Category Archives: Appraisal

Detrimental Crime Scene Discounts

Home of the Suspected East Area Rapist

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.

 

The Outsize Influence of Sacramento on the Appraisal Industry

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….

The Role of the Appraisal in Residential Real Estate Lending

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.

Residential real estate lending appraisals use a standard definition of market value from FNMA (https://www.fanniemae.com/content/guide/selling/b4/1.1/01.html for reference).

Key points from the FNMA market value definition:

  • “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)

Time Adjustments for Residential Appraisers and Basic Excel for Appraisers in Marysville, WA

Just got back from teaching for Dave Towne’s Appraiser Education Service in Marysville, WA. 32 of my closest appraiser friends spent six hours discussing time adjustments for residential appraisers and how to use excel. Thanks Dave for hosting me and putting together a fun class at a great facility.

Multiple Listing Service Reporting of Private Sales from an Appraisal Perspective

 

Today I was asked to comment on the issue of reporting private sales to my local multiple listing service (MLS) by a friend who works for Metrolist, the MLS for the Sacramento region. Today, Metrolist and most other local MLS systems do not allow for sales not sold through the listing service to be included in the sale databases maintained by these organizations. There’s a push within the residential real estate community to include this data. Here’s my response for why, from an appraiser’s point of view, I think it’s a bad idea:

As appraisers, data is our lives. We want available as much data as possible to help us value properties. By rule, we’re required to consider all competitive sales when valuing a property. The vast majority of assignments are for some version of market value. Here’s FNMA’s definition of market value:

“Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  • buyer and seller are typically motivated;
  • both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
  • a reasonable time is allowed for exposure in the open market;
  • payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  • the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.” (FNMA Selling Guide, Section B4-1.1-01)

This definition requires us appraisers to confirm some information regarding every sale used as a comparable in our reports. We must analyze each comparable we use in the sales comparison approach, the primary method for determining the market value of single family residential homes in the US. We must understand that both buyers and sellers do not have unusual motivations and that the comparable sale was properly exposed to the market so that all interested parties could bid on the comparable sale. The most widely used marketplaces in most of California are the various multiple listing services. Exposure on the local multiple listing service gives the widest viewing to potential buyers and allows for market mechanisms to arrive at the market value for any given home. Without this exposure, there is significant uncertainty whether the agreed-to price is market value or something else.

In addition to the value of having a central marketplace with mechanisms to arrive at a market value, the multiple listing services serve as a central repository of data. Most of the time, we can look at one central database and see all relevant property characteristics and data. Additionally, we have record of listing agents and buyer representatives who we are required to contact as part of due diligence. Some of the markets we cover have a significant percentage of sales not reported to the local multiple listing service. In general, we do not use these transactions in our appraisals because of the uncertainty of whether they sold at market value or not. For example, the for sale by owner that puts a sign up on his lawn may attract offers from people driving by but most likely he missed all potential buyers and may have sold his home too low. The “pocket listing” of one agent only marketed to agents in his office misses a huge pool of potential buyers. As appraisers, we can’t rely on these sales as primary data-we just don’t know if the sale price was market-derived.

I have worked extensively in Solano County over the past 15+ years. BAREIS, the multiple listing service for this area, has accepted sales data not sold through the MLS and reported it as “Sold Off MLS.” In the handful of years since this data has been offered, I have used it once in approximately 300 appraisals in Solano County. The sale used was included as secondary evidence for a very difficult assignment because this sale was not clearly a market value transaction. In more than 95% of assignments, I do not bother to check the “Sold Off MLS” sales. Even when similar sales are very difficult to find, the “Sold Off MLS” sales are not very helpful.

Does your local MLS system allow for agents to enter non-MLS sales into the database? Is this good or bad in your opinion? Why or why not?

Thanks Don

Don, Michelle, and son Mark

Thanks Don.

I’ve been very fortunate to know Don Machholz over the past 10 years or so. If you’re a residential appraiser, there’s a good chance you’re familiar with Don’s 1004MC calculator. In 2009, in a belated response to the housing crash, Fannie Mae and Freddie Mac required every residential appraisal going into their pipelines to include the now infamous Market Conditions Addendum-Form 1004MC. The good intention of this form was to force residential appraisers to consider and report market changes. (The form is a disaster. George Dell has a great article about how poor the 1004MC is here). The immediate issue for me was doing the calculations by hand was a major pain and none of our clients were going to pay extra for adding this required form. I did a few by hand and spent an extra hour each time doing the calculations.

Don saw a need to automate this process. He spent a couple of weeks building the first of his Excel workbooks, the 1004MC Calculator, and released it free. Filling out this odious form went from an hour of work to 5 minutes. First version was for my local MLS system and we loved it. As word spread, Don received requests to customize it for other MLS systems across the country. He has 42 different versions on his website.

