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On a regular basis, I complete appraisals for private investors. Over the years, I cannot remember a time when an investor was upset when the estimated value of the property they wanted to purchase, was lower than what they had anticipated the property to be worth. That’s because investors don’t want to loose money by over-paying for a home. They understand that one of the fastest ways to loose money on a property is to over-pay for it.

Needless to say, my investor clients appreciate the value an appraisal provides them. An appraisal fee is cheap in comparison to the money they might loose by paying too much for a property.

While that is the case with investors, it is not always the case with home owners and prospective home buyers who are not investors. Why?

OWNERS ARE EMOTIONAL ABOUT THEIR HOMES

For home owners, there is more involved than just money. Home ownership comes with emotion. Buyers have specific desires and expectations about where they want to live and the kind of home they want to live in. Often, improvements they make to their property are influenced, at least partially, by emotion.

Home owners love their homes!

As home owners, we remember ever project. We remember how much time and money we spent on every improvement. We enjoy the emotional satisfaction that comes from making improvements to our home. That is completely natural! Our home may be perfect in our eyes.

However, our emotions regarding our home does not always equate to value, or at least the value we anticipate our home to be worth.

I recently appraised a beautiful luxury home. In recent years, hundreds of thousands of dollars in upgrades were spent on the property.  Additionally, the owner purchased a large portion of land behind their property to increase the acreage in order to provide more privacy. Sadly, the home didn’t appraise for any more than it had sold for before the improvements were made. How is that possible? There are two factors that contributed to this situation.

First, it appears that the buyer may have over-paid for the home when they purchased it. Second, they added improvements to the home that the market did not recognize as adding major value.

In this example, I had appraised numerous luxury homes in the area. Because of this, I had a first hand knowledge of their upgrades. Most were similar to, or superior, to the subject. Is a buyer willing to spend hundreds of thousands of dollars more for one property than another, when both homes offer comparable quality and upgrades, simply because the owner spent that much money on the improvements? The answer is clear. This demonstrates a principle in real estate. The principle of substitution. Basically, this principle states that an informed buyer is not going to pay more for a property than they would pay for another comparable property.

There is also another principle at play here. It is called the Law or Principle of Diminishing Returns. Appraisers see this principle in action all of the time. Many have probably never even heard about it. So what is it?

THE LAW OF DIMINISHING RETURNS

This law states that there is a point in which the added value of an additional improvement or addition, is less than the cost of that item. A home can be improved to such a degree that the additional improvements will add little, if any,  additional value to the property. A home owner may want to make an improvement to their property. But, they will usually not see a dollar for dollar return in value for the money that they have spent on the improvement.

Money to burn?

What if the roof or windows are in need of being replaced? The market expects the home to have a roof and windows.  Therefore, while installing a new roof and windows may increase the value, it is not likely to be dollar for dollar. For example, if a home owner spends $10,000 on a new roof, it is unlikely that this improvement will increase the value of their home by $10,000.

Here’s another example. What if a home owner has to spent $30,000 rebuilding a portion of the home’s foundation? As is the case with a roof, prospective home buyers expect a home to have foundation that is in tact.  Foundations repairs are expensive. However, when they are made, it usually not observable. Foundation repairs usually don’t enhance the appearance of a home. Whereas, a new roof or windows will add not only to increased functionality, but often curb appeal. So, there is a good chance that foundation repairs will have even less of a return on value than other things like roofs and windows.

Clearly, whatever the improvement is, there is a cap on what it will bring in terms of added value. Making improvements to a property does normally improve the condition of a home, which in turn, lowers the effective age of a home. That does normally have a positive impact on value to some degree. Just not dollar for dollar.

If this is the case, how do investors make money?

THE LAW OF INCREASING RETURNS

Investors try to buy homes at a discount. Since there is a limit to the amount of return on investment (ROI) they can receive on a property through improvements, they understand that much of their money is made at the time they purchase the property. Therefore, investors often look for distressed properties that are being sold either below market or are being sold at a very low price, due to the property being in need of many repairs. Of course, distressed sales are usually in need of repairs.

It’s better to make money than loose it.

Investors rely heavily on another law. The Law of Increasing Returns. This law is the opposite of the Law of Diminishing Returns. The Law of Increasing Returns states that the value an additional feature adds to a property, will bring a larger return in value than the money spent on making the improvement.

For example, a home may be in need of many repairs. Because of this, it may have very low market appeal. Many market participants are not interested in buying a home that is in need of many repairs. However, by simply making the needed repairs and improvements, the home’s value may increase fairly rapidly, especially if it is in poor condition to begin with.  In this scenario, since there is the potential of making a profit by making the improvements, this serves as an incentive for entrepreneurs to purchase the property, and make the needed improvements. But there is a limit how much value the improvements will bring.

There is a fine line between the two laws. Who decides where that line is? The appraiser? Actually, no. It is the market. That line is determined by examining what comparable sales are selling for. HOW CAN AN APPRAISER HELP YOU?

A licensed or certified appraiser can help you to determine where that line is. You can hire an appraiser to estimate the market value of your potential investment property, as though the improvements were already completed. By doing so, you will be armed with some very important information about what you can reasonably expect to see in terms of return on investment. An appraiser can help you weight your options, which will help you to make an informed decision regarding purchasing a property!

Are you a home owner that is thinking about shelling out big bucks on an improvement to your home?  Hire an appraiser to value your property as though the improvements were already made. You may find that the improvement is not going to give you a dollar for dollar return. You may actually find that a certain improvement will bring no additional value to your property at all.

Does that mean that you shouldn’t go forward with the improvement? That is something that you will have to decide. Many times, home owners go ahead with making a certain improvement, even if it is not going to add market value to their home, because there is value to them in terms of the enjoyment, or usefulness, that improvement will bring them. If you have an appraisal completed, at least you will be armed with more knowledge. What you decide to do after that is your business.

I hope you enjoyed this article. Thanks so much for reading it! Here’s My April Monthly Market Update
April 2019 Monthly Market Report - YouTube
Here are some other articles and videos I enjoyed recently! I hope you will also…

Plastic Covers Don’t Hide The Housing Market – Housing Notes by Jonathan Miller

7 out of 1000! Appraisal Waivers and Nasty People! – The Real Value Podcast! (PODCAST)

Two things to understand about Zillow’s accuracy rate – Sacramento Appraisal Blog

Hi-Brid, Lo-Brid, No-Brid? Hybrid Appraisals, Part VI – George Dell’s Valuemetrics Blog

What Is The FHA Rule for Plumbing? – Birmingham Appraisal Blog

The Power of Praise – Rachel Massey, SRA, AI-RRS, IFA – Working RE

Praising Appraisers; Hobbit Houses; New York AMC Law – APPRAISAL TODAY

Private Work Look Before You Leap – Interview with Rachel Massey  – The Approach Coach Podcast (PODCAST)

Here are some articles I enjoyed related to Northeast Ohio

Nature Center begins major renovation project on beloved All People’s Trail – Karin Connelly Rice Freshwater Cleveland

Who’s Hiring in CLE: Hattie Larlham, Blockland Solutions, LaunchHouse, Upcycle PS, GE Healthcare – Freshwater Cleveland

From Career builder to woodworker; How this retired recruiter transformed his hobby into a business – Karin Connelly Rice – Freshwater Cleveland

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Cleveland Appraisal Blog by Cleveland Appraisal Blog - 3w ago

If you saw a headline that said, “Man is hit by car while running and looking at his cell phone”, you might conclude that the runner was partially responsible for the accident. After all, a person shouldn’t be running down the street while looking at their cell phone,  right? Then you see the video coverage below, and suddenly a much different story comes to light! Running and looking at a person’s cell phone, while on a tread mill, is a much different situation! See video below.

Car Crashes Into California Gym Hitting Man On Treadmill - YouTube

It is very easy to make assumptions based upon limited information. However, when additional information is provided, it helps to put things into context. Things may look very different in the proper context. This is true in many things in life. How is this the case in real estate?

There’s no shortage of real estate stats out there. It’s easy to look at one housing statistic and assume that it applies to every home in every neighborhood. I wish it were that simple! To really understand how real estate statistics apply to your home, a little context is needed. For example, I made the following chart to show inventory on a county-wide level.

Overall, Cuyahoga county has 3.9 months of housing supply as of 04/07/2019. Is that reflective of every price range in the county? No. Here is another chart I made that breaks down inventory levels based upon specific sales price ranges. What do you see?

The housing supply varies depending on different factors, including price point. In the example above, there is less housing inventory for homes selling at $650K and above versus homes that are selling below $250K. Interestingly, the marketing time for these two categories is also much different. That makes sense, since the market for people looking to spend $650K or more on a home in Cuyahoga County is less than those looking for homes under $250K. So at the $650K plus price point, a home is going to need to be exposed to the market for a longer period of time before it is likely to sell. This, despite there being a shortage of inventory for homes in that price point.

