The residential lending industry is moving away from appraisals after seven years of rapid appreciation when many markets in Northern California are showing signs of slowdown and stability. I joined FindMyAppraiser.com because of their strong advocacy for appraisers and consumer protection.
From the FindMyAppraiser.com website:
“FINDMYAPPRAISER.COM IS A NATIONAL REAL ESTATE APPRAISER DIRECTORY AND JOINT MARKETING CAMPAIGN
FindMyAppraiser.com serves as the link between local property appraisers and the public that needs these services.
Let the buyer beware! Now more than ever American consumers must protect themselves when purchasing a home, buying rental property or investing in a business. These decisions are “life changing” and can effect consumers for many years to come. Buying a home is the biggest financial investment one will make and getting an accurate property value from a qualified local appraiser is best way to make sure you are making a wise decision.
Many banks don’t order appraisals! That’s right. Many home buyers believe banks will order an appraisal when they apply for a mortgage but more and more banks are using AVMs (Automated Valuation Modules) or out-of-the-area “valuers” in the mortgage process. These valuations are not performed for your benefit, they are only used by the bank. You don’t own them and you should not rely on them to make your purchase decision. You need a properly trained market expert. You need an Appraiser.
FindMyAppraiser.com is dedicated to supporting professional appraisers and promoting consumer protection.”
Thanks to Phil Crawford and Lori Noble for putting this together.
Two recent posts from my friend Jamie Owen at the Cleveland Appraisal Blog plus a planned realtor office visit inspired me to write this. Jamie did a great job blowing up the myth that comparable sales need to be within one mile of the subject in this post. He also tackled geographical competency, or the need to have boots on the ground knowledge about a market in order to credibly value properties in a second post.
Both posts touch on the subject of what is a comparable sale and why should anyone in real estate, or even the general public, care? The quick answer is that “comps” are the basis for how we, both those in the real estate industry and the man on the street, value residential real estate.
Per the Dictionary of Real Estate Appraisal, 3rd Edition, comparables are:
“…similar property sales, rentals, or operating expenses used for comparison in the valuation process; also called comps.“
Comps are used in the Sales Comparison Approach to Value, especially in residential real estate appraisal. All of us, appraisers, real estate agents, and folks considering buying a home, use the theory of substitution to determine the value of a home. What would the typical buyer shopping in that neighborhood buy instead of the subject?
A comparable sale is a sale of a home that the typical buyer of the subject would buy instead of the subject.
Subconsciously, everyone who owns a home compares it to homes in their neighborhood. We learn about a recent sale on our block and place a price on ours based on whether we think it’s better than ours, relatively similar, or inferior. The formal version of this is the sales comparison approach used by appraisers.
We appraisers find the most similar sales, adjust the comparables for differences from the subject, leaving each adjusted comparable sale an indicator of value for the subject. The vast majority of single family residential appraisals in the US rely upon this methodology.
In the context of the sales comparison approach to value, the key is to identify the comps for the subject.
The easiest way to get the value of a single family residence wrong is to get the comps wrong!
Residential real estate, such as a house, a condominium, a home on a small acre lot outside of town, etc., have characteristics (“dimensions”) that serve as descriptions of a specific sale for a specific property. The more similarities between a sale and the subject under consideration, the better a comp. We can go into a deep dive, like George does in his classes; instead, I want to talk about what I do specifically for simple single family residential work in conforming neighborhoods.
Some examples of dimensions and characteristics important to valuing homes include transaction terms (financing, credits, etc.), motivations, location, views, quality, design, condition/age, floor area, and amenities.
Some dimensions/characteristics are more important than others and can vary dramatically in importance depending upon the location. For example, pools are valuable in the Sacramento region but have less value in the Pacific Northwest where the weather is cooler. Basements are common in the Midwest and East Coast but not so here. In the Whisper Creek Subdivision in Arbuckle, CA, a tract of large homes on half acre lots, RV parking is a significant factor unlike other nearby markets. This is why the geographical competency that Jamie discusses is so important. Appraisers with geographical competency understand what characteristics define a true comparable and get the subject’s value right.
