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A market full of real estate prophets

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Have you heard the prophets lately? The market is flooded with real estate predictions, and there are a ton of people telling us what the future will look like. So naturally I figured we should have a way to test whether these voices are legit or not. Enter the flow chart below.

Okay, I created this because it tickles my funny bone. But there’s some truth in here too maybe, right? Obviously we’re all thinking about the direction of the market, and that’s exactly what we should be doing. But let’s also carefully consider the credibility of messengers out there too.

A few serious points:

1) Predictions: One of the dangers of predictions is you can end up losing credibility when/if your “prophecies” don’t come true. For years I’ve watched people prophecy the demise of the market and then move their predictions ahead when they didn’t happen.

2) Local data: Watch local data closely and study the market to know the signs of a seasonal slowing vs a tanking market.

3) Living in the tension: I stray away from big market predictions because my crystal ball is broken and I’m humble about my ability to predict the future. This doesn’t mean I’m naive to red flags or unwilling to discuss issues that could affect the future market. No. It only means I’m realistic about studying trends for hours each month and then living in the tension of not knowing the future.

By the way, download a larger version of the image above here. 

I hope that was helpful.

Class I’m teaching: On September 17th I’m teaching my favorite class called “How to think like an appraiser“. I’d love to see you there.

Questions: What do you think of the chart? Anything else I should’ve added?

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How much does a previous purchase matter to appraisers?

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How much does a previous purchase matter? Do appraisers give strong weight to the purchase price? Or do they completely ignore it? This is an important conversation, especially in the midst of so much talk about the market changing.

1) Meaningless: Sometimes a previous purchase is meaningless. That’s not always happy news, but if a property sold for too little or too much, it just might not mean much to us today. As an example, it doesn’t make sense to give any real value weight to a short sale that closed way too low or an inflated purchase that was clearly disconnected from the market and not supported by data.

2) Strong weight: If a property sold recently and it was a reasonable price, appraisers might actually give strong weight to the sale. If you didn’t know, appraisers are actually allowed to use a previous sale of the subject property as a “comp” in an appraisal report too (usually Comp #4). That might seem strange to do, but then again what is more comparable than the subject property itself? Of course let’s be careful about understanding exactly how the market and property have changed since the sale though.

3) Someone overpaid: One thing we have to consider before giving too much weight to a previous sale is whether it was a reasonable representation of value or not at the time. It can be dangerous to blindly accept a sale without understanding the full story of why it sold at the level it did. On that note, my observation is at times cash buyers fall prey to overpaying on the higher end of the market where comps are a little more sparse and it’s not always easy to see value. Here’s an example I just tweeted about this morning:

4) Seeing the context: Sometimes a previous purchase is an incredible way to understand how a property fits into the market. In the graph below I have three previous sales in the Stollwood area of Carmichael, and each time the subject property competed at about the same price position. That’s powerful, right? So in this case I would likely give strong weight to the previous sales because they help me understand value.

FYI: Here is a tutorial if you want to learn how to make a graph like this.

Quick closing thoughts:

1) The temptation: It’s easy to get stuck on a previous purchase price and not see the current market because we think, “It has to be worth at least X amount because it sold for Y amount in the past.” Be careful of that. We have to be objective by giving the most weight to the current market.

BIG POINT: As some wonder if the market will make a big turn at some point, this conversation could be very relevant if that did happen.

2) Ch-ch-ch-change: The market could have changed since the subject sold previously. Values could have increased or softened. The subject could have been in better or worse condition too.

3) Different trends: Sometimes I hear things like, “It sold in 2016 and the market has increased 15% since then, so it must be worth 15% more now.” The problem is market trends aren’t the same at every price level. Maybe the lowest prices in town have seen increases like that, but price changes could be more subtle at higher levels. So let’s be cautious not to project a more aggressive trend from a lower range on a higher one.

4) Distressed: I find looking to older sales from the foreclosure days isn’t all that helpful because the market was not normal then and properties were selling all over the place. I usually recommend researching previous sales, but when they’re from the distressed days we often have to take them with a grain of salt. The same thing is true for stuff that sold in 2005 at inflated prices.

5) Boldness: Appraisers and agents sometimes have to tell clients why value is actually lower than a prior purchase. That’s not always easy to hear, but we have to be bold and let the numbers speak rather than putting weight on a previous sale that might not reflect the market today.

I hope this was interesting or helpful.

Questions: Which point stands out to you the most? Any stories to share or other points? I’d love to hear your take

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When sellers expect buyers to pay for solar

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Sellers often expect buyers to pay the full cost of a solar system. So they say, “I spent $30,000 on this system, so let’s price it $30,000 higher.” I get the sentiment, but is it reasonable? Let’s talk about it.