Another example is when it comes to sales prices. Appraisers analyze more than just one trend. When analyzing overall neighborhood trends, we start by looking at the stats of all sales in a neighborhood. For instance, when appraising a single-family home, the statistics for all single family home sales in that neighborhood or market area are analyzed. That trend may mirror trends of homes that are comparable to the property being appraised, but not always. Why?

When considering all sales in a neighborhood, or county for that matter, these larger data sets are affected by things like new construction sales, any flipping going on (a home may be purchased at a low price, renovated and re-sold in the same year for considerably more), bank sales and other factors. If there are more luxury homes selling in one part of the year than another, that can impact price trends. In recessions, more bank owned sales take place, which can have a negative impact on housing trends. You get the idea.

After analyzing the macro market trends, the appraiser will zoom-in and analyze trends of comparable sales. The trends of comparable sales are not as affected by some of the factors just mentioned.

Sometimes, the trends of overall sales prices in a market area are the same as what the sales trends of comparable sales are doing.  The chart below was taken from a report I recently completed in a neighborhood in Cuyahoga Falls. Clearly, in this neighborhood, the neighborhood trends and the trends of homes comparable to the one I was appraising, were the same.

However, at other times, there is a clear difference between what overall neighborhood housing trends are doing in comparison to what homes, comparable to the property being appraised, are doing. Here is an example from another appraisal I recently completed on the west city of the city of Cleveland.

Sales that are comparable to the home I was appraising in this neighborhood, are completely flat. However, overall neighborhood sales prices are increasing at a rate of 2.6%. I see this on a regular basis in many neighborhoods right now. Appreciation trends are definitely slowing down in most neighborhoods in Northeast Ohio.

What’s interesting is that in Cuyahoga County, where the second example is located, the current county-wide median single-family home sales price for March, increased by 6.5% when compared to the median home sales price for March of 2018. Additionally, in Summit County, where the first example is located, the current county-wide median single-family home sales price for March increased by 15.8% when compared to the median home sales price for March of last year.   But keep this in mind. One month of sales data is just a snap shot in time. The annual rates over a twelve or twenty-four month period are going to be different than the year over year price changes. Here is a chart of all single family-sales that have sold within Cuyahoga County over a two year period. While median home prices increased YOY for March, overall single-family sales price trends are flat.

Since county-wide trends and neighborhood trends can be different than the trends of homes that are comparable to a particular property, does that mean that those trends are not meaningful? Not at all! County-wide and neighborhood trends are an overall indication of the health of the housing market. That information is important to track for those in real estate. All of these trends offer valuable information. Analyzing different trends is much like a doctor who uses a stethoscope. They don’t just listen to your heart. They also listen to your lungs and other areas of your body, when measuring your overall health.

While those macro statistics are important, sometimes I see home owners, and even some agents, who try to apply them to the home that they are selling. This often leads to unrealistic value expectations.

SAMPLE SIZE

Sample size is another important factor to keep in mind with trends. If the sample size is too small, the trend is going to be more readily skewed by outliers. (Extreme highs and lows) Typically, a sample size of at least thirty sales is desired in order to derive a meaningful trend. Honestly, thirty is really low.

Extra credit: All statistics have a margin of error. That fact should be remembered. If you’re working with statistics, you can determine the margin of error, divide 1 by the square root of the sample size. Then multiply that number by 100. That will give you a percentage of the margin of error for that sample size.

When appraising a property, sometimes it is not possible to find thirty comparable sales to analyze, even going back several years. This is often the case in rural areas. So what does an appraiser do in this situation? I always analyze what comparable properties are currently listed for, as well as what comparable pending sales are priced at. They are usually good indicators of what’s going on in the market right now. If active listings and pending sales are priced lower than sales that have sold within the past year, that’s a sign that things are in decline. However, if listings, and especially pending sales, are higher than sales that have sold within the past year, that is a good sign that sales prices are probably increasing, or are at least generally stable.

SEASONAL CHANGES

When analyzing statistics, remember that there are seasonal changes that affect home prices. For instance, in certain seasons, depending on location, sales prices may decline whereas in other seasons, sales prices may increase. This is usually due to fluctuations in supply and demand throughout the year. That’s why most appraisers will analyze trends going back beyond a year or more, to get some context as to what’s going on now. I typically analyze at least two years worth of data for every appraisal.

Hopefully I didn’t bore you too much with all of this talk on statistics.  The key point to take away from this article is to not apply large scale statistics to your home, because those stats don’t usually translate to the same rate for your home.  Remember that context is key!

If you’re interested in getting some context on how your property relates to the overall market, hire a licensed or certified appraiser in your area. Analyzing the market is what we do!

If you’ve just been bored out of your mind by this article, and you made it to this point, perhaps you will enjoy this short commercial.  Thanks for being here! Have a great day!

Here is my latest commercial. I hope it makes you laugh a little!
In Real Estate Expect The Unexpected! - YouTube
Here are some other articles and videos I enjoyed recently! I hope you will also…

An Unredacted Hack: Housing Spam Edition – Housing Notes by Jonathan Miller

1000 True Fans! – The Real Value Podcast! (PODCAST)

How much is that new roof & AC unit worth? – Sacramento Appraisal Blog

It’s just NOT a cash market like it used to be – Sacramento Appraisal Blog

Is The Agent Liable If No Appraisal Is Done? – Birmingham Appraisal Blog

The Power of Praise – Working RE Magazine – Rachel Massey, SRA, AI-RRS, IFA, CDEI

Can Pricing Indexing Speed Your Work – George Dell’s Analog Blog

Strange Bathrooms; Secret Suburbs; Accurate MLS Data? – APPRAISAL TODAY

Getting Purchase Contracts and are Adjustments Necessary – The Approach Coach Podcast (PODCAST)

April Newsletter – DW Slater Blog

Here are some articles I enjoyed related to Northeast Ohio

Play: CLE’s List of Notable Northeast Ohio Blogs (Thanks for including us in your list!) – Play CLE Blog

Off to market we go: Inside the 2.0 Version of Night Market CLE and Asia Town Food Tours – Karin Connelly Rice Fresh Water Cleveland

Free Samp: All things freein the #CLE, Earth Day Edition – Dana Shugrue – Fresh Water Cleveland

Opal on Pearl – BiteBuff

25 Perfect Weekend Daytrip Destinations Within 4 Hours of Cleveland – Scene

Cleveland Bucket List – Cool Cleveland (PODCAST)

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Can you think of some things in which less is more? The week I wrote this article, my family and I were on vacation in Kissimmee, Florida. As we were sitting by the pool, I asked them to come up with some things in which less is more. Here is what they came up with. (Participant ages range from 11 to 55 years old).

Talking (usually what my wife reminds me of that), golf scores, taxes, rashes, cologne and spices…Okay, these things are totally subjective.

What about in real estate?

What sounds more appealing to you? A one acre lot or a lot that is .15 acres? I think if I was taking a poll, the majority would say that a one acre lot is more desirable, and therefore worth more. But that is not always the case. I recently appraised a property in which homes with .15 acre lots were selling for more than very comparable dwellings on lots that were around an acre. Say what?!

AN EXAMPLE OF LESS BEING MORE IN TERMS OF VALUE

At this point, you might be thinking, “Here we go again with this crazy appraisal mumbo-jumbo”. Please read on. You might change your mind. The home I appraised was in a neighborhood in which typical buyers were on the lower end of the income range. This neighborhood was not REO driven. However, there was some REO (Real Estate Owned, Bank Sale) activity. Interestingly, the home I was appraising had two lots. The adjacent lot used to have a home on it. That home had been sold in a bank sale and demolished several years ago. The owner of the main lot I was appraising, purchased this lot to make their lot larger.

Before we go on, it’s good to note that I only appraised the main parcel because the Highest & Best Use of the second lot was as a buildable lot that could be sold as such. So this second parcel was not included in my valuation. In real estate, when a lot is larger than what is typical in a neighborhood and capable of being used separately, like to build a dwelling upon it, this is referred to as excess land.

The main parcel that I appraised still had one acre of land. In this neighborhood, the typical lot size was around .15 acres. Due to the configuration of the lot, there was no way to split the one acre lot into smaller lots. Since this additional area of land is not needed to support the existing improvements, but cannot be separated from the property to be sold off, this additional land is referred to as being surplus land. In other words, more land exists than will contribute to value. The dwelling itself was very comparable to other dwellings in the neighborhood. The only big difference is that the lot size of the subject was much larger than most in the neighborhood.

MORE OF SOMETHING DOESN’T ALWAYS EQUATE TO HIGHER VALUE

One might conclude that a one acre lot is more valuable than a lot with only .15 acres. In many cases it is! However, not in this case. As I mentioned, the neighborhood was attracting lower-income buyers and a lot of flippers. I think that for most buyers in this neighborhood, having a one acre lot is desirable in terms of having a little extra space and land. However, along with that extra land comes a lot more maintenance!

More land means more maintenance.

More maintenance means spending more time and money. The typical buyer in this neighborhood is simply not interested in, or able to spend time and money to maintain a lot that is the size of the subject lot. This was clearly seen in my research.