Time usually matters except when it doesn’t. If a market is rapidly changing, using the most recent sales can reduce the impact of market change. When a market is relatively stable, time is less important and so using older comparables is reasonable. I downplay time frequently because time is usually the easiest and most reliable adjustment to make.
For a typical tract home in my area, the most important factors are motivations for the purchase or sale, time, location/proximity, and size/floor area. I start with a map search using my neighborhood boundaries and go back 12 months prior to the date of value for closed sales. I exclude from consideration REO sales, short sales, and other transactions where motivations likely had an impact on sale price.
I search for homes a little smaller than the subject because most buyers can make do with a slightly smaller home. Because the typical buyer can accept a larger home than the subject, I set the upper boundary on my floor area range wider than the lower bound. For example, if the subject has 2300 sf of living space, I will search for comparables with 2000 sf to 2800 sf of living space (300 sf smaller to 500 sf larger).
After I set my criteria in the MLS search, I run the search and review the results.
I mentally draw a box around the subject’s important characteristics so I can place it in the competitive market. This is known as bracketing. Reasonably, would the typical buyer consider the sales found suitable substitutes for the subject? Are the sales similar in quality and design? Are there differences in lot size or age? Do I have larger and smaller homes? Do I have homes in similar condition, or inferior and superior? I try to account for every significant characteristic of the subject so I can show, by comparison, the value of the subject by using these comparables.
If I’m comfortable with the sales found, I can start my adjustments analysis. If not, I revise my search criteria and run the search again until I am happy that the sales found reasonably describe the subject.
Once I have my initial candidate comparable sales identified, I dig in and look for most representative comparables of the subject and decide on which sales to research further (view the exterior, contact agents involved in the transaction, etc.). I review outliers, sales outside the normal range, and try to determine why the sales deviate from the norm. I either adjust for the issue or remove the outlier from consideration. The remaining comps, after adjustment, are my indicators of value for the subject.
Comps are usually easy to find in conforming neighborhoods as long as the subject is similar to the rest of the neighborhood. When the subject is unusual, or when there are few sales available and they are all different (“non-conforming”), comparable selection is difficult. The appraisal becomes complex and beyond the scope of this article. I do have tips in my article about appraising complex residential properties.
How do you search for comparables? What are some tips for a real estate agent or new appraiser you can share?
I’ve posted the full version of my article Why You Should Join An Appraisal Organization with links to the organizations mentioned in the article. Now is an important time for the residential appraisal industry to join together because of threats to our place in the US real estate market. We need to spread the word of the role of appraisers, especially to federal regulators who want to diminish our standing.
If you haven’t heard, federal financial oversight groups such as the FDIC, Federal Reserve, and others have proposed changing the de minimus for residential lending in the US from $250,000 to $400,000. This is exactly the wrong time to reduce oversight in residential real estate given widespread signs nationally of markets slowing and potentially nearing a peak. Did we learn nothing in the last market crash?
Ryan Lundquist has an excellent summary on his blog (link). I strongly encourage you to sign the petition started by Ryan and Jonathan Miller at change.org (link) and to comment in the federal register about why this is a bad idea.
I want to add to the praise for the first AppraiserFest held last week in San Antonio. Kudos to Phil Crawford, Lori Noble, and Mark Skapinetz for a great first event! I’m very glad I made the decision to attend.
I was struck by how positive everyone was at the event. Even though the residential appraisal business is under threat from changing client needs and reduced loan volumes, AppraiserFest speakers gave us many ideas for how to grow our business.
I greatly appreciate that this was an appraiser-centered event with a distinct lack of client presence.
Attendees were younger than typical for industry events, a refreshing change. Also, a larger percentage of attendees were women.
I spent much of my time at AppraiserFest with George Dell and Steve Smith at the Valuemetrics booth discussing data analysis with attendees. Hanging out with George and Steve for several days was like a master’s seminar in appraisal. I’m so fortunate to have mentors so willing to share their experience like these two.
