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It might not be an appraiser at the inspection due to new “hybrid” appraisals

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It’s happening. It might not be an appraiser who shows up for the appraisal inspection. I’ve been talking about the potential of “hybrid” valuations like this, and now they’re here.

The gist is somebody besides the appraiser inspects the property and then gives the inspection details to the appraiser to do the “value part” (without seeing the property). Last week Chris Little, a Realtor friend, was talking to me about his first experience with a non-appraiser inspecting one of his listings, so I asked him some questions.

Ryan: What gave it away that this person wasn’t an appraiser? 

Chris: When he called and asked for an appointment to access the property he identified himself as a property inspector working on the appraisal. I asked if he had a lockbox key (every appraiser I know has one) and he said he did not. We agreed to meet at the property. At the house he gave me his card which said he was a project manager for a company in upstate New York. There was no mention of appraiser on his card.

Ryan: What did the inspector do at the house? Did he measure it?

Chris: He came in and took a bunch of photographs which he said he would upload to their portal so the appraiser could look at them. He went outside and measured the home.

Ryan: What price was this house? 

Chris: The home was listed in the low $800,000’s. The buyers sold their former home and were renting on a short term basis. They were putting down 55% of the purchase price.

Ryan: Did the inspector say he would pass along information you gave?

Chris: Yes, he asked a few questions and said he would include that in his report.

Ryan: What are your concerns about this new process?

Chris: My overarching concern is the validity of the “appraisal.” The buyer was charged less than a traditional appraisal and in my view received less. The proper valuation of a property is essential for many reasons. Inaccurate or incomplete information can effect value and that can effect a transaction, both during the transaction and later on if there is ever a question about value resulting from loss bankruptcy, foreclosure.

Ryan: Anything else to add?

Chris: In my view, this “hybrid” appraisal is meant to streamline the lending process yet puts homeowners and lenders at risk. I don’t think there is a lender out there who would use a discount Cardiologist or Oncologist if they had heart problems or cancer. Why would you underwrite a loan based on an unlicensed individual snapping pictures and taking measurements? One thing that particularly concerned me about the house in question was at almost 4,900 square feet it was more than twice as large as any other home so developing comps would take someone with real knowledge of the market to develop the appropriate value. This unusual Sacramento home doesn’t seem like a good fit for a watered-down process like this.

Ryan: Thanks so much for your time Chris. 

Now a few quick things.

MY CLOSING THOUGHTS:

1) This is a move that diminishes the role appraisers play in the housing market for the sake of so-called convenience. Banks are saying, “Don’t worry. Trust us. It’s all good…” While there is a place for big data in real estate, let’s not forget the crucial role appraisers play as a systems of checks and balances. Do we really trust banks to do the right thing?

2) Value isn’t just about size or bedroom and bathroom count. There is so much more an appraiser observes while walking through a house and talking with the agent. To be fair it seems like this would less of an issue on a cookie cutter house, but on something unique it could be a disaster waiting to happen.

3) If the inspector does not have adequate training, there could be a legitimate issue measuring the house accurately (and we know how important that is).

4) Could this become risky for the rest of the market if inflated appraisal waiver or “hybrid” sales become the new comps? 

Communication advice for Realtors: It’s going to be key to ask for a business card and be sure you know who you are talking to. My advice? Show up with my appraiser info sheet filled out so an “inspector” can hopefully pass along relevant details to the appraiser. Remember though, the appraiser is getting paid very little do this type of report (I hear $100 to $150), so the “hybrid” system is not designed to encourage appraisers to spend lots of time on the appraisal… 

I hope that was helpful or interesting.

Questions: What do you think of “hybrid” valuations? What are the positives and negatives? Any stories to share?

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6 ways buyers have changed since the housing bubble

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There’s lots of focus on how home prices have changed since the previous “bubble”, but let’s talk about how buyers have changed. Here’s some observations. What else have you noticed?

1) More picky: During the previous housing “bubble” buyers seemed so desperate to purchase that they pulled the trigger on about anything, but they’re much more discerning these days. Of course let’s remember underwriting has changed dramatically though too. In the past many properties flew through the loan process without hardly any scrutiny, but lenders today are incredibly strict, which has certainly propelled a more picky feeling in the market.

2) More patient: Despite a housing shortage buyers aren’t willing to pull the trigger on junk. They’re simply more patient for the right house and they want to make an informed purchase (and even feel like they’re getting a good deal where possible too).

3) More informed: Just as the “bubble” began to pop we had companies like Zillow and Redfin coming to the forefront. Well, now they are household names and buyers are basically obsessed. Seriously, buyers scour these sites day and night, and they know about every single new listing, price reduction, and sale. This doesn’t mean buyers don’t make value mistakes still, but it does mean they are more informed than EVER about prices. At the same time, guess who is not looking at Zillow as much? Sellers. This is a huge issue because it means sellers are not as in tune with the market these days, which means they’re prone to overprice.