Furthermore, there are a lot of investors buying up homes in this neighborhood to use as rental homes. A home with one acre is not demanding any more rent than a similar home on .15 acres. If an investor was to purchase a property with an acre of land, they would likely have more expenses which means less income.

What it all boiled down to is that the subject lot was so much larger than most in the neighborhood that it actually had a negative impact on market appeal and value. Sometimes, smaller is more desirable!

Bigger is not always better!

When searching for comparable sales, I discovered that homes that offered around a half an acre, or more, were typically selling in the $80’s. Whereas very similar homes on lot sizes of around .15 acre were typically selling in the $90’s. While there were not a lot of comparable sales, in terms of lot size, I did find a handful that had sold in the past two years. One of them had sold on the same street as the subject, within the past year. That sale also offered an acre of land. The differences were very clear. Homes with .15 acre lots were definitely selling for more than similar homes with lot sizes over a half-acre.

This appraisal was for a purchase. The purchase included both parcels. As mentioned, I only valued the one parcel. My opinion of value came in slightly below the contract price.

The seller provided the bank with numerous sales that they felt supported a higher value. The bank presented them to me as part of a value dispute. Most of those sales presented only had .15 acres of land. The one sale, that was in the neighborhood, and that offered a comparable lot size, actually sold for around what I appraised the subject home for. (Go figure) The listing agent called me and stated that they had talked to another appraiser before listing the home. They had told him that they would have just used the sales with the considerably smaller lots and made adjustments upward. So, the agent was surprised that there was a value issue.

If I had used the sales with .15 acre lots, and made adjustments upward, it would have a created an artificially high value that is not supportable on any level.

USING THE MOST COMPARABLE SALES IS BETTER THAN USING LESS COMPARABLE SALES AND MAKING MORE ADJUSTMENTS

I recently read two excellent articles, one by Rachael Massey entitled “Seeing The Forest Through The Trees”, and another by Dustin Harris called “Should Adjustments Actually Be Done?”. These articles both made the point I am trying to make. Sometimes, applying adjustments can lead to a less than accurate value conclusion.

The best comparable sales need few if any adjustments. This situation demonstrates the importance of choosing sales that are truly comparable in all aspects. It’s also important to understand why the market reacts to differing situations. In my example, it’s a matter of affordability. More land requires more time and money to care for. If the sales utilized are not really comparable, just applying some adjustments to those sales will not always lead to a realistic value conclusion. The sales that I used all offered around a half-acre to just over an acre. I made no site adjustments as none were supportable.

There are times when less is more when it comes to value. There are also times when there is little if any difference in market reaction to certain features of a home. Even if an adjustment may be able to be derived, that does not always mean that making one is supportable, or advisable.

By the way, I take adjustments seriously. I think that often, adjustments help appraisers to estimate a more precise value opinion. When derived and applied properly, adjustments can be very revealing when it comes to value.  However, when applied incorrectly, they can do just the opposite. Recognizing if and when making an adjustment is supportable, and the amount of the adjustment to make, is something that appraiser’s have a responsibility to understand and explain. USPAP (Uniform Standards of Professional Appraisal Practice) does not dictate how larger or small an adjustment should be, or whether one should be made at all. If an adjustment is made, the appraiser also needs support for those adjustments in their work-file. I also think that if no adjustments are made, especially where it might seem that one should be made, the appraiser will need to be explain why no adjustment is supportable.

In addition to land, there are other home features in which something can be too large and have an adverse impact on value. This is often referred to as being super-adequate or over-improved.

I know these kinds of situations sound counter-intuitive to many. That’s why I wrote about it. Hopefully, after reading this article, you will see that a lot of careful analysis goes into each appraisal. Value is not always obvious at with a simple glance of some sales. In performing an appraisal, appraisers have to understand not only what people are buying, but why they are buying a certain kind of home. What might not make sense at first, may make more sense when all of the facts are presented. By the way, I wonder if an AVM (Automated Valuation Model) would have caught the market reaction to the larger lot sizes? Somethings tells me it would not have.

Thanks for being here and reading my article. I greatly appreciate it! Have a great day!

HERE IS MY MARCH 2019 MONTHLY MARKET UPDATE
March 2019 Monthly Market Report - YouTube

You can also download a .pdf copy of this report by going to the County Market Report section of this website.

Here are some other articles and videos I enjoyed recently! I hope you will also…

London Calling Reminds Me Of The Expanded Mansion Tax – Housing Notes by Jonathan Miller

It might not be an appraiser at the inspection due to new “hybrid” appraisals – Sacramento Appraisal Blog

7 Things Buyers Should Know About PIW’s & Hybrid Appraisals Or You’re Screwed – Birmingham Appraisal Blog

Seeing the forest through the trees – Rachel Massey, SRA, AI-RRS, IFA, CDEI

Phil Welcomes Jason Frazier from The Industry Syndicate! – Voice of Appraisal With Phil Crawford (PODCAST)

Should Adjustments Actually Be Done – The Appraiser Coach Blog

Price Per Square Foot Facts and Misunderstandings in Real Estate!!! – Advanced Appraisal Blog

Straw Bale House; Revised FHA Handbook 4001.1 – APPRAISAL TODAY

Woodland Ridge Baton Rouge Post-Flood Home Sales Report – Baton Rouge Housing News

What is Gandysoft – The Approach Coach Podcast (PODCAST)

Who Cares About Appraisal Opinion? – George Dell’s Analogue

How to Pick a Real Estate Agent to Sell Your Home – Bill Gassett – Active rain

8 Attic Renovation Mistakes That Cause Setbacks – or Spell Disaster – Terri Williams – Realtor.com

5 Important Home Buying Mistakes to Avoid – Xavier De Buck – Realty Biz News

Here are some articles I enjoyed related to Northeast Ohio

Into the groove: Was Mage owner spins vinyl records into trippy works of art – Karin Connelly Rice – Fresh Water Cleveland

Land Conservancy study finds Cleveland’s east side neighborhoods rebounding from foreclosure crisis – Karin Connelly Rice – Fresh Water Cleveland

Act local, eat global: Culture. CLE set to spotlight Cleveland’s unsung ethnic eats – Jen Jones Donatelli – Fresh Water Cleveland

Free Samp: All things freein the #CLE for April 2019 – Dana Shugrue – Fresh Water Cleveland

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My family and I love frozen yogurt. Maybe a little too much to be honest. We usually go to our favorite fro-yo shop in Brecksville called Lemonberry. It’s a simple process. You grab a cup and fill it with your favorite frozen yogurt and then pile on the toppings. When you’re done, you put your cup on the scale and pay per ounce. No matter what you put in the cup, the price per ounce is the same.

My wife, the sensible one in the family, doesn’t usually like a lot of toppings on hers. Just some fresh fruit. But our boys and I load our cups with chocolate chunks, cherries, gummy worms and whatever else we can squeeze into the cup. They may all have similar weights, but they are oh so different!

I took the pictures below from our latest trip to Lemonberry.  (In order, from left to right, my wife’s, our 11-year-old son’s and mine. (I’m basically 11)

That type of pricing works great for frozen yogurt. But what about your house?

A popular way to come up with a listing price for a home is to use a price per square foot method. An individual take the sales prices of other homes they feel are comparable to theirs, and divide those sales prices by the gross living area of those homes. They use the price per sq. ft. that they come up with and apply it to the size of gross living area that their home offers.

Wouldn’t it be awesome if you could get every upgrade and lot size (toppings) you desired in your home for the same price per square foot, like frozen yogurt?

It just doesn’t work that way when it comes to home value. Different aspects of a home bring different values, with some features bringing more value than others. Using a price per square foot metric solely, doesn’t usually reflect these differences. Let me share an example of a home I recently appraised that demonstrates this.

A PRACTICAL EXAMPLE

It was a small ranch style home (about 900 sq. ft.). It had been nicely updated. It offered an average quality of construction with an average residential view. Admittedly, there were not a lot of comparable sales in the neighborhood that had sold within the past year. However, there were a few.

The listing agent told me that they had a taken one home in the neighborhood that looked to be generally comparable in terms of condition and style. The home they used sold for $118,000. It had 660 sq. ft. of GLA (gross living area).  They simply divided the sales price of that sale by its gross living area. They came up with a price of $178 per square foot.

If you’re old enough to remember the show The Dukes of Hazard, remember that point when Luke and Bo were about to get into a heap of serious trouble? That’s where we’re at in this story!

They took that factor of $178 per sq. ft. and applied it to the gross living area of the subject property and voila, they had their listing price, which was $160,000.

Now before we go any further, just applying some common sense, does it seem logical that a home that is several hundred sq. ft. larger than a home that sold for $118,000 would sell for $42,000 more? Possibly. Clearly it would depend upon a number of factors. Not in this case though, as you will see.