Tom, Ryan, Jamie, and Bill with yours truly at AppraiserFest
Meeting online friends in real life was the best part of AppraiserFest. I was fortunate to break bread with some of the best appraisal bloggers in the country including Tom Horn, Jamie Owen, and Bill Cobb. And Ryan Lundquist, a long-time friend in real life (!), was kind enough to put up with my snoring. Thanks for sharing the room Ryan.
This was my first trip to San Antonio so I had to visit the Alamo and the Riverwalk.
It was great catching up with Diane, John, and Teresa from the Excel class I gave in Portland two years ago. Can’t wait to see you again.
Positive vibe throughout
Great networking with people I actually wanted to meet
Very professional event with great speakers and topics relevant to my day-to-day business
Recently Joseph James Angelo was arrested outside of Sacramento and was accused of being the East Area Rapist. The East Area Rapist terrorized California in the 1970s and committed more than 50 rapes and 12 murders before disappearing more than 30 years ago. My friend Ryan Lundquist started a poll and conversation on his blog: What discount would you expect if the East Area Rapist’s house came on the market?
The results are interesting. Most respondents were in the 0-10% and 10-20% brackets. I was in the 0-10% bracket based on the one time I’ve worked on a similar problem. Several years ago I was completing an appraisal on a house for a purchase in one of my markets and I noticed a weird note in the listing. “Blessed by a deacon.” What the heck did that mean?
I called the listing agent, a friend of mine, and asked her what she meant by that. Turns out there was a murder on the site within the past six months. Would have been nice if she’d let me know when I scheduled the appointment that, oh, by the way, there was a murder at the subject….
I frantically called the lender to warn them that a murder had occurred at the subject in the past six months, that I would need time to analyze this new evidence, and that I needed more money for the report because of the extra due diligence. I called my mentor to get advice on how to deal with this and to see if he had any data (nope). I then searched MLS over the past 10 years but for some reason, listing agents don’t normally advertise “recent murder here” when trying to sell homes so struck out again. No one at the local Realtor meeting could remember any sales of homes after a murder or similar circumstance either. One of my comparables, however, had a death by natural causes within six months of date of sale.
So after a bunch of due diligence, I had jack squat for data. I took a step back. This was an entry tier home at a time where inventory was low in a relatively safe neighborhood where the murder was unlikely to occur again. Three full-price offers were received for the subject and all three potential buyers were aware of the home’s history. Was there a discount because of the murder? My best evidence, the three full-price offers, showed little to no market reaction from the murder. I discussed my research in my report and concluded no market reaction and sent it in. The purchase closed less than a month later.
This is not the exactly same situation as if the East Area Rapist’s house was on the market. First, no reports to date suggest that crimes were committed at the accused’s house while the house I appraised was the site of a murder. Second, the murder at my subject’s property was one off with little news coverage outside of the community where it occurred. The East Area Rapist is notoriously known throughout California, if not the US, especially for those of age at the time of his crimes. A better but not perfect model might be Dorothea Puente, the landlord in Sacramento who murdered at least seven people and buried them in the backyard. Ryan plots the sales of her duplex on his poll results post.
Tony Bizjak, the real estate writer for the Sacramento Bee, liked Ryan’s post enough to turn it into an article and quoted me for the story.
p.s. Randall Bell, PhD, MAI is the national expert on diminution in value and determining crime scene discounts. His book Real Estate Damages is highly recommended. He thinks the discount will be closer to 25% if the home of the East Area Rapist hits the market.
Sacramento area appraisers stand large in the appraisal industry. We have much more influence than you would expect from a sleepy state capitol halfway between San Francisco and Lake Tahoe. Here are four locals you might know.
Ryan Lundquist might be better known by his website http://sacramentoappraisalblog.com/. He is one of the leading real estate appraiser bloggers in the US and is widely quoted in national media. Here’s a link from quoting Ryan in Ken Harney’s national real estate column from yesterday. Locally, Ryan is famed for his monthly regional market summaries and for being named the 2014 Affiliate of the Year by the Sacramento Association of Realtors. Realtors voting an award for an appraiser? Really? See Ryan speak at the Appraiserfest this November in San Antonio about his expertise in leveraging social media to increase his business.
