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At least read this part of the appraisal

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I know, nobody actually reads appraisal reports. Well, except for one thing – the value. But let’s talk about a critical place to look in an appraisal that can make all the difference. I have a story to share too about why this even matters.

BONUS: Check out the new new sales volume graphs below.

Look for these boxes: The bottom of page two in the appraisal has a few important boxes the appraiser can check, and these boxes help show if the value is “as is” or if there are required repairs, inspections, or other conditions. My advice? Be sure to look at these boxes carefully as well as any commentary listed in the space below (or the addendum if it says “See Addendum”).

If the value is “as is”, the appraiser is saying the property is worth that amount without any required repairs or further inspections needed.

If a “subject to” box is checked that likely means the value has already taken into consideration certain repairs or that the property will pass a future inspection (maybe a pest inspection, foundation inspection, two-year roof certification, etc…). So if an owner does the repairs listed, it doesn’t increase the value because the value was already based on the repairs being made.

In short, if you see a box checked besides “as is”, that’s a clue there is more to understand about the value.

An example of why this matters: A real estate agent uploaded an appraisal I did into MLS. This appraisal was completed for a lawyer and the value was not “as is”. In fact, this property had extensive damage, but the attorney asked me to value the property as if it was in average condition. This was spelled out blatantly in my report by using the boxes above (and in other places).

The problem here is the selling agent may not have realized the appraisal was not “as is” because the listing said something like, “Appraised at $670,000 in August 2018.” Yet the property was listed for $100,000 less because it was being sold “as is.” So the question becomes, could this be a liability for the agent? What if an out-of-town buyer bought based on thinking he/she was getting a discount because of the attached appraisal? Also, does this expose the appraiser to liability or reputation damage if people are reading the report and not understanding the value isn’t “as is”? I’m not a lawyer, but something doesn’t quite smell right here.

I’m not trying to make a big deal out of this, but sometimes details matter, so I caution real estate friends to look closely at the appraisal to understand the value. By the way, the agent was cool about removing the appraisal when I reached out about this.

The Big Point: Please read the bottom of page two to understand if the value is “as is” or if there are repairs built into the value. That can make all the difference.

I hope this was interesting or helpful.

SALES VOLUME SLUMPING: On a different note, here are some graphs I made yesterday to tell the story of sales volume slumping 11% in the Sacramento Region. I included a graph from 2005 also in case you’re wondering what volume did when the housing market imploded.

Questions: Any stories to share? Do you look at the boxes I mentioned above? When is it okay and not okay to upload appraisals in MLS?

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Get rid of appraisers while nobody’s looking

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Did you hear the news? There’s a proposal from the FDIC, Federal Reserve, and others to not require appraisals for some mortgages under $400,000. This is a big deal and I have some thoughts. Actually, Ken Harney in the Chicago Tribune penned a fantastic piece about this today (I was quoted too).

Dude, this will save us money: The idea is to do away with traditional appraisals so consumers can save money and the loan process can speed up. Here’s the thing though. Regarding cost, the appraisal is one of the least expensive elements in a transaction. Of course to be fair the Borrower might pay a much higher fee for the appraisal because of what Appraisal Management Companies (AMCs) charge the consumer. Regarding turn-times, if an appraisal was ordered right away that would speed things up. It also doesn’t help if an AMC offers an absurdly low fee and shops around for an appraiser willing to work for that amount.

A 60% change in a slowing market: It’s troubling to hear a proposal to increase the appraisal threshold from $250,000 to $400,000. This 60% change hurts appraisers, but let’s be real about who it is helping. This is a ploy for banks and big corporations to make money by controlling the valuation process. This rule of course doesn’t necessarily mean appraisals won’t be required in all situations, but the danger is it paves the way. More than anything though this looks like a move in the agenda to usher in an era of “evaluations” (see below).

Systems of checks and balances: Consumers are certainly not being protected here. Why are we diminishing the role of the appraiser, one of the systems of checks and balances for our financial markets? What could possibly go wrong? This seems like very convenient timing for banks too because it helps position them to operate with looser standards as the market is softening.

The people behind the rules: We have nearly 95,000 appraiser credentials across the country, so changing the rules can put lots of people out of business.

Evaluations instead of appraisals: There’s been a big push to introduce “evaluations” in lieu of appraisals. As Ken Harney writes, “Instead of a formal appraisal, these homes would receive an “evaluation” by individuals who have no appraisal licenses or certification and would not be subject to current state regulatory oversight requirements that govern appraisers. The evaluators could be an “independent bank employee” or unnamed “third part(ies).” They would, however, have to be “competent” and possess “knowledge of the market, location and type of real property being valued.”” I’m guessing these “evaluators” will be real estate agents who do BPOs, employees at banks and data firms, and probably some appraisers who need the work at $75-$100 a pop.

Hybrid appraisals: Speaking of changing the appraisal process, it’s worth mentioning there is a hybrid evaluation product where someone else does the inspection part while the appraiser does the value part. I’m not certain if all evaluations would work this way, but here’s the gist. An individual would measure the property, take photos, make notes, and then send everything to the appraiser to do the value part. I really don’t like this idea because it treats value like it’s only crunching numbers at a desk instead of seeing the fuller picture of a property. I want to see the home, walk the parcel, smell the property, observe the street, understand the layout, etc…. instead of relying on someone else’s photos and notes – especially if that person is inexperienced.