Take a look at these adjustments I derived using data taken from that specific neighborhood and market area, using several multiple regression models and a depreciated cost new method:

Gross Living Area –$45-55 per square foot (The comparable sales I used were so comparable to the subject that no GLA adjustments were even applied.) Site Size – Approx. $2 per sq. ft. ($87 per acre) Basement Finished Sq. Ft. –$10-$15 per sq. ft. Garage – $6,000-$10,000 per garage space (up to 2) (No garage adjustments were made because all of the sales had 1 car garages, like the subject) Bathroom – $4,000-$6,000 per full bathroom (up to 2) (No bathroom adjustments were made due to the subject and comparable sales all have 1 bathroom) Bedrooms – $3,000-5,000 per bedroom (up to 3)

$45-55 per square foot for gross living area is a lot less than what the agent used. I did make a positive condition adjustment to one of the sales of around $10,000. The other two sales were very comparable in terms of condition. By the way, I only had to make adjustments for sales concessions, one condition adjustment, two bedroom  adjustments and one adjustment for finished vs. less finished basement area.

I found three comparable sales that adjusted to a range of $137,500-$141,000. My opinion of value fell between that range. Interestingly, if I had used the one sale that the agent had used to come up with their price per sq. ft., and applied the market derived adjustments above, it would have adjusted to very close to what I appraised the subject property for.

Here’s something interesting. The subject property had been remodeled by an investor the prior year, and then sold to the current owners for $140,000. The current owners had made no major additional improvements to the subject since they had purchased it for $140,000 the prior year.  Now they were asking $160,000. Furthermore, sales prices are flat in this neighborhood. So, no time adjustments were supportable. This prior sale only further supported my over all analysis of the current market value of the subject.

Inquiring minds want to know: “What were the prices per sq. ft. of the comparable sales that I used in my report?” They were $153, $159 and $168. The two most comparable sales were $153 and $159 per sq. ft., with the most comparable sale in terms of site size being $153 and the most comparable sale in terms of condition being $159. The lot size of the sale with $168 price per sq. ft. was about double the size of the subject’s lot. One could argue that price per sq. ft. works if you’re using sales that are very comparable to the subject. Clearly the lot size had a specific impact on market value.  Additionally, condition, finished basement area and bedroom count also played a role in the sales prices of the comparable sales that I used.

Here’s some food for thought. Can you imagine if the buyer had qualified for an appraisal waiver for this loan and actually purchased it for $20K over market value?  WHY IT DOESN’T WORK THAT WAY

What is included in that total price per square foot? Everything! That price includes the land, the bedrooms, bathrooms and basement areas including additional value for finished basement areas.  The sales price also reflects the quality and condition of a home. All of these features contribute to the value of the property at different rates. An appraiser will analyze data from the subject’s neighborhood and market area, using a variety of methods, in order to determine the most probable price these components of value really add to a comparable property. Adjustments are then applied to the sales prices of the comparable sales to reflect the market reaction to these different features.

This is a far more precise and accurate way to estimate the market value of a home. Often, using solely the price per square foot of a property, muddies the waters of value precision, leading to unrealistic value expectations. Using a price per square foot method solely is like cutting out a piece of cake with your hands. You’re going to get a chunk, but it’s going to be messy. 

Estimating value using specific adjustments that are reflective of the different components of value of comparable homes, is more like cutting a piece of cake with a knife. It’s more precise and less messy. (Usually)

IT’S LIKE STARTING AN OLD CAR

Pricing based solely upon a square foot metric does work sometimes. If the sales are very similar to the subject property, then it may work. Like two of the three sales I used in the report. That’s why some get hooked on using it. I get it. It’s easy.  But beware! It is a huge gamble and will likely let you down at some point.

It reminds me of my first car. Here is a picture of one. This one is not mine, but it’s pretty close. This one is even the same color. (Photo credit to Bing and Velocity Automotive Journal) My friends called it the Blue Goose. It got a whole 8 miles to the gallon.

1972 Lincoln Continental Market IV

It was 17 years old when I purchased it. (I was 16 years old.) I paid $200 for it. Every morning when I went to turn it on, I thought to myself, I know it can start. The question is, will it? A lot of things had to go right for this bad boy to turn over. (It needed some work) The same is true with solely using a price per square foot metric for coming up with an asking price on a home. It can work, but will it? A lot of things have to go right for it to work.  And, like an older car, it’s probably going to let you down at a time when you need reliability the most, like when you’re trying to price your home to sell.

This article is in no way intended to chastise people who use a price per square foot method to estimate value. After all, many seasoned real estate professionals use this as a way of getting into the ball park when it comes to value.

To price a home accurately, you have to consider more than just the square footage of the GLA. If you do decide to price your home yourself, I put together a list of things to think about when looking for comparable sales. I hope you find the list helpful.

By the way, what do I mean by getting “licked”? Obviously I was having a little fun with the whole fro-yo theme. According to the dictionary (dictionary.com), that term is also an idiom for “completion through discipline”.  Sometimes we learn things the hard way. (I know I do!) That is a form of discipline.  But you don’t have to learn the hard way when it comes to pricing your home!

If you have questions about pricing your home, pick up the phone and call an appraiser in your area. We can help you to estimate the market value of your home with more precision than solely using a price per sq. ft. metric. Even if you don’t want to hire an appraiser to perform a full appraisal, many appraisers offer services in which they will measure your home to make sure that you have an accurate idea of the gross living area of your home.

In April, I am going to be speaking to a group of real estate agents about this very topic. I always look forward to meeting new real estate professionals and discussing real estate topics in a fun and friendly environment. If you are located in Northeast Ohio and would like for me to visit your office, I would love to! Give me a call.

The week I was planning on posting this article, my friend Shannon Slater of DW Slater Blog, in Texas, wrote an excellent article on the same subject in her blog.  So I figured I would postpone posting this article until now. I also have numerous friends across the country, who are appraisers, and who have also written on this topic. I actually like their articles more than mine. I recommend you read them as well.

HERE’S A LITTLE VIDEO THAT I MADE ON THE TOPIC
Pricing Per Square Foot - YouTube

Here is a link to their articles that speak about the dangers of only using a price per square foot method to price a home. They all have a different flavor on this topic that you’re going to enjoy!

The Problems with the Price Per Square Foot Method – DW Slater Appraisal Blog

Why price per square foot can be an agent’s worst enemy when pricing a home – Birmingham Appraisal Blog

Starbucks cups and price per sq ft – Sacramento Appraisal Blog

I was recently on Dustin Harris’s podcast, The Approach Coach, discussing my article, ‘What Makes an Appraisal Supportable’. A big thank you to Dustin for the opportunity! I had a great time. Here it is if you would like to listen. 
417 What Makes an Appraisal Supportable_theappraisercoach.com - YouTube
Here are some other articles and videos I enjoyed recently! I hope you will also…

Bowling for Housing Tax Revenue At Your Pied-a-Terre – Housing Notes by Jonathan Miller

The place where insurance & real estate collide – Sacramento Appraisal Blog

Tips for choosing comps on a unique home – Sacramento Appraisal Blog

6 Steps Agents Can Take When There Are No Comps To Price A Listing – Birmingham Appraisal Blog

9 Things You Must Avoid Doing If You Want To..

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Cleveland Appraisal Blog by Cleveland Appraisal Blog - 2M ago

When appraising townhouses, I always search the MLS for both single-family attached sales as well as condominium sales. Why? It’s because at times, there is confusion between the differences. Often I see real estate agents list townhouses as condos when they are not actually condos and visa versa.

I totally understand why. When it comes to townhouses, it is impossible to know from an outward appearance whether or not it is a condo, or not. Before we get into that, what is a condominium and what is a townhouse?

WHAT IS A CONDOMINIUM?

A condominium can come in many different styles. Here are some pictures of properties that are condominiums.

The term condominium is often used to describe a style of dwelling. That’s not necessarily wrong in some cases. However, it’s not always that clear. The term condominium is actually a form of land ownership. With condominiums, a plat of land is divided into multiple parcels. Each individual parcel includes ownership of the interior walls, floors and ceilings of the unit. The exterior elements and shared common areas are generally collectively owned and maintained.

WHAT IS A TOWNHOUSE?

The term townhouse relates to a style of dwelling that generally consists of two stories and is attached or semi-attached on the sides.

Here is where it gets tricky. This style of dwelling can offer condominium ownership or single family ownership. If it is a single-family ownership, generally speaking, the owner actually owns the ground directly beneath the dwelling footprint. In these cases, owners are often responsible for the maintenance of the portion of the exterior that they own. At times, townhouse associations will care for certain aspects of the exterior. It really depends on what has been decided upon in the bi-laws of the association.

If the townhouse offers a condominium ownership, typically the land below is not owned by the parcel owner of the parcel.

There are many variations of these types of ownership in the market today. The descriptions used in this article are just basics.

HOW CAN YOU TELL IF A PROPERTY IS A CONDO OR NOT?

In my area, and I assume many others, if you read the legal description, the term condo or condominium may be in the verbiage. If it is, then there’s a good chance that the property is a condominium. However, just because there is no mention of those words in the legal description does not mean that the property isn’t a condominium, as you will see in the examples below.

