, I’m too smart for my own good…

As an appraiser, I’d like to think I have a pretty keen sense of the real estate market (like a financial planner does…).  I can quickly estimate the value range of a home and I know good neighborhoods.  As the real estate market was in its nadir in 2010, we were just looking for the right deal.  On top of that, besides appraising homes all over the valley, I worked for a servicer of Fannie Mae defaulted loans, doing nationwide appraisal fraud investigation- so I knew that the pipeline for distressed homes was endless- think the Sta-Puft Marshmallow man of shadow inventory. staypuft I would not overpay, and it was a buyer’s market.  I have friends who buy houses at auction- fix and flippers.  We weren’t looking to get in that game ourselves, just use those sorts of resources to get a home at auction.  But we don’t have the cash available to buy a houe outright.  We’d need traditional financing.

However, this proved to be more difficult than anticipated.  At first my wife and I were very particular about neighborhoods.  We’d research the homes coming to auction over the next 60 days, check them out and then put in a bid.  However, so many auctions were cancelled or postponed, that the ratio of homes actually going to auction on the dates scheduled was like one in ten.  So despite this arduous research and planning, we were only able to bid on four houses during a year’s span- and in every case, we lost out by just a few thousand dollars.

This process was made worse by the fact that we had previously seen short sale listings- that take forever to close, and they actually closes during the time that we had been searching through our process.  A friend of mine actually put in a bid on short sale and has subsequently moved in.  So with this in mind we decided to expand our search to the Multiple Listing Service.  Through this process, we actually found a home that fit our criteria and placed a full price offer on a home that appeared to be slightly undervalued.  Our good friend loan officer told us that we would have no problem with the loan- despite a HAMP loan mod in 2010- and we didn’t even need to rent out our current house (though we would)!

Well, as my wife worked at a bank, her in-house lender got wind of our move and asked “why don’t you do the loan through the bank?  It will essentially be a free loan since you’re an employee.”  At this we decided to have the in-house lender do our loan.  Our friend told us that he couldn’t beat that deal and we decided that it was the best route to take to save a few bucks…

We un enrolled the kids from their schools, their classmates threw them going away parties and gave them goodbye cards, we met up with some renting friends from the neighborhood for a little celebration, got a carpeting quote and placed a down payment through Home Depot, we had the inspection done and we had the appraisal done.  We even had a tenant lined up with rent several hundred above our mortgage payment.   All was well- until the loan officer told us that loan wouldn’t go through because of our loan modification- despite the fact that they were already aware of it and said it wouldn’t be a problem.  But not to fear she told us, she had another lender who said they could do the deal- it would just take another two weeks.  A week later and now the middle of December- the day after school let out for Christmas, we were told that this second lender had also balked at our loan.  We were devastated and slightly pissed off and we started venting about it with our friends.  Everybody and their brother heard of our plight and assured us that they knew someone who could do our loan- even our friend lender who we were supposed to work with from the get go.  He was astonished that our loan was dead and assured us that his in-house underwriter was already aware of our situation and was ready to fund our loan.

However, this would mean another three weeks minimum as we’d be starting from scratch.  We’d be pushed out to mid January, school would have already started, and still, we had doubts that it would go through.    The president of my wife’s bank actually approached us and offered to give us a private loan for 12 months until we could get conforming financing (they don’t keep residential loans in house).  We respectfully declined.  So after some praying and discussion, and insight from a local real estate expert… my wife and I decided to back out of our deal completely with the notion of starting from scratch in the new year.  Total out of pocket expenses- $250 for the inspection, $400 for the carpet down payment.  But we had already packed our entire house so our garage was filled with stuff- ready for the move.

Christmas was fine with a rush decorating job but we were happy nonetheless.  Kids were a little confused but started up school again in our district at their old schools.

In January, we found a remodeled house in the MLS.  We threw caution to the wind and placed a full price offer the day it was listed (through our original lender) and lost out to a cash bidder who offered less.

At about the same time, I appraised my first home in a brand new tract of a neighborhood that had been heavily depressed over the past several years.  This house was selling for $30,000 more than resales of the same utility!  I was astounded.  I subsequently did about 30 houses in that subdivision and whenever I went there, people were packed in the sales office.  Competitior sales offices were also packed.

In February, the loan officer from my wife’s bank WAS FIRED for INCOMPETENCE!!!!!!

We placed an offer on another MLS house- full price, lost out to a cash buyer.  A friend who fixes and flips and did over 50 deals in 2011 had gone through the first quarter of 2012 wihtout finding a single house.  Investors had started to pay 10 percent over “zestimate” on auction homes- simply to get the homes and in most cases rent them out immediately.  Another fix and flipper had reworked his margins but was having a slower year.  My wife started unpacking boxes in about April.  We discovered clothes that we forgot we had.  I appraised many more homes with increasing prices.  We found none for ourselves.  My work doing Fannie Mae Appraisal Fraud review continued robustly.  There was a never ending supply of bad loans.  Yet the talk of the press was “recovery” and it was legitimate.  Or was it?