Don included a couple of sale charts in the workbook to help those who didn’t know how to run a trendline. He built other tools including a scheduler, lot adjustment calculator, PSF adjustment calculator, plus additional market analysis tools. After several years of offering his tools for free, he finally came up with the 1004MC version 5C that packaged a lot of calculators into one workbook for a modest $50.

Word spread last month that Don had retired and was planning to move to the northern Arizona desert with his lovely wife to devote time to astronomy and finding more comets. He’s found 11 so far and is the most successful living visual comet discoverer in the world. Find out more about Don’s astronomy activities on his personal website, http://donmachholz.com/.

I’m so happy for Don and thankful for his generosity. Unsurprisingly to everyone who knows Don, all of the tools he developed are now free on his appraisal website, https://donsappraisals.com/.

Thanks Don for all you have done for our profession.

Below are photos from his retirement party at Moonraker Brewing in Auburn, CA.

Moving from Excel to R-What Software Do I Need?

Everyone knows what Microsoft Excel is, right? Either you have a copy that came with your PC or you’re on the Office 365 subscription model at $69/year for a personal copy $99/year for 5 users (my subscription of choice). Money flows into Microsoft coffers, satisfying shareholders and most of the greater Seattle area given Microsoft’s reach. Make more Seattleites happy by ordering your copy through Amazon!

R is very different (free). It is open source software available under a public license and is maintained by a group of volunteers (free). Get your free copy here.

R on its own is usable. However, it was designed from the ground up to allow for additions to make it more useful.

RStudio, an open source integrated development environment for R, makes using R much easier for folks like me who are not full-time programmers (also free). RStudio sits on top of R and extends usability significantly. RStudio offers the same basic terminal R does but also gives you additional really useful windows and information. I’ll discuss RStudio in the future but if you can’t wait, here’s a link with more information about RStudio.

Here’s an article: 9 Reasons to use RStudio. Or Top 6 Reasons you need to be using RStudio. Get your free copy of RStudio here.

You can extend the usability of R by adding packages. Packages are bundles of R code with explanation and data examples. Data Camp has beginner’s guide for R Packages here. Managing packages is one of RStudio’s strengths, making it easy to install packages. These are free too.

ggplot is a package for creating graphics and should be the first package you download. Two more packages of interest to appraisers just getting into R are tidyverse, a collection of R packages for data science, and rmarkdown, a package for adding R output to documents. You can learn more about all three here.

To summarize, download for free R, RStudio, and the ggplot2, tidyverse, and rmarkdown packages. I’ll talk more about packages in the future as I explore R’s functionality.

Download Pages and Instructions

 

Teaching in Washington State in March

Time is your friend

Edit: Just found out the Washington class is sold out. Thanks Dave.

I can now confirm that I’m going to teach two classes in Marysville, Washington on Friday, March 30. The first is a two hour Introduction to Excel for Appraisers, a brief review of Excel basics (Excel structure, navigation, simple commands). The second is my four hour Time Adjustments for Residential Appraisers class. This class focuses on sale price and PSF trendline analysis for determining market direction and comparable time adjustments. We also discuss trending for neighborhood markets plus what to do with few sales/scarce data. Both classes are through Dave Towne’s Appraiser Education Service.

If you’re in Northern California, I’m teaching the Time Adjustments for Appraisers class for REAA North Bay on May 17 and June 18 for REAA East Bay.

Moving from Excel to R-What Do I Need To Replicate in R?

This is the second post in a series describing my journey to move my residential appraisal business workflow from Microsoft Excel to R. Last time out, I made the case for why I’m making the change. This post will be a catalog of the ways I use Excel today to serve as a guide for where I need to go.

I use Excel a lot. Each appraisal I work on, I start a separate Excel file. Us appraisers are required to retain for each report a work file that supports our conclusions and allows for someone else auditing us to understand what we did.

Here’s what I do with Excel today:

  • Store my Neighborhood Market Data downloaded from MLS. I grab all sales in a competitive market area for at least five years back, sometimes ten years. This goes into a Market worksheet.
  • Store my Competitive Market Data downloaded from MLS. I grab all potential competitive comparable sales and listings going back at least 12 months but frequently further. This goes into a Comparables worksheet.
  • Create Neighborhood Price Per Square Foot and/or Sale Price trendlines from the Market data. If I have questions about trends, I’ll also look at changes in floor area over time. I create Charts for each data run. I then spend time formatting and labeling so I can include the charts in my reports.
  • Create Pivot Table summaries of the Neighborhood Market Data. My normal summary table includes all sales summarized by month in a neighborhood with homes sold, mean Days on Market, Low Price, High Price, Mean Sale Price, and Mean PSF. I use a template and replace my old market data with the new data, then refresh, so right now this is really fast in Excel. However, I can’t do Median summaries in Pivot Tables easily, an issue that I expect to be able to handle in R. For most of my reports, I include this pivot table summary.
  • I use the pivot table summaries to create a column chart showing 12 month change in mean PSF and/or mean sale price as another tool to understand and report changes in my neighborhoods. This is especially important in seasonal markets like Davis, California, where home selling revolves around the university schedule. I’ll include this chart in every Davis appraisal and in other appraisals where necessary to explain market trends.
  • I occasionally create histograms to show the shape of a market with regard to one variable (sale price and floor area primarily-great for showing where the subject lies in relation to the rest of the market). I’ve seen an example how easy it is to create a histogram in R. I have high expectations that R will be an improvement over Excel for histograms.
  • Create PSF and Sale Price scatter graphs of competitive sales. I use the trendline coefficients to determine daily price adjustments for market change. I’ll also look at floor area over time to see if my comparables are changing over time or not to help understand what my market is really doing. I include the scatter graphs in my reports so clients and intended users can understand the subject’s sub-market.
  • I use pivot tables linked to my comparable sales data for contrasting one variable. For example, I’ll use pivot tables to examine the difference between homes sold with pools and without pools, a significant factor in the Sacramento Valley. I’ll create a table that shows how many comparables sold with pools vs. without pools, the difference in mean sale price, the difference in mean PSF, and to understand my data, mean floor area and mean year built to see if I’m dealing with an apples-to-apples vs. apples-to-oranges comparison. If the homes with pools are relatively similar in size and age as the ones without pools, my adjustment is more likely to be strictly the pool. If homes with pools tend to be bigger than without, I have to consider covariance as part of the explanation for the differences noted. (Covariance is a significant issue in residential real estate markets)
  • I have a Calculators page that I use for random modeling and calculations I need to do by hand. The most significant calculators I have here that I’ll need to move to R are one I use to do the math to figure out the time adjustments for comparables plus others for modeling lot size adjustments. These should be painless to move over to R.

This is the bulk of what I do with Excel today. As I start to shift this workflow over to R, I plan to go into more detail about the special or not so special challenges I encounter. I also have high expectations that R will inspire me to come up with new ways of analyzing and presenting my data.

Reminder for appraiser readers in particular: R is a tool. Excel is a tool. Most of what I plan to discuss in this series is about changing tools. Occasionally, I’ll talk about modeling decisions (like covariance above). However, all of what I’m doing is rooted in the Stats, Graphs, and Data Sciences classes I’ve taken. You need to understand the theory so you can make informed decisions about your modeling choices.

Take classes from George, he’s very willing to help. https://georgedell.com/

Why I’m Switching to R

I’ve come to rely heavily on Microsoft Excel over the years to do my work as a residential appraiser. So much so that I teach classes to other appraisers on how to use Excel in their work. However, after taking George Dell’s first R for Appraisers class recently, I’ve decided to completely revise my workflow and replace what I do in Excel as much as possible with R.

What’s R? might be your first question. R is a free data analytics software package used widely for data analysis. Most university economics programs teach with R these days. Here’s the official description (link). You can download a free copy here.

However, if you’re going to use R, you need to use RStudio, the free integrated development environment for R. It provides a way of seeing more and doing more with the basic R programming language and really extends what you can do with R. Free copy and more information here.

Why would someone who has invested heavily in developing skills in Excel move to a brand new software package? Here are my reasons:

  • Data Analytics vs. Spreadsheets Data Retention-R is software designed for data analytics from the ground up. That’s what appraisers do, relatively specialized data analytics. Spreadsheets were designed to replace paper ledgers. You can scribble all over a sheet. If you’re not careful, you’re very likely to write on your numbers and make a mess. This is a problem if you’re trying to preserve your data in the future, say if you need to maintain workfiles like appraisers are legally required to do. R solves this data retention issue.
  • Reusable Processes-R is designed from the ground up to be reusable. Drop your data in and get your results. I’ve done a lot to get Excel to work that way for me but I still do a ton of manual processes each time I work on an appraisal. Once I know what I’m doing in R, I’ll have a lot fewer manual processes to deal with. It will be easy for someone else to audit my analysis for appraising.
  • Superior Analysis-I use pivot tables a lot in Excel. In fact, I teach a class on using pivot tables for appraisers. The big drawback with Excel pivot tables is that I can’t include median values as part of my summaries without a lot of work (coding or buying someone else’s product). This is not an issue in R.
  • Personal Growth-R gives me an opportunity to learn new ways to analyze data, the underlying job function that has given me the most satisfaction throughout my career. I’m excited to learn new ways to do my job better and I expect big changes once I’ve completed the move to R. Also, if this appraising gig doesn’t work out, with R I’ll have a job skill in demand in other industries.

I plan to document my migration from Excel to R here. I’ll share resources I find useful and will discuss issues I run into. I also plan to describe the benefits and drawbacks. This is mainly for me, and maybe Abdur Abdul-Malik and Bruce Hahn, the other appraisers I know making the same journey. And maybe I can help George Dell come up with ideas on how to spread the word to the rest of the industry. Thanks again George for the inspiration.