If you have access to data that provides you with a plat map, looking at the plat map is, in my humble opinion, one of the best ways to determine whether or not a property is a condominium or not. If the plat map includes multiple units (parcels) on one plat, it’s probably a condo. If the plat map shows just the one building or the footprint of the one unit, then the it is a single-family attached or semi-detached dwelling.

Here are some examples of what I am talking about.  I hope this is helpful.

CONDOMINIUM (Townhouse Style)

LEGAL DESCRIPTION (Doesn’t mention condo or condominium)

PLAT MAP (The plat map contains numerous parcels on it. Clearly this is a condominium.)

SECOND EXAMPLE OF A CONDOMINIUM (Townhouse Style)

LEGAL DESCRIPTION (Mentions condominium)

PLAT MAP (Plat map reflects multiple parcels on one plat. This is a condominium.) SINGLE FAMILY ATTACHED (Townhouse Style)

LEGAL DESCRIPTION (No mention of condominium)

PLAT MAP (The plat map only outlines the one parcel of land surrounding the subject property. This is not a condo. It is an attached single-family dwelling.)

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As I stepped foot inside the home, the strong earthy smell was immediate. Walking through the home on the first floor I noticed that the ceiling fan blades were drooping down like wilted flower pedals. As I approached the basement door, I noticed that the walls of the stairway were speckled with thousands of dull black, green and dark gray spots that appeared to have a wave-like pattern going up the stairway walls from the basement. When I entered the basement, there was a dark growth on the walls and ceiling and standing water in the basement.

This describes many of the bank owned homes I appraised in the years surrounding 2008. Around that time, my appraisal business was slow. So, I took classes to become certified with the IICRC (Institute of Inspection Cleaning and Restoration Certification) to remediate mold. Shortly thereafter, my appraisal work picked up and I eventually let my IICRC certification expire. However, I have never regretted the education. I learned a lot about mold. So I thought I would talk about it.

WHEN IS DOES MOLD BECOME DANGEROUS?

Mold issues have become larger in recent times. In an attempt to build more efficient homes, newer homes are built more air-tight. That’s great for energy efficiency. However, it can be problematic at times. Why? Because mold is everywhere. Yes even in your house. A problem can arise when there is a high concentration of moisture on the interior. In certain situations, excess moisture in a confined area can set the stage for the growth of toxic mold.

What is a normal amount of mold spores? With mold remediation, the goal is to achieve a mold spore count on the inside that is equal to that of the outdoors. So yes, there is mold spores in every home. There are mold spores everywhere.

Toxic mold spores have a defense mechanism called mycotoxins.  These are poisonous, microscopic, spores that can break off of the mold with the slightest movement of air. Just walking past mold can create enough air flow to break these off. This is why you might see mold growing on stairway walls in a wave-like pattern. It’s because the mold spores are catching a ride on movement of air, as warm air rises up the stairway.  Once ingested, these mycotoxins can make even a healthy person sick. And for those with weak immune systems, the results can be even worse.

It should be noted that even if mold is no longer actively growing, the spores and their mycotoxins still exist and are just as poisonous. That is why killing the growth of the mold with chemicals is not enough. The spores must be removed.

HOW TOXIC MOLD IS REMOVED

Removing toxic mold is like herding microscopic cats. Herding cats of any size is difficult.

Before any mold is removed, the source of the moisture that created the environment for the mold to grow, needs to be corrected.

Next, any porous items in which toxic mold has settled must be destroyed. Things like carpeting, dry wall and most furniture made up of cloth materials. That in itself can be very costly.

Next, a negative air chamber needs to be created around the area that has been exposed to the toxic mold spores. The chamber is made of walls of plastic sheeting that surrounds the affected area. What is negative air? This simply means that instead of pushing air into a room, air is pulled out of a room. An air scrubber with HEPA (High-Efficiency Particulate Arresting) filters is used to accomplish this. The HEPA filters catch the poisonous spores. Negative air is used because it is a better way of controlling air flow and capturing the spores. If air was pushed into the chamber, mold spores would slip or be pushed through the cracks in the containment chamber more readily.

If a home uses forced air for heating or cooling, and if it was on while mold is in existence, then the ductwork and furnace will need to be cleaned. Also, if there is a possibility that mold has been spread to other parts of the home due to the forced air, than these areas have also likely been contaminated and will need to be cleaned as well.

Mold growth on hard surfaces, like wood, concrete, cinder block and other hard surfaces can be blasted off using a sand blaster or by blasting the surface with things like baking soda or dry ice. I found soda or dry ice blasting to be fun. Check out this video to see how.

How to Clean Up Attic Mold - This Old House - YouTube

Mold removal is very labor intensive, with a great deal of care being taken to use the proper PPE (Personal Protective Equipment) and following containment protocol. With mold remediation, a person must wear a plastic suit and respirator (mask) with the proper filters for mold. The filters must be designed for VOC (Volatile Organic Compounds).  Mold is considered to be a Microbial Volatile Organic Compound (mVOC).

If you are an appraiser, home inspector or agent, I recommend keeping a respirator, with the proper VOC filters, in your vehicle in the event that you have to enter a house with visible mold growth. These respirators are relatively inexpensive to buy.

HOW TO KNOW IF MOLD IN YOUR HOME IS AT A TOXIC LEVEL

If there is visible growth on walls and ceilings, chances are there is more growth behind the walls or trim. At times it is clear to see mold growth, but not always.

There are also times when there may be toxic levels of mold in a home that is not visible. So how can you find out? If you suspect that you have a mold problem, I recommend hiring a professional In-Door (aka. Industrial) Hygienist, or other qualified professional, to do the testing. Testing is very expensive, but proper testing will inform you, know not only how many spores are in your home, but also the type of mold spores you’re dealing with.

Spore traps and surface swabs are some of the ways that professionals use to test for mold. Throughout the process, tests have to be taken in both the affected areas as well as outdoors. Tests are taken before remediation begins and numerous times throughout the process until the levels are acceptable. Samples may cost $75 or more per swab or per trap. According to HomeAdvisor’s website, the national average cost for mold testing is $661. That is in line with what I have seen in the past. Even a relatively small area could end up costing many hundreds of dollars, just for the spore testing, not to mention the tedious work of removing the mold. There are tests that a home owner can purchase and use. They are less costly. However, they may not give you all of the information that you need to make an informed decision regarding the degree of remediation needed.

This is why mold remediation, done the correct way, is so expensive. Just scrubbing the area with bleach water is not sufficient, contrary to popular belief! The costs of mold remediation alone, is one reason why mold issues can have a negative impact on market value.

THE DIFFERENCE BETWEEN MOLD AND MILDEW

Mildew is a type of mold. Mildew is generally not toxic. Mildew is sometimes referred to as Allergenic mold. It is generally white in appearance.  Some people are allergic to this type of mold. However, most people are not. Even if a person is, this type of mold is not typically life-threatening.

Toxic mold is a different more serious type of mold because it can release spores that are very toxic. There are several types of toxic mold that can cause more severe types of illness. They are far more dangerous than mildew and can cause permanent damage to those with weak immune systems. Black mold (Stachybotrys) is the most infamous molds. However, there are other toxic molds than can be just as poisonous. Some of them are Penicillium, Fusarium, Aspergillus and Cladosporium.  They all have a wide array of harmful qualities.

WHEN DOES MOLD BEGIN TO AFFECT VALUE?

Will a mold growth on the exterior of a property, like the siding, have a negative impact on the market value or the marketability of a property? Probably not. Especially when it comes to being a health and safety issue. Remember, the goal of mold remediation is to have a spore count on the interior that is the same or less than what is on the exterior. So, if the mold is on the exterior, this is generally not a health concern. However, it may affect the appearance of the exterior of a home, which may lessen its market appeal. So mold on the exterior can have a negative impact in value for this reason. I once saw a home (not one I appraised), which had so much of a mold-like growth on it, that it appeared to have permanently discolored the aluminum siding. That would clearly have a negative affect on value.

When it comes to the interior, there are some things to consider. If you see some dark mold-like substance in some very small areas, say above a shower where there is regular moisture, that is not likely to have a major impact on market value. Nor would mildew in a bathroom. Of course, if this was the result of poor upkeep of the bathroom or other areas, there may be other factors that would impact market value, such as condition and appeal. However, a small amount of a mold-like growth or mildew is not likely to require major remediation.

However, if you see growth of a mold-like substance on walls, ceilings or floors in a home in areas that should be dry, this may be indicative of an area in which there may be mold growth. Anytime major mold remediation is necessary, there will be a negative impact on market value.  As already commented on, proper mold remediation is very expensive. So, this kind of situation is likely to have a large impact on market value.

Additionally, there is a stigma associated with toxic mold. So, the market in general is going to expect that any toxic mold be removed. The impact on market value could be very large, depending on the situation. I have appraised homes in which the mold was so extensive, that the cost to remediate the mold exceeded the market value of the home. Generally in these cases, the home is razed. The times where I have seen this were with bank-owned homes. Generally, if a home is occupied, the owner will recognize that there is a problem long before it gets to that point.