Sales were up, but in most cases- at least in Phoenix, it was investors, and they were paying cash.  The common man (AKA me) couldn’t buy a house despite being qualified.  And we couldn’t exactly overbid because of the fear of the appraisal coming in low and not having the funds to make up the difference.

In our favor was the fact that we never had to move in the first place.  Our house is beautiful and big enough for us and more.  We have views of two mountain ranges, are on a golf course and have a beautiful oasis pool that my wife designed herself.  We have a very good (modified) loan and our payment will stay low throughout its duration.  By the way, our renter friends whom we celebrated with a year ago?  They literally justed moved into their new construction home last week.

Am I too cheap?  Am I too conservative?  Am I too “smart” for my own good- despite the countless lost opportunity costs associated with being frugal?  The answer is undoubtedly YES with a little sarcasm around the quoted “smart”.  The house we were in escrow with is now worth 20-percent more.  There are very few homes on the market that we like and now they are listed for 30-percent more than they were a year ago, and quite frankly, we can’t afford that.trend

The good news is that all our moving boxes are out of the garage so we can park our cars there, we painted some rooms that needed it badly, and our home value has also gone up about 30- percent- but we’re still $60k in the hole.  From a personal perspective, we ended up where we started, but from a professional perspective, I can confidently tell you that whatever reasons you use to explain this recovery, it has been legitimate in 2012.  Where will things go in 2013?  If you can’t figure me out already, I have faith that the combination of fiscal cliff, high unemployment, increasing entitlements and lack of “real” buyers will cause things to slow down if not reverse- sort of a dead cat bounce.  But since I’ve made that proclamation, you can rest assured that we’ll continue to go up!  Have a Merry Christmas and Wonderful New Year filled with happiness, and good fortune!

Visit our website at http://www.advantageappraisalsllc.com, and if that doesn’t roll off the tongue, just try http://www.appraiserdude.com. Or now you can follow us on Twitter at @appraiserdude AND we just added a Facebook page for you to “like” at http://www.facebook.com/appraiserdude. Give me a call at 480-544-1217 if you have any questions. I look forward to working with you.

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How to Prevent a Realtor-Appraiser Breakdown

July 31, 2010 at 3:36 pm | Posted in Uncategorized | Leave a comment
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It never ceases to amaze me that the various parties involved in a real estate transaction can have such little knowledge of what each other does and have the audacity to pull attitude with each other.  I can tell you stories of Realtors who refused to unlock a home for me because it was half an hour from their office. Or how about the loan officer who told me to trim my report size- not the file size but the number of pages- and when asked which part, they said “I don’t know, it’s just too much to read- remove like 8 pages”.  But today I’m not going to share war stories, but instead offer some constructive advice to my Realtor “friends”

The Home Valuation Code of Conduct (HVCC) was created to help eliminate pressure between appraisers and anyone who might try to influence them.  Yay!  But that’s like saying condoms protect you from pregnancy or venereal disease.  I can’t tell you how many times that in the heat of passion I’ve incorrectly tried to put on a… oh wait, where was I?  Ah yes, the HVCC creates more of a letter of the law vs. spirit of the law dilemma which has caused overreaction.  Should Realtors interact with appraisers?  If an appraisal’s value is below the contract price, should the Realtor try to fight it?  And if so, what is the right way to do it?  That’s what I’d like to help you with today.

When I want to inspect a home for purchase, I always call the listing agent- not to meet with them, but to ensure them that I am on task and to confirm accessibility to the home.  Plus, if it’s an FHA loan, I need to make sure that utilities are on.  And get ready for my taxicab confession- I do not own an electronic SUPRA key! 

Now you can criticize me for that little ditty, but when the industry slowed down a few years back, I simply couldn’t justify keeping it- 90% of the homes I appraised were either on combo box, were retrospective drive by assignments or by golly, the Realtor would be more than happy to meet me at the property to let me in.  My attitude was that Realtors involved in a transaction would be more than happy to help in the process.  And guess what- in two years I had a total of two Realtors actually give me attitude about me not having a SUPRA key.  I could have lied and said mine was broken, but I just say that I don’t have one.  In fact recently, I had an assignment where the Realtor just flat out said that she couldn’t drive the 15 minutes to the home- (I hadn’t even suggested an appointment time)- and she didn’t offer an alternate solution.  I could feel her “holier than thou” attitude through the phone, so when she asked why I didn’t have a SUPRA key, I was in a rare mood where I said “I’ve found that the better Realtors who care about their transaction will meet me at the property”.  Too bad that she wasn’t so dense to not get what I was saying, and when she said that the assignment would have to be reassigned, I was busy enough where I simply said “ok, have a nice day”.