This isn’t a “how to value” solar post, but a conversation focused on some logical points that might help sellers see why buyers often don’t pay the full cost of an owned solar system in the resale market.

1) Location: I don’t doubt the value of solar, but I do doubt the market always recognizes the full cost of solar in the resale market. If a solar salesman says the value is always the same as the cost of the system, that sounds like a great sales pitch. Is it real though? Does it work in Alabama, Missouri, and Antarctica? Is it the same for a $75,000 house compared to $850,000? Probably not.

2) Dollar for dollar: It’s always the dream in real estate to get buyers to pay dollar for dollar for any home improvement done by sellers, but that’s not so easy to pull off. Even if you look at Remodeling Magazine’s 2018 Cost vs. Value Report, hardly any items on the list give close to a 100% return compared to the cost. Of course solar is different because it saves money, but there still might be a principle here worth considering.

3) Age of the system: Imagine a solar system that is built to last 20 years, and it’s now 5 years old. An owner says, “I know the system isn’t new, but I paid $40,000 for it, so a buyer should pay $40,000 too.” That’s a nice thought, but the system is 25% used up already, so why would a buyer pay the full cost of a brand new system? It would be like saying, “I realize my car is 5 years old, but I want you to pay the sticker price from the dealer because that’s what I paid.”

4) Rebates: Were there any rebates when the owner purchased the solar system? For instance, if there was a $5,000 rebate for a $25,000 system, that means the real cost of the system was $20,000. This is important because why would a buyer pay $25,000 if the seller technically paid $20,000? Moreover, newer systems are bound to be more efficient and maybe even less expensive, so why pay full cost for an older system?

5) Savings: Imagine an owner saves $150 per month on her energy bill for a solar system that cost $25,000. In this situation at $150 per month it would take 14 years to save the full $25,000. Would buyers pay upfront for 14 years worth of savings to keep $150 per month in their pocket? Are buyers even going to be in the property that long? Let’s remember the benefit of solar is realized over the course of two decades, so paying for all of that benefit in one instance may not reflect what most buyers are willing to do. 

6) HUD solar programs: A home owner told a Realtor friend that HUD allows appraisers to add the cost of a solar system into the value. That sounds like an awesome idea, but it isn’t true. Appraisers don’t have a mandate from HUD or Fannie Mae to handle solar by adding the cost of the system to the value. What is true though is FHA allows owners and buyers to add solar on a purchase or refinance and get a loan (in some cases) for the full cost of the energy improvements. See page 453-454 in the HUD manual.

The puzzle of solar: This isn’t a post to explain how to value solar, but I hope some of the points above might bring perspective. In short, valuing solar is like a puzzle. We have to look to many pieces for the answer, so we’ll check out comps, consider the cost and age of the system, be in tune with how much money is saved each month, etc… If you think it would be useful, I can do a follow-up Q&A post about valuing solar (let me know).

I hope that was helpful.

Class I’m teaching: On September 17 I’m teaching my favorite class called “How to think like an appraiser“. I’d love to see you there.

Questions: What do you think of the points? Anything to add? What advice would you give to sellers expecting buyers to pay the full cost of solar?

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Things to know about appraisals after a disastrous fire

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It’s been an utterly devastating fire season in California, so I wanted to talk about what happens on the appraisal side of things after such a disaster. This isn’t something that people ever think about until they have to, but now is one of those times. I figured this would help home owners with questions and it would help give real estate professionals a resource to dig deeper.

Today I’m interviewing Penny Woods, an appraiser colleague based out of Pleasanton CA with 30 years of experience (see bio below). Penny knows her stuff and she has vast experience with post-disaster appraisals.

Ryan: Tell us about your experience with post-disaster appraisals.

Penny: In October 1991 the Oakland firestorm totally destroyed 2,800+ single family homes and an additional 400+ townhomes. I worked for an appraisal fee office that had a major insurance company as a client with over 500 total loss properties. For the next 7+ months one other appraiser and I did nothing but retrospective fair market valuations for structures that were completely destroyed. At that time, insurance policies were written and paid out on “Market Value”, but this fire changed that. Now they are written and pay out based on “Replacement Cost”.

 

Ryan: When is an appraisal ordered after a disaster?

Penny: Appraisals after a disaster can be ordered at different times for different reasons. When it is safe to return to the fire damaged property the insurance company will start the process to get their replacement cost (Cost Approach) valuation. Additional appraisals may be needed by the property owner following the insurance company’s initial replacement cost valuation for: property tax assessment reductions, to challenge/rebut the insurance valuation, IRS causality loss tax claims, or for other types of civil litigation.