SOME FRIENDLY ADVISE FROM ONE PROFESSIONAL TO ANOTHER

As already stated, it is always best to wear a proper respirator before entering into an area with mold growth. Because the cost to remove mold can vary greatly, it is advisable to have a professional remediation company, who is certified for mold remediation, provide a cost estimate. Keep in mind that the estimate could go up during the remediation process, depending on what is found behind walls, under floors and in attics.

When it comes to identifying mold, it is always better to not make an assumption that it is mold. Is it toxic mold or just mildew? If it is toxic mold, what kind or kinds is it? Even someone certified to remove mold, as I was, is not generally qualified to identify it. So, it’s best to not state that something is mold, even if we are pretty sure it is. In my appraisal reports, I refer to any such growth as being a “mold-like” growth or substance, unless already identified by a qualified professional.

So, the next time you open the door to a home you’ve never been in before, and you’re hit with a strong earthy smell, and you see evidence of excessive moisture on the interior, like drooping ceiling fan blades, don’t go into the home without a respirator!  Thanks for reading my blog!

Here is my monthly market update for January 2019. You can download the report or enjoy a visual version.  I hope you find the information useful. Northeast Ohio is having a strong start to 2019!  You can find more reports on my website at www.aspenappraisalservices.net.

January 2019 County Market Update

January 2019 Monthly Market Report - YouTube
Here are some other articles and videos I enjoyed recently! I hope you will also…

The Apple Peeled – Ask the Experts: market Dynamics with Jonathan Miller – Matrix Blog by Jonathan Miller

Spocking Fives for Housing To Live Long and Prosper – Housing Notes by Jonathan Miller

What’s A Comp and Why Should You Care? – Yolo Solano Appraisal Blog

The players in the market & normal pendings – Sacramento Appraisal Blog

The Fallacy of Price Per Square Foot and a Highway 280 – Chelsea Real Estate Update – Birmingham Appraisal Blog

Interview with Craig Morley – Appraiser’s Minute with Tim Andersen

Kaizen – Continuous Improvement in Your Appraisal Business – The Real Value Podcast!

Lake Kiowa Market Update? – DW Slater Blog

Here Come the Zestimates – The Appraiser Coach Video Podcast

Clients Need To Know Reliability – George Dell’s Analog Blog

For my appraiser friends – Ann Arbor Appraisal Blog

Workfiles & USPAP Compliance – Appraiser eLearning

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In 1998, I began my appraisal career. Most lenders required the appraiser to take photos of the comparable sales. This is not an USPAP requirement. However, it is a requirement of most lenders. There is good reason for this requirement. Viewing each property in person makes it easier to determine if views and locations of the comparable sales are truly comparable to the property being appraised. Of course, with the advent of technology, an appraiser can observe satellite and street views without leaving the office and make a fairly good analysis of these things.

I put about 25-30k miles on my vehicle every year. A lot of those miles come from taking comp pictures. It’s not such a big deal when I am already in the area for the observation of the subject property. However, no matter how much research I make before making the home observation of the property I am appraising, it seems that on a regular basis, during the analysis of the data, when I get back to the office, I find a comparable sale or two that is really better than those I took photos of initially. So, I have to go back to the area and take additional comp photos. For me, that’s just part of my work. I would rather provide some of the best comparable sales available than less comparable sales, just to save time. This situation is time consuming. I know that there are services that will take comp pictures for me, but I personally don’t feel comfortable using this kind of service. Even with this being the case, I schedule my day so that I still nearly always have the report back to the client within 48 hours or less, from the time of the walk-through of the subject property, unless the appraisal is on a complex property.

THINGS ARE CHANGING

Fast forward to where we are now. In recent years hybrid appraisals have come on the valuation scene. There has been so much discussion about them in recent times, including prior posts of my own, that I was reluctant to even talk about it again. However, I do feel that it warrants further discussion.

I remember when they first started being used. The creators and users of these bifurcated products painted a picture of the importance of the appraiser’s analysis, after the observation was made. They presented this new type of valuation reporting as helping the appraiser to perform what is arguably the most critical part if the appraisal process. Namely, the analysis of the data.

With these types of valuation products, someone other than an appraiser will make the observation of the home and will digitally upload the data, including photos if the subject property, to the lender who then shares this information with the appraiser. It is noteworthy that the people they use to “inspect” the subject property do not take the comparable sales photos. In fact, no one does, because comp pictures are not required to be taken. The appraiser uses this information to develop an opinion of value based upon the information provided.

The person making the observation is not an appraiser. They are unlikely to understand what things and situations will affect value in their walking through the home. Will they recognize what a tandem bedroom is or some other functional issue? Will they measure the finished area of the basement or even know how to calculate gross living area accurately? If they are not measuring the GLA, can public records really be trusted as accurate? (Not in my experience) There are many things that an appraiser is trained to look for that can affect value. I highly doubt that these things will be readily noticed or accurately documented by the non-appraiser inspector.

Did you know that the observation of most homes takes about 30-60 minutes on average? Of course, the observation might take considerably longer if the home is complex. Usually, the observation is the shortest part of the entire process. Before I ever leave the office, I usually spend about 30-60 minutes just pulling data for market trends, searching for possible comparable sales and data for extracting adjustments. After the observation of the property being appraised and comp pictures are taken, it usually takes me another 2-3 hours, and sometimes much longer, in completing the analysis and developing my opinion of value.

HERE’S RUB

In hybrid style appraisals, in which the appraiser is supposed to use their valuable skills to develop an opinion of value, most lenders ordering these type of products say that they can be completed in an hour. Say what!? By the way, they are not even paying market rates for what they claim is an hour of work, at least in what I have experienced. I just saw an advertisement for what the AMC called a “staff appraiser” position, which paid $50 per hour. They prefer that the appraiser have a bachelor’s degree. When I read further, it was basically an add for an appraiser to perform desktop appraisals all day.

What this means for appraisers that complete these kinds of reports is that they have to really rush through these reports if they want to have any chance of making a decent living. There will be no time for a careful analysis of the market, neighborhood trends, extracting market derived adjustments and so on. There’s just enough time to find three quasi comparable sales, slap them on a grid, add an opinion of value and push out the report. Yep, a form filler. I thought we were getting away from that type of appraisal mentality. And yet, it seems that the mortgage industry is embracing it more and more.

Do you think that something is going to be lost in quality and accuracy, when appraisers have to pump out these reports in rapid succession?

I completed a few of these over the past couple of years. They took me about as long as a traditional appraisal, when all of the work necessary to be USPAP compliant was completed, including the work necessary to develop a supportable opinion of value.

One of the hybrid appraisals I completed did not allow for adjustments to be made. Some do allow for adjustments to be made. However, an hour is not enough time to develop an appraisal which includes deriving market adjustments. Making market supported adjustments is such an important part of the valuation process. That’s why the GSE’s have spent a lot of time and money implementing systems to flag appraisals in which the adjustments may not be supported by the market. Do you think that not making market derived adjustments will make the opinion of value more or less accurate?

YOU GET WHAT YOU PAY FOR

Make no mistake, hybrid appraisals are about speed and money. They have nothing to do with the appraiser being able to focus more on the analytical process. Part of the reason I feel this way has to do with the ridiculously low fees that are being offered, and the anticipated time that these products are claimed to be able to be completed in. If lenders want to use hybrids, then pay the appraiser for the time it will take to develop the hybrid appraisal properly. Pay them for the training and education required to become an appraiser, which today also requires a college degree or equivalent. I bet the people who perform the inspections are being paid about the same fee as the appraisers, while not being required to have anywhere near the education that appraisers must posses, including on-going CE. Let that marinate for a while.

Clearly there is some time savings in performing a hybrid appraisal in comparison to a traditional full appraisal. The hybrid appraisals I have seen pay the appraiser about 20% of what a normal full appraisal would costs. If only developing a credible value using a hybrid model really only took 20% of the time a full appraisal takes.

I am convinced that lenders that use these products are going to get what they pay for. However, it’s about risk. I get that. While these products may have been originally invented or at least proposed with quality in mind, quality is no longer the focus. History repeats itself. We are clearly seeing this again as some banks are willing to lend using riskier business practices and business models until it bites them. The riskier practices are not just seen in the use if this product. The only real losers will be home owners and tax payers. Just like in 2008.

One of the dangers with these appraisal products is that while they can be useful for some limited purposes, if they are slowly allowed to be used on a larger scale for making mortgage lending decisions, the damage will not be realized until it has already taken place. It’s like boiling a frog. How do you boil a living frog? You put the frog in a pot with a nice temperature of water. Than you gradually turn up the water temperature until the damage is done. The frog gets used to the increased temperature until it’s too late. The water reaches a deadly temperature and the frog is kaput.

While these products are not used for every loan right now, some lenders seem to be moving more in the direction of relying on these more in the near future.

Sometimes all it takes is one step in the wrong direction that can lead to disaster!