4) Financial mistakes: Buyers remember the pain of financial turmoil in the past, so they’re sensitive to repeating mistakes. For instance, I talked with a buyer considering purchasing the highest-priced listing in a neighborhood, but he’s concerned we’re at the top of the market. This buyer asked, “If a buy right now and the market turns, would it be possible I’d have to hold on to the house for 10 years before values come back?”

5) Higher expectations about condition: These days buyers have higher expectations about homes being in good condition. In other words they are much more picky about properties that are not in “move-in” shape or upgraded. Wait, there aren’t granite counters? What the? There could be many reasons for this, but I think heightened investor flipping activity played a huge role. In a fairly short period of time investors had a gluttonous real estate feast by purchasing an avalanche of bank-owned homes, rehabbing them, and selling them. This helped quickly upgrade the housing stock, and also widen the price gap in some areas. What I mean is values used to be very tight together as you can see in the graph below, but now the price spectrum is simply wider since buyers are willing to pay more for rehabbed homes in today’s market. I’m not saying this dynamic is in every neighborhood, but I definitely see it in quite a few areas.

6) Less cash-out refinances: Everyone and their Mom had a boat before the “bubble” burst because people were using their house like an ATM to buy toys. Well, today we don’t have that dynamic (image from Leonard Kiefer). Home owners are clearly cashing out less, which makes them sound financially wise, but let’s realize lending guidelines have changed to make it more difficult to ATM your house. Moreover, many owners are sitting on 3% interest rates, so why the heck would they trade pulling out cash for a much higher rate?

NOTE: I updated this post with “more informed” above after Peter left a stellar comment (thanks). This is such a big point. I can’t believe I didn’t mention it while writing this, but it didn’t come to mind at the moment. The irony is I’ve been talking about this in other posts and in person so much lately. Ha. Well, it’s fixed now.

I hope that was interesting or helpful.

MARKET UPDATE VIDEO: A few days back I did a screencast to talk through trends. Lots of people are wondering if the market is tanking or softening, so I wanted to pitch in two cents. Well, the video is actually 20 minutes (there’s lots to say). Anyway, give it a view if you’d like here (or below).

SPEAKING GIGS: If you’re around, I’m doing a blogging class on October 11th at SAR. I’ll be speaking at the AI’s 2018 Fall Conference in San Francisco on October 19th and AppraiserFest in San Antonio on Nov 1-3.

Questions: What else do you think has changed about buyers since the “bubble” burst? Any stories to share? I’d love to hear your take.

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Is the public trusting Zillow too much?

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I don’t have an axe to grind. I’m not angry. And I’m not worried about Zillow replacing my job. I am concerned about the public trusting Zillow way too much though, so I wanted to share an eye-opening “Zestimate” example to help create conversation. Please give it a read and let’s talk in the comments.

Here’s the Zestimate history of a single family home in Carmichael, CA. I’ve been following this property for the past two months.

1) OVERPRICED: This home was originally overpriced in MLS at $380,000 and the Zestimate happened to be $380,414 when the home listed for sale.

2) PRICE & ZESTIMATE REDUCTION: The price was reduced to $335,000 in MLS and very soon after the Zestimate was changed to $346,364. Seeing this definitely gave me pause and made me wonder how much weight Zillow’s algorithm gives to the list price. Does it usually match the list price when a property is first listed? How much do price changes affect the Zestimate? These are reasonable questions. By the way, I shared about this house on Twitter and Inman News included it in a story.

3) ZILLOW DIDN’T GIVE MUCH WEIGHT TO THE SALES PRICE: The property sold at $350,000 eventually, but then Zillow’s estimate said the property was worth $327,960 after the property recorded at $350,000. So it looks like Zillow’s algorithm did not automatically give strong weight to the actual sales price.

4) ZESTIMATE DECLINES 8% IN 30 DAYS: Despite selling at $350,000 one month ago, Zillow now says this property is worth $301,972, which is a whopping 14% less than it actually sold for last month. Moreover, in just 30 days Zillow states the value of this home has gone from $327,960 to $301,972, which is an 8% loss in value. Did the market really decline by 8% this past month?

ZILLOW’S TRENDS ARE OUT OF SYNC: I can’t speak for every property listed on Zillow, but the Zestimate history in this case is definitely out of sync with the market in Carmichael. Values are certainly softening for the season like I talked about last week, but a decline of 8% in 30 days is simply not accurate. Look at the trend line in my graph that shows the market balancing out, and then look at the Zestimate connected by dots. That’s a huge difference in direction, right? Obviously Zillow hasn’t been inside this house, so we can give grace to an algorithm not knowing the full picture of value for an individual property, but to say the market has dropped by 8% is just inaccurate (and you don’t need to go inside a house to know that).

QUICK STUFF ON MY MIND:

1) It’s not just a “ballpark” for consumers: Despite Zillow touting itself as a “ballpark” valuation or starting point for consumers, many people treat it like a definitive value. Bottom line.

2) Blind trust: I find many consumers trust Zillow without thinking too much about accuracy. I don’t say this to be insulting, but there is a deep trust with this brand right now without many questions being asked. My advice? Think critically about examples like I showed above before you trust with all your heart.