Ryan: How does an appraiser value a home if it is no longer there?

Penny: As with any retrospective valuation, some of the research is exactly what the appraiser would do for any assignment and some of it is very different. Data sources include: public tax records; planning department plans and permits; old MLS listings; the lender may be willing to provide an old appraisal, the data collected by the insurance company, an in-depth talk with the property owner; and don’t forget family photos! Yes family photos are usually still available at the homes of grandparents, aunts & uncles, and family friends. You’d be amazed how much information is available in a photo from Johnny’s birthday party or a holiday dinner.

Ryan: What date of value is used during the appraisal?

Penny: The initial appraisal is a retrospective valuation, which means the value is usually for the day immediately before the fire loss. Any subsequent appraisals may use the same retrospective date or post fire dates depending on the use/purpose of the valuation. An appraisal for a property tax reassessment would use a date after the property had been damaged. This could be the day after the fire or a more current date depending on the assessment dates. To challenge/rebut the insurance company’s valuation would require the same retrospective valuation date used by the insurance company. If the property owner needed to provide information to the IRS for a casualty loss claim there would be 2 valuations, “immediately before” and “immediately after”. The IRS “immediately before” value is the retrospective before the fire and the “immediately after” date can mean up to 2 years from the date of the loss to allow for time for the general clean up and/or recovery. If there was additional civil litigation the date or dates would be specific to the cause of action.

Ryan: What type of information does the owner need to provide to the appraiser?

Penny: As much as possible!!! Appraisers, for you to be able to complete a credible appraisal you need to have as much information from the property owners as they can provide. This could be a difficult process because you will be working with people who are in a very emotional situation. Be patient, and professional. Understand that if you are doing a lot of this type of work it may also become a very emotional and/or stressful situation for you too.

Ryan: Does the appraiser focus on the value of the structure or the land too? In other words, what is the insurance company really asking for?

Penny: The insurance company is looking for the value of the onsite structures that have been destroyed. The land is still there and not insured so the insurance company only wants the value of the structures. With the other types of valuation assignments we have been discussing it is a case by case situation, some will need separate land valuations and some won’t.

Ryan: What did you see happen to the market in Oakland during the big fire in the 90s? Did it collapse, stall, decline, etc…?

Penny: The Oakland fire occurred in October of 1991. This was a time throughout the country where the economy was in a decline. In the Bay Area the decline could be tracked from the Loma Prieta earthquake in October 1989 and continued through the mid 1990’s. It is difficult to say how much of the decline that occurred in the Oakland and Berkeley Hills was directly related to the fire and how much was the overall declining market trends. There was also a unique situation where the majority of the properties that before the fire had nice wooded views or little “peeks” of the San Francisco Bay suddenly had partial to full bay views! That alone increased the value of these properties. It was a slow process to rebuild, a total of 700 permits for new construction had been issued 1 year later and none of them had actually started to build. Again some of that could certainly be attributed to the overall economy. I believe that each market will react differently depending on the extent of devastation and the specific economy of the surrounding area. 

Ryan: Any advice you’d give to owners who just lost a home?  

Penny: While your life is certainly disrupted beyond most of our imaginations, don’t rush! Be sure you know what all of your options are before taking any major steps. Consult professionals in each of the fields where you have questions and need information and help.

 

Ryan: Any advice for appraisers too?

Penny: These disasters could be a large source of potential business. You must first remember that you are benefiting from other people’s major losses, so always be as professional as possible! Not every appraiser has the temperament to take on this type of work, but it can also be very rewarding helping the fire survivors rebuild their lives even if it doesn’t involve a move to a different location.

Ryan: Thanks so much for doing the interview. You killed it. Everyone, if you need an appraiser in Penny’s area, please reach out to her.

Penny’s Bio: B. Penny Woods, owner of BPW Appraisal & Realty Service based in Pleasanton, CA, has been working as an appraiser for the past 30 years, coming from a background of property management and real estate sales. She got her start in appraising by working for a fee appraisal firm; obtaining appraisal experience with both residential and small commercial properties. In 1994 she started her own firm and now does only residential appraisal work. Penny specializes in the unique and unusual properties, completing assignments for lender financing, probate, divorce, estate planning, litigation & expert witness testimony, earth movement, fire damage, and insurance claims. Penny’s phone #: 925-485-0641

I hope this was helpful and interesting.

Questions: Do you have any questions? Any stories to share? How have you seen the market change after a fire or disaster? I’d love to hear your take.

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