And all of a sudden from funny

I do believe that the creators of these products really did feel that they were creating an environment in which appraisers could focus more on the data analysis. But sometimes good intentions have unexpected consequences. Like the scientist who discovered the massive energy that could be harnessed by splitting an atom. Little did they know that their discovery would be used to make weapons of mass destruction!

If I were a betting man, I would bet that, if users of these products are not careful, the cost of these bifurcated valuation products will end up costing the lending institutions that use them, considerably more money than a traditional appraisal. Sometimes chasing after the money can make you loose more than you get!

Works on humans as well … lol from funny

Would simply removing the requirement to take pictures of the comparable sales made a difference in speed? Would appraisers be willing to accept a smaller fee for not having to take comp pictures? I believe that the answers to those questions might be yes, at least in some cases.  However, that’s not really the answer. I think it really comes down to a lack of appreciation for what appraisers do and why we are still needed at this point in time.

It will be interesting to watch this play out. It is my belief that this is going to damage the housing market down the road. I hope I am wrong. If it does, and homes began to default due to loans made based upon faulty (risky) valuations, seasoned appraisers will be here to perform full appraisals for the banks when these homes are foreclosed upon. Then they will hire the appraiser to perform full appraisal to develop a value in which they can sell the home they foreclosed on, in a 90 day time period to minimize their losses, which ironically may have been created, in part, by making a risky loan in the first place. All in the name of saving time and money on the appraisal.

Here are some other articles and videos I enjoyed recently! I hope you will also…

Commuting By Vertical Travel When Your Home Is Nearby – Housing Notes by Jonathan Miller

More Owners, Less Sales & Confidence  – Sacramento Appraisal Blog

The Most Expensive Birmingham Home Sale in 2018 – Birmingham Appraisal Blog

How’s Your On-Line Presence? – DW Slater Blog

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Have you ever heard of the term geographic competency? It’s something that an appraiser must posses. But what does it really mean and when must an appraiser have it?

WHAT GEOGRAPHIC COMPETENCY MEANS

I have both experienced and heard accounts of real estate agents  questioning an appraisers ‘geographic competency’ due to the appraiser’s office being a 30 minute drive from the subject property. It seems that some, and I emphasize some, agents are of the mindset that if the appraiser’s office is not in relatively close proximity to the property being appraised, or if the appraiser doesn’t live in a nearby area, that they do not possess geographic competency. And they may be right.

However, the appraiser’s office location or where they live, in relation to the property being appraised, has little if anything to do with geographic competency!

To be geographically competent simply means that the appraiser has the skills and resources needed in order to competently complete the assignment, in harmony with the Uniform Standard of Professional Appraisal Practice (USPAP).One of the major resources typically necessary for an appraiser to be geographically competent is  access to the local MLS (Multiple Listing Service). Why? The MLS is the primary way that most appraisers locate comparable sales, analyze listings and extract market data. This information is used to make an analysis of real estate trends and for extracting adjustments. Granted, not all areas have an MLS system. In that case, an appraiser must have other reliable sources in order to obtain the data needed to complete an appraisal report competently.

An appraiser must also be aware of anything in the subject neighborhood or surrounding areas that might have a positive or negative influence on the values and marketability of homes in the area. There are many resources that can be used to help the appraisal make these determinations in a relatively short time period.

AT WHAT POINT DOES AN APPRAISER NEED TO BE GEOGRAPHICALLY COMPETENT?

This may sound like a trick question. Doesn’t the appraiser need to be geographically competent at the time that the appraisal assignment is accepted? Actually, no. USPAP  does have a Competency Rule. Here is what USPAP has to say about the matter:

“The COMPETENCY RULE requires an appraiser who lacks the knowledge and experience to complete an assignment competently to (1) disclose the lack of knowledge and/or experience to the client before accepting the assignment, or (2) disclose the lack of knowledge and/or experience to the client during the assignment if discovered by the appraiser during the assignment. In either instance, the appraiser must then take all steps necessary to appropriately complete the assignment competently and document the steps in the appraisal report. An appraiser may gain the knowledge and experience with required through any or all of the following: personal study by the appraiser, association with an appraiser reasonably believed to have the necessary knowledge or experience; or, retention of others who possess the required knowledge or experience.”

If an appraiser is not geographically competent in an area, they can gain the needed competency through research and analysis, while in the process of completing the assignment. Admittedly, there have been appraisers who have not take the proper steps necessary to become geographically competent. And in these cases, I completely understand why an agent or other parties involved would be upset at the appraiser. This can add a great deal of complication to the process and unnecessary stress for all of the parties involved in the transaction. A lack of competency is not a pretty sight in any profession!

Dave Grohl chugs a beer and then falls off stage from funny

While that is the case, before the appraisal takes place, there is no way a real estate agent, home owner or anyone else can really determine whether or not an appraiser is geographically competent or not. Remember that even if the appraiser was not initially geographically competent, they can gain the necessary competency through the process.By the way, if the appraiser does not posses geographic competency at the time that the appraisal assignment is accepted, or they find out they are not yet competent to complete the assignment without further research and/or education, did you notice who they have an obligation to notify? It’s not the agent. It’s not the home owner. It’s the appraiser’s client. Therefore, the appraiser does not have an obligation to make the agent aware of their not having geographic competency. This is a matter that is between the appraiser and their client.  

It is not lost on me that there have been some appraisals completed by appraisers who did not do what was necessary to become geographically competent. Those situations can make a purchase transaction very difficult for everyone involved, including the agents, as already stated.

Here’s the thing. Before the appraisal is completed, there is no way to know if the appraiser is either geographically competent or will take the steps to become so. So, it really doesn’t make much sense to interrogate the appraiser about their geographic competency, or lack thereof, before the appraisal is completed. However, once the appraisal is completed, it will provide evidence regarding the appraiser’s competency, geographically and otherwise.

My recommendation to agents who suspect that the appraiser is not competent to complete the appraisal, is to wait until the report is completed. If you suspect that the appraiser does not posses geographic competency before the appraisal is completed, and you make it your mission to have the bank replace that appraiser with another one, you may inadvertently be removing an appraiser that would have taken the steps to become geographically competent with one who is not. Remember, you are not going to know for sure whether the appraiser was competent or gained the needed competency until after the appraisal is completed. 

A word of warning about competency. If the appraised value is the same or higher than the contract price, that in itself is not an indication of competency. Conversely, if the appraised value is lower than the contract price, that is also not necessarily an indication of a lack of competency.

WHO ELSE NEEDS TO BE COMPETENT?

I recently ran a search on-line for “geographic competency”. The only articles that I saw were related to appraisers. That makes sense because, as already discussed, appraisers have to be geographically competent.

Is the appraiser the only real estate professional that needs to have geographic competency?

Real estate agents also need to have geographic competency in the area that they are selling in. In my experience, most agents do because they research trends, comparable sales and what is taking place in the neighborhood of the home they are selling.

However, at times, the same agents who put the appraiser through the third degree regarding geographic competency, are the same agents may demonstrate that they actually need to obtain geographic competency themselves.

For instance, there are times when my opinion of value is lower than the purchase price. Some agents will rebut my appraisal by giving the lender sales that they feel I should have used. However, the sales provided are often in different neighborhoods or are superior to the subject. Does it demonstrate geographic competency, on the part of the real estate agent, when they provide an appraiser with so-called comparable sales when those sales are located in completely different neighborhoods? Especially when there are comparable sales within the subject’s neighborhood.

Another area in which I see some lack of geographic competency is when it comes to specific neighborhood trends. I think that some may look at overall city or county trends and try to apply those numbers to the comparable sales. The problem is that often the trends for an entire city or county are very different from the trends that are specific to sales that are truly comparable to the subject. Last year, an agent complained to the bank that I didn’t make time adjustments. The sales I used had sold within six months and the rate of appreciation for comparable sales was less than half of one percent per year. Inflation was outpacing the incredibly minor appreciation of comparable sales. The agent was looking at sales trends from data that was not reflective of the comparable sales. My data was based upon the sales trends of comparable sales in the neighborhood. And there were ample comparable sales available in order to estimate a reliable trend.

Sometimes appraiser’s work is discounted by others. Usually this is the case when the  appraiser’s research and analysis support lessor value than what is desired by the parties involved. While that’s the case, appraisers are the only real estate professionals who are burdened with having to support our work. That’s what we do! And it’s much more difficult than many realize.

I should clarify that this article is focusing on USPAP requirements. An appraiser needs to understand the requirements of their clients. For instance, if an appraiser is performing an appraisal under Fannie Mae requirements, they are required to posses geographic competency before accepting the assignment. Rachel Massey, who is a well-known and well-respected appraiser in our profession, wrote a great article addressing this entitled “Wow, My Market Area is Slow”. Click on the title for a link to that article.

Whether the appraisal is being completed based upon Fannie Mae standards or not, the next time you assume that the appraiser is not competent to complete the appraisal, give them a chance. They probably are. You might be pleasantly surprised!