3) Pricing according to Zillow: Many sellers are growing disconnected from the real market lately and they’re prone to overprice. Having sensational real estate headlines for six years is definitely one of the reasons why this is happening, but I think some of it comes down to consumers having more information than ever about prices and value. The struggle is when sellers feel so strongly that a Zestimate is legitimate that they aren’t willing to price below it or hear pricing suggestions from others. My advice? Listen to the market around you as well as real estate professionals. Don’t get so caught up in a Zestimate that you cannot see anything else.

4) Feeling stressed: I had a friend who used to get stressed out when his Zestimate would dip. He has since passed away, but I can only imagine how he’d feel about an 8% price decline in 30 days if that’s what Zillow said about his home. He’d be freaking out, and the truth is he wouldn’t be alone because there are lots of people who think of Zillow as way more than just a “ballpark”. In short, I recommend being careful about letting a website’s value claim affect your mood or even your real estate decisions. By the way, the New York Time’s wrote a piece last week called Why Zillow Addicts Can’t Look Away.

I hope that was interesting or helpful.

SPEAKING GIGS: By the way, if you’re around, I’ll be speaking at the Appraisal Institute’s 2018 Fall Conference in San Francisco on October 19th and AppraiserFest in San Antonio on Nov 1-3. I’m also doing a real estate blogging class locally on October 11th at SAR. Just a heads-up.

Questions: What do you think of Zillow? Is the public trusting this website and brand too much? Any stories to share?

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When marijuana grow operations are down the street

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Does it matter for value if there are a few legal marijuana grow operations in the neighborhood? That’s not really a question we asked much in the past, but it’s definitely a reality in many portions of California now since recreational marijuana was approved at the ballots last year. I know this is a polarizing topic, but legal cannabis cultivation is something we have to pay attention to now in real estate – regardless of our personal views. Today let’s look at a specific situation I encountered a few weeks ago and consider a few takeaways.

Not an advocate: Just to clarify, I am writing for the sake of analyzing real estate trends. I am not a cannabis advocate in any way and this post is not about whether marijuana is good or not for society.

If you didn’t see in the SacBee, there are now 108 locations within the City of Sacramento with a commercial cannabis permit in process. This means there are at least 108 planned legal grow operations. The largest cluster is in an industrial section off Power Inn Road, but there are quite a few in North Sacramento too.

The situation: I appraised a house on Eldridge Avenue in Sacramento a few weeks back and I discovered there are three commercial cannabis cultivation permits on file with the city one street to the south. This is a residential area, but it’s next to industrial properties.

On Kathleen Avenue there are residential homes to the north and the “green zone” to the south. In many cases commercial grow operations will be far from residential homes, but not in every case as seen below.

Three things to consider about legal cannabis cultivation:

1) Neighborhood trends: Part of knowing the market and being a real estate expert is being in tune with what is happening in the neighborhood – even in the commercial sector. If you haven’t bookmarked the SacBee cannabis map, I recommend doing that. You can also see where marijuana dispensaries are located here.

2) Disclosure: Anyone who works in real estate needs to consider what disclosure looks like when we find out about cannabis grows nearby. I won’t tell anyone what to disclose or how to do it because that’s not my role, but knowing about commercial cannabis grow operations might be a good place to start. This is especially true in a situation like the one above where one side of the street is residential and the other side is industrial. This is a conversation that each appraisal firm and brokerage ought to have as the legal cannabis industry emerges. In my appraisal report on Eldridge Ave I simply disclosed my knowledge of three cannabis cultivation permits one street south of the subject property. Remember, it is illegal to have a commercial cannabis operation in a residential home, so disclosure is probably something we’ll think about more when there are nearby industrial properties. Moreover, it is only legal to grow commercially in the City of Sacramento as most other areas including Sacramento County have said NO to legal commercial grow operations (for now).

3) Value impact: Over time we’ll have to ask if there is a value impact due to proximity of cannabis cultivation businesses. Right now this is all so new and we are only seeing the beginning of an emerging industry take root in Sacramento. Keep in mind there are very strict guidelines for these businesses, and the City of Sacramento is putting rules in place to ensure neighborhoods and areas don’t “go to pot” so to speak (pun intended). There are rules for security, safety, proximity to schools, and even odor. In many cases these businesses could operate without any visible evidence at all. Though if there does end up being a problem with odor, crime, or stigma, then that’s something we’ll have to watch and consider. On a side note, it seems many of these grow operations so far are located in areas with lower property values. To be fair there may be more industrial properties in these locations, but this is still something to watch closely.

4) Other: What is #4?

Cannabis class I’m teaching: By the way, I’m teaching a class at SAR called “The emerging trend of marijuana in real estate” on August 30. I’ll talk for 60-75 minutes about zoning, land value, disclosures, etc… More details here.

Questions: Do nearby cannabis businesses need to be disclosed? What do you think we need to look for to know if there is any impact to value? Anything else to add? I’d love to hear your take.

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