Have you heard about iBuyers? This is a relatively new business model in residential real estate where companies offer to buy your home for cash with a very short turnaround. These companies, such as Opendoor and Offerpad, make a preliminary offer, do a property inspection to determine needed repairs, and quickly offer a price for the home. The iBuyer then prepares the home for market, cleaning and making any necessary repairs, and lists the home for sale. Zillow, Redfin, and national real estate brokerages are starting to offer this model, too. Here’s a quick primer from Housing Wire that explores variations on this basic model.
Some clear advantages to the seller include fast turnaround and simplicity. Accept an offer, receive your cash, bid on the house of your dreams. This is a compelling story in our short attention span society. But what is the cost?
The iBuyer model works only if there is sufficient profit between buying the home and selling it. This creates an obvious incentive for the iBuyer-make the lowest offer to buy and sell the home at the highest price possible. What supposedly separates the iBuyer from the traditional flipper is advanced analytics to determine the market value of a home. The iBuyer model relies on a seller not knowing the market value of their home and/or a seller willing to accept a below market price. Sellers are trading money for speed and convenience.
There’s variation in the data. Some transactions were closer to market value, some were further. The key to making an informed decision is to understand what current market value is for your home before you accept an offer.
Before entertaining an offer from an iBuyer, learn the market value of your home from a local, independent appraiser.
Once again, the fine state of North Dakota has requested regulatory relief from mandatory federal appraisal requirements. Current law requires lenders to obtain independent appraisals when loan limits are above certain levels for federally related transactions. This law, passed in the aftermath of the savings and loan crisis in the 1980s, supports prudent risk management for a lending industry that has shown time and again an inability to manage itself.
This time, Governor Doug Burgum has requested a five year exemption on the argument that appraisers are hard to find in North Dakota. His argument for the waiver is that there is a shortage of appraisers in North Dakota. But is that really true?
I decided to test this. I downloaded a list of all active appraisers in the US from the Appraisal Subcommittee website and compared the number of active appraisers in each state to that state’s population. If North Dakota has a shortage of active appraisers, the population to appraiser ratio would be higher than in California, my state, where there is an oversupply in Southern California, right? I prepared the two graphs below to answer this for 1) residential clients (residential appraisals can be completed by any licensed appraiser); and 2) commercial lending clients (certified general appraisers only). So where does North Dakota fit in?
As of yesterday, North Dakota had 2545 people per appraiser. California, in contrast, has 4,194 people per appraiser. The US overall has 3,490 people per appraiser. North Dakota is in the top 15 for coverage for all appraisers.
North Dakota has even better coverage for commercial with 4,069 people per active certified general appraiser (US Coverage: 8,371 people per appraiser). It is top 5 for coverage in the US.
Do 35 states have a shortage of residential appraisers? Not that I’ve heard. Do 45 states have a shortage of commercial appraisers? No other state is asking for relief.
So why does North Dakota want undermine prudent financial safeguards?
I hope everyone who reads this will comment on the Federal Registry. Use this link. Comments close on 7/1/19.
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.
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.
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)
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?