But less appraisers is good news: I realize some might be excited to have less appraisers. I get it. But here’s some honest questions. If you work in real estate or you’re purchasing or refinancing a home, what’s going to happen when less experience is infused into the valuation space? Do you think that’s going to help protect consumers? If you’re frustrated now, what are you going to be feeling in the future? Does it bother you the banks are changing the rules to their benefit?

ACTION STEP: If it’s within your power to say something, please speak up right away. Maybe ask your local and state associations to make a statement and put pressure on the FDIC, Federal Reserve, and Trump administration. Thank you for your consideration.

SIGN THE PETITION: There is now a petition, so please sign here to make your voice heard.

I hope that was interesting or helpful.

Questions: What do think of this? Is this a good move? What are any positives and negatives you see? I’d love to hear your take.

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When there’s no other manufactured homes in the neighborhood

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What do you do if you’re trying to value a manufactured home and there aren’t any comps in the market? I’ve been asked this a few times lately, so I wanted to pitch in some thoughts.

PUZZLE APPROACH: There isn’t one easy way to approach this, so when appraising something challenging I tend to look at a property like a puzzle where my goal is to find clues into value by considering a number of factors.

THINGS TO CONSIDER:

1) Older sales: There might not be any recent sales over the past 3-6 months, but what about older sales? There’s nothing wrong with looking at sales over the past few years and then figuring out how much the market has changed since those properties sold. This is exactly what I did when appraising a manufactured home in Carmichael recently. There were no recent sales and the most relevent one I could find was from 2016. I used that sale and simply adjusted for the market increasing in value over time.

2) Competitive markets: If sales are sparse in the neighborhood or city, why not look to competitive markets? When appraising in Carmichael I looked to Fair Oaks, Orangevale, and Citrus Heights. Of course I didn’t blindly choose sales. No, I had to be thoughtful about comp selection by making sure the other areas really were selling at a similar level. After all, there are portions of the other locations that could easily sell for more or less than portions of Carmichael.

Beyond one mile? Remember, it’s okay to use “comps” outside of a one-mile radius, but it’s suspect to cherry-pick higher sales further away when there are better (and lower) ones nearby. Here’s a good saying. It’s not how far you can go for comps, but where you should go.

3) If it was stick built: In my experience manufactured homes usually sell for less than stick-built homes. Duh, thanks Captain Obvious. But for the sake of being objective I’m leery about saying stuff like, “It’s going to sell for less than a stick-built home every time”. Anyway, my point is I can ask what the subject might sell for if it was a stick-built home in the neighborhood. Then at least I have a figure in mind as to what the highest possible price might be for the subject.

4) Subject sale: Has the subject sold in the past? If it was a reasonable sale at the time, it might give clues into value. What other locations were competitive at the time? Did it seem to sell toward the higher or lower end of the competitive market? Did it sell for more or less than other stick built homes?

5) Manufactured vs stick built: What’s the price difference between manufactured and stick built homes? That’s a good question. It’s not easy to answer if we don’t have sales in the market, so this is where we might look to a nearby market with more manufactured homes (not ones found in mobile home parks). When comparing manufactured vs stick-built homes, what sort of percentage price difference do we see? I’m not saying we should just take a percentage like this and apply it to stick-built “comps” in the subject neighborhood, but there could be some data here we might end up using. Remember, this is a piece of the puzzle or clue into value rather than the entire solution to value.

6) Ask for advice on finding sales in MLS: One of the challenges with manufactured homes is knowing how to find them in MLS. I suggest starting a map search as I show below. You might also do a single family home search and type in “manufactured” in the property description to see if anything comes up. Ultimately it might be worth it to ask a few colleagues how they find stuff in MLS.

7) Bottom & Top: Sometimes when dealing with a challenging property we have to ask ourselves where the top and bottom of the price market is in the neighborhood. At the least this gives us some context for where the value of the subject property might fit. In Carmichael I looked to the market and saw the lowest sales were closer to $300,000 and the highest competitive sales were just above $400,000. I realize this is a huge range, but at the least this gives me something to work with. Also, if my value is coming in below the bottom of a reasonable range, that’s a prod for me to keep digging for better comps and data (unless there’s a reason why the value should be lower).

8) Land value: Let’s not forget about land value. It’s worth asking what the site would sell for if it was vacant. This isn’t the main approach to value, but it’s a piece of the puzzle. The problem is if I’m relying heavily on one manufactured home comp in the market, but land value alone is more than that comp sold for, then maybe that one “comp” sold for too little.

CLOSING THOUGHTS: It really is like a puzzle when valuing something without the benefit of recent similar sales. My advice? Try to piece together many details like the ones above to help collectively paint a picture of value.

I hope that was helpful.

Photo credit: Thank you Realtor Sandy Muzinich for letting me use photos.

NEW VIDEO MARKET UPDATE: A couple of days ago I made a video to talk through the latest stats. It’s 10+ minutes and I talk through prices, inventory and sales volume. Enjoy if you wish.

Questions: What point stands out to you the most? Anything else to add? I’d love to hear your take.

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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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