Here are some other articles and videos I enjoyed recently! I hope you will also…

Sometimes We Don’t See Signs Of Housing Trends Until They Hit Us – Housing Notes by Jonathan Miller

At least read this part of the appraisal – Sacramento Appraisal Blog

What Is A Quality Home Appraisal? – Birmingham Appraisal Blog

Don’t Fall Off The Cliff – The Real Value Podcast!

A Response to: Mortgage Industry Expert Wants to “Eliminate Appraisers”- Appraiserblogs.com by Abdur Abdur-Malik

Judgement = A Required Part of Good Science – George Dell’s Analogue Blog

Ready or Not – It’s Another Year – DW Slater Company, Real Estate Appraisal Blog

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Sometimes I am asked, when searching for comparable sales, do appraisers have to stay within a mile of the property being appraised? The answer is that it depends. By the way, that’s the typical response that an appraiser will give you when asked a question about appraising. And rightly so. There are may things that an appraiser has to consider when developing an opinion about the most probable sales price of a property.

MISCONCEPTIONS ABOUT PROXIMITY

The Uniform Standards of Professional Appraisal Practice (USPAP) do not give any limitations regarding proximity, when searching for comparable sales. The appraiser simply has to use the most comparable and proximate sales. Sometimes the most comparable sales are over a mile away. Sometimes they are less than a mile away. It really depends.

Some of the lenders that I complete appraisals for, like to see comparable sales within a mile in urban neighborhoods, two miles for suburban neighborhoods and five miles in rural areas. However, most lenders recognize that there may be times when this cannot be achieved. Therefore, the appraiser simply needs to explain in the report why it was necessary to exceed these proximity parameters. The reason for these lender guidelines is that typically, in urban neighborhoods, there is a higher density of homes, usually resulting in numerous comparable sales typically being located in relatively close proximity to the property being appraised. Whereas rural or low density areas have fewer sales. Therefore, the appraiser will generally have to expand the proximity search to other comparable areas, often over a mile away.

I think that there is also a misconception by some that simply staying within a mile is all that is needed for a comparable sale to be comparable in terms of location. Sometimes within a mile of a property, there may be major differences in neighborhoods and/or market areas in which a comparable sale might not be in a comparable location, despite its being within a mile of the property being appraised.

Earlier this year, I had a home owner tell me that they had their home appraised a number of years ago by a different appraiser. They said that this appraiser told them that they were able to use sales in a completely different city, because the sales were within a mile of their property. There may be times when this is true, but this was not one of those times, as I will demonstrate in this article.

The adjacent city has, at least in my twenty years of appraising, always demanded higher sales prices than the city in which the property I was appraising was located. It should be noted that this is a high density neighborhood with many potentially comparable sales that have sold with the previous year. This is exactly the kind of situation in which dishonest, or inadequately trained appraisers, can artificially inflate opinions of value. It looks great on paper. Three seemingly comparable properties, all within a mile of the subject property. However, as I am about to demonstrate, being within a mile is not always the benchmark for being considered a comparable location.

Here are a few examples from my market to demonstrate the danger of thinking that it’s always okay to use sales within a mile.

DIFFERENT CITIES

This first example is reflective of the situation and location in my introduction.  I was appraising a home in Warrensville Heights, which is south of the yellow line in the map below. The yellow line is the city line between Shaker Heights and Warrensville Heights. Notice the large difference in sales prices.  Driving through these two neighborhoods, you might not realize the difference. They both have relatively similar feels. The homes in both neighborhoods are similar in terms of style and size. The lot sizes are comparable. It would be easy to find homes that had comparable lot sizes and building characteristics. However, Shaker Heights offers a superior market appeal due to its  superior school system and city amenities. Clearly the neighborhood boundary is the city line and not a one mile proximity.

The other appraiser used several sales from Shaker Heights, resulting in an artificially inflated opinion of value.

DIFFERENT CITIES – SAME SCHOOL DISTRICT

My next example is in the Village of Bratenahl. The Village of Bratenahl is located within the Cleveland City School District. It is located north of I-90. Notice the huge difference in sales prices north of I-90 vs. sales south of I-90, within a mile.

While sales north of I-90 are located within the same school district and are within a mile of properties south of I-90, there is simply no comparison. The numbers on the map are not typos! There is really that much of a difference. I-90 is clearly the boundary between neighborhoods. Clearly, just because a home is within a mile of the subject property and even within the same school district, this does not automatically mean that it is comparable in terms of location.

SAME CITY – DIFFERENT SCHOOL DISTRICTS

The next example might be a little trickier.  The majority of the city of Cleveland Heights is located within the Cleveland Heights/University Heights School District. However, there is a small portion Cleveland Heights, on the northwest portion of the city, that is located within the East Cleveland School District.  Notice the difference in sales prices as a result of this difference in school districts.

In this example, while being located within the same city, the difference in school districts makes a sizeable difference in sales prices.

NEIGHBORHOOD BOUNDARIES

Sadly, I have seen some appraisal reports that have stated that the neighborhood boundary is a one mile radius subject property. That is highly improbable. I have never seen a market area or neighborhood in which the boundaries are as clean as a simple  radius.

The Appraisal of Real Estate 14th Edition states that to identify the boundaries of a market area, an appraiser:

  1. Examines the subject property. The process of defining a market area’s boundaries must start with an analysis of the subject property.
  2. Examines the area’s physical characteristics. The appraiser should drive or walk around the area to develop a sense of place, noting the degree of similarity in land uses, structure types, architectural styles, and maintenance and upkeep. Using a map, the appraiser can identify points where these characteristics change and not any physical barriers-e.g., major streets, hills, rivers, railroad tracks-that coincide with these points. 
  3. Determines preliminary boundaries on a map. The appraiser indicates lines on a map of the area to connect the points where physical characteristics change.
  4. Determines how well the preliminary boundaries correspond to the demographic data. The market area boundaries are often overlaid on a map of geographical areas (e.g., zip codes, census tracts, block groups). The appraiser’s observed market area and the areas for which data is available seldom match up perfectly. The information available for census tracts, zip code regions, and counties must be segmented to delineate pertinent sub-markets.

There is more, but you get the point. As demonstrated in this article, there are many factors to consider when it comes to determining neighborhood boundaries. Each neighborhood has its own influences, both good and bad.

SOMETIMES YOU HAVE TO GO BEYOND A MILE

As noted earlier, USPAP does not have any proximity guidelines.  The three examples I provided are in urban and suburban areas in which there is a high density of homes and a subsequent large number of sales to choose from. However, there are times when an appraiser must go beyond a mile.

When appraising very unique homes or appraising homes in less dense areas, it is common for the appraiser to have to go beyond a mile in order to find comparable sales. I have appraised some luxury homes that were so unique that I had to travel over 50 miles away in order to find something truly comparable. When appraising in rural areas, it is very common to have to travel well beyond a mile to find comparable sales.  Of course, as appraisers, we try to find the most comparable sales that are closest in terms of proximity.

As demonstrated in this article, sometimes school districts play a part in determining a comparable location, and sometimes they don’t. While at first, proximity appears to be an easy way to determine whether a location is comparable, generally a more careful analysis is needed.

Kind of like this drone being used to get into close proximity to the power lines. Using a drone to fly near power lines to torch debris for removal, may have seemed like a no-brainer at first. What could possibly go wrong? I am not sure if someone really thought this through. I digress.

A drone with flamethrower to remove debris caught on electric wires. from gifs

Just going on auto-pilot and thinking that a comparable sale’s location is comparable merely because it is located within a mile of the property being appraised, is not advisable. This is where geographic competency really comes into play. Appraiser’s have to do the work necessary in order to really understand a market and a neighborhood. They must do the research necessary in order to determine whether or not the location of a comparable sale is truly comparable to the location of the property being appraised. Proximity is only part of the answer!

Thank you so much for being here and reading my blog! In the later part of 2018 I was writing a weekly blog. In 2019 I am going to write two or three blogs a month. I hope that you will continue to read my blogs this year along with other great appraisers from around the country that are working so hard to provide the public with good information. This information helps the public to learn about what we as appraisers do and why we do it!  Have a great day!

Here are some other articles and videos I enjoyed recently! I hope you will also…

Housing Is Skating On Thin Ice And A Private Resolution – Housing Notes by Jonathan Miller

Real estate trends to watch in 2019 – Sacramento Appraisal Blog

Appraisal Process For Consumers – Ann Arbor Appraisal Blog

Top 5 Appraisal Blog Posts of 2018 – Birmingham Appraisal Blog

Be Careful Who You Choose To Follow! – The Real Value Podcast!

Why Should An Appraiser Join An Association? – The Appraiser Coach Podcast

An Appraiser’s First Impressions of Clear Capital’s AVM – Portland Appraisal Blog

How Do You Measure Believability? – George Dell’s Analogue Blog

December Newsletter – DW Slater Company, Real Estate Appraisal Blog

The Appraiser Gap Between Where We Are & Where We Want to Be – The Appraiser Coach

2018 Home Sales Prove Slowing Trend – Baton Rouge Housing Report

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