I’ll be at Appraiserfest too if you want to grab a beer.
Next up is John Brenan. John is the Director of Appraisal Issues for The Appraisal Foundation (TAF). He’s the appraisal point person for the Appraisal Practices Board (APB), Appraisal Standards Board (ASB), and Appraiser Qualifications Board (AQB). Or, in English, he’s the guy helping to set the standards, qualifications, and practices for our industry. John was the author of TAF’s letter urging that the Appraisal Subcommittee reject TriStar Bank’s request for a temporary waiver of appraisal certification and licensing requirements. Every appraiser with lender clients should be grateful for the support. Here’s more about how our industry dodged a bullet.
Don Machholz is another local appraisal industry star. When Fannie Mae required the 1004MC form added to residential appraisals in 2009, Don stepped up and created the 1004MC Calculator and released it free of charge. Don created almost 50 different versions for use with different MLS systems around the country. I went from an hour before Don’s spreadsheet to 5 minutes with it. Don went on to create a host of tools for appraisers to use and now that he’s retired, you can download them all on Don’s website for free. Photos from Don’s retirement party below….
Vicki Keeler may not be known as well outside of the region as Ryan, John, and Don but she deserves to be recognized. She’s one of the founders of the Real Estate Appraisers Association (REAA). REAA started in Sacramento as a local appraiser association and has grown to five chapters across California with approximately 300 members. REAA hosts monthly or bimonthly meetings for practicing professionals and is a model for other state appraiser organizations. Vicki has devoted countless hours to providing education to her fellow appraisers and is one of the unsung heroes of our industry.
Not too bad for a sleepy little town in the middle of the Central Valley….
I had the opportunity to write an article for my local paper, the Woodland Daily Democrat. Here’s what I came up with:
The Role of the Appraisal in Residential Real Estate Lending
Most of the time when you buy a house or refinance your existing residential loan, the lender will require an appraisal of your house. What is an appraisal? An appraisal is an independent opinion of value about real estate. In this context, the appraisal is a report that describes the subject, the subject’s neighborhood, includes at least one of the three approaches to value used by us appraisers, and includes the market value of the subject home on a given date. The client for an appraisal, even if the borrower pays for the appraisal, is the lender. I write my residential appraisals for lenders, not buyers or borrowers.
“Most probable price”-My values are not the highest value possible, not the contract price, not the amount you need to complete your refinance. It’s the value supported by evidence in the subject’s competitive market.
“Buyer and seller are typically motivated”-Market value assumes no unusual motivations like short sale, foreclosure sale, sale to a relative, etc.
When deciding whether to loan hundreds of thousands of dollars to someone, the lender will evaluate the borrower’s credit history, income, and expenses. My appraisal will be included as part of the lender’s risk assessment. If the lender were to take back the subject home today, how much would the subject be worth? Is the subject worth more than the loan? Are there any issues that would make it difficult to resell? Are there any obvious repairs that might reduce the value of the subject long term? Are there any obvious safety issues that might open the lender up to liability? My appraisal helps the lender with these questions.
Us appraisers serve as a check for over-exuberance in the residential real estate market. The real estate agents and loan officer get commissions only if the loan closes. The lender makes money only if it makes a loan. The seller gets paid only if the home sells. The buyer gets a house only if the loan closes. Since I get paid whether the loan funds or not, the underwriter and I are the only truly independent parties in the typical residential transaction. The lender relies on me to report any issues with the home and to honestly arrive at my opinion of value. If my appraised value is above the amount needed for the loan amount, and there are no other issues, the lender can move forward with the loan with confidence. In those cases where my opinion of market value is lower than needed to fund the loan, my report warns the lender that the loan may be risky.
The independence of the residential real estate appraiser is vital with the housing market crash of the 2000s fresh in mind. We don’t want to go through that again.
Anything to add? What did I miss?
(I’ll add a link to the article once it’s published)