But let’s move on to something else.  Should Realtors provide comparable sales for the appraiser?  Absolutely!  Print out a list, put your own notes on each one- not opinions but facts based on YOUR honest observations like “mold problem”, “similar upgrades”, etc.  But please, don’t lie.  Appraisers aren’t dumb.  But here is why you should do this.  Appraisers cover a region- for instance, I cover the Phoenix metropolitan area even though I’m based out of the Southeast Valley.  That’s a pretty big area to be an expert on.  I can honestly say that I have done a majority of neighborhoods in the region, but I don’t do them regularly.  The Realtor is supposed to be the local expert.  Also, as the local expert what about sales that were incorrectly input in MLS or were For Sale by Owner?  I’ve seen plenty of sales that don’t show up in a regular search because perhaps the Realtor misspelled the city name or the mapping software doesn’t plot it properly.  If the Realtor knows about relevant sales like this, they should be provided to the appraiser.  And put a note on the list that says “Hi George, I’m sure you already have data on all these comps, but I figured I could save you some paper and extra phone calls to Realtors”.  Worst case scenario- he throws them away.

WHAT ARE GOOD COMPS?

Now the key to understanding what “good” comps are is rooted in understanding the appraisal guidelines as set forth by Fannie Mae, HUD or specific lending institutions.  How old can comps be?  How far away can they be?  How much different can they be?  There are no definitive answers to any of these questions.  Sure you might have heard “one mile” or “six months”, but it all depends on the data available.  If the subject is a tract home built in 2000 and the Realtor thinks value should be based on 7 month old sales that are in a different neighborhood- but there are ten sales from a month ago in the subdivision, then that Realtor is in for a rude awakening.

But what about when the appraisal is already completed and the value is “killed”.  Well first of all, a Realtor needs to take on the attitude that the appraisal is now evidence that the home might be overpriced.  Perhaps the best course of action would be to try to negotiate a lower contract price- after all, you can now confidently say “an appraiser expert has proven that the home is overpriced, so you’ll never sell it for that much.” 

However, if the deal is potentially lost, then of course the Realtor might be upset but how should it be handled?  First and foremost, one must know what they are talking about so if you can see a copy of the appraisal, then look at the sales used and the property details.  Did the appraiser forget anything that significantly adds to value?  Maybe they forgot to mention the in-ground swimming pool, or maybe they didn’t notice the upgraded padding.  Now of course the pool is a glaring thing but let’s talk real quick about “upgrades”.  We’ve all seen the articles that tell you what home improvements add the most value to a home and guess what- most of them, don’t add dollar for dollar value.  So sunscreens, extended garages, updated carpet padding, 2 inch blinds, etc. don’t really matter in the grand scheme of things.  When Realtors tell their clients to make business decisions instead of emotional decisions, oftentimes they are just as guilty of thinking too much of their own listing.

Next, look at the comparable sales used.  Are they really similar properties?  Are they recent sales?  If you have three “better” sales but they’re older sales, or further away, or newer homes, then you’re fighting a losing battle.  Now put yourself in the shoes of an underwriter who sits in a cube in some high rise in Chicago.  When that decision maker looks at the data (whether it’s the appraiser’s or the Realtor’s), what will make more sense to them?  Remember, this isn’t 2005 anymore.  Some lenders are actually looking to make good business decisions instead of simply rubber stamping loans.

So if you really feel that the appraiser did something wrong, or ignored more appropriate comparables, how do you proceed?  I’ll tell you right now, that we appraisers are a proud race and we don’t like to be told that we are wrong, so you need to present this information in a loving, caring manner – I’m totally serious.  Write a letter- thank the appraiser for all his hard work, and mention that it was a pleasure meeting him.  Pat his back for his integrity and quality and admit that what you’re asking is not normal.  And then present your comparable sales.  Ask him if he wouldn’t mind helping you be a better Realtor so that you can do better on your next transaction.  Literally ask him to explain why he didn’t consider your “better” sales.  Maybe you’ll paint him into corner and he’ll understand that he screwed up- and that you know it.  But don’t get all accusatory.  Make it clear that you are not trying to influence value but that you want to make sure he has the necessary data.  You might even want to ask him what he’d recommend you do at this point- “should I request a second appraisal?”.  Thank him for his consideration and respect his response, and CC the loan officer as well…  What you’re doing is planting seeds of doubt in the appraiser’s head. 

Now remember, I’M an appraiser!!!  So why am I trying to teach you how to get your way with an appraiser?  Well that’s a perception issue.  I’m not trying to teach you to influence, I’m trying to explain how you can tactfully and ethically present your case and perhaps get an appraiser to reconsider his value.  There’s nothing wrong with that as long as your argument is based on fact.  But guess what?  He probably won’t do anything… but he might if you present a strong case.  If he ignores your letter, then you really have no recourse.  If you really do know that the appraiser was completely negligent or that he lied about something, then of course you can file a complaint with the state appraiser board.  But unless the complaint is about fraud, it’ll get dismissed.  Remember, above all else an appraisal is an opinion of value and it should be rooted in factual data, and if the appraiser presented his data clearly and accurately, you can’t dispute an opinion- you can only dispute facts.

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.

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

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