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choosing comps

Does it help appraisers when agents increase the pending price in MLS?

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Does it help appraisers when agents increase the pending price in MLS for the subject property? In other words, if a house was listed at $400,000, but gets into contract at $415,000, does it help if the pending price is changed to $415,000 in MLS? This might seem like a silly topic, but I get asked this question all the time, and it seems like many believe this makes a difference for value. Here’s my opinion, and I welcome your two cents also.

Quick Answer: First off, sometimes agents think appraisers only look at the pending price, but appraisers make it a point to view the entire listing history. If you didn’t know, the Fannie Mae appraisal form actually asks appraisers to input the complete pricing history of the subject property into the appraisal. The appraisal report therefore records the original list price, any price changes, and the pending price. So it’s not like the appraiser or lender is blind to the fact the subject property was originally listed for less and is now in contract for more. In short, upping the list price for the subject property doesn’t help the appraisal come in higher or do anything for value. We have to remember the proof of value is found in the comps instead of whether the list price in MLS was increased or not for the subject property. However, on a different but related note it can be useful when appraisers are choosing comps and they see other pendings in the neighborhood getting into contract at higher levels. After all, pending sales showing higher prices might help us see the market is increasing or even help us make upward time adjustments. So while this practice of changing the list price in MLS for the subject property doesn’t do anything for value, in my mind it can be useful when looking at other pending sales in the neighborhood to see if everything is getting bid up or in contract at higher levels.

Three questions:

  1. What is the goal of this practice?
  2. If this practice is not done when the property is in contract for less, why should it be done when the property is in contract for more?
  3. If this happens in mass could it screw up data in any way?

I hope this was interesting or helpful.

Questions: What is your opinion on this practice? Is it a good idea or not? I’d love to hear your take.

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Does paying off Mello Roos early increase value?

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What happens when an owner pays off Mello Roos early? Does that mean the property can sell for more? Let’s talk about that. If you’re not in California, just know Mello Roos are taxes imposed on newly constructed communities to help pay for infrastructure like streets, schools, and parks. So over a period of usually 20 years, the owner might have an extra $1,000 or so in taxes to pay each year.

Scenario: Imagine an owner has $20,000 in Mello Roos taxes over the next 20 years and decides to pay them off right now instead of waiting. Is the house now worth $20,000 more?

Things to consider about value & paying off Mello Roos:

1) Expecting the full $20,000: When sellers do something to their property, they often expect buyers to pick up the tab of whatever the price was. This is true for kitchen remodels, landscaping, bathrooms, and even Mello Roos. In this case the seller would expect a buyer to pay $20,000, but that’s probably not realistic.

2) Logic & 20 years of payments: Buyers often stay in homes for less than 10 years, so it’s unrealistic to think most buyers are going to pay for the future savings of 20 years worth of tax payments in one instant. That’s disappointing to sellers, but doesn’t it make sense? It’s just not logical for someone to fully reimburse the seller for a bill they might not actually be paying for the next 20 years. Side note: This reminds us of solar a bit because buyers probably aren’t going to pay the full cost of the system in one instant either.

3) Comps & adjustments: A property with no Mello Roos payments is going to have a marketing edge at the least because it’s essentially less expensive to buy the house compared to others. At best there could be some value there too, though it’s going to be hard for an appraiser to support a Mello Roos adjustment because it’s not easy to find comps where sellers have paid them off. In an ideal world we’d have three model match sales without Mello Roos so we can analyze whether these homes really sold for more or not. If we don’t have sales, but it seems clear the market is willing to pay more based on the number of offers, price level of offers, feedback from agents, logic, data from other neighborhoods, etc…, we can always look at the range of value in the neighborhood for similar homes and choose to reconcile the subject at a higher tier of value. Thus it’s important to realize appraisers might not always give a specific adjustment, but they can still recognize an asset by reconciling the final value to a higher level (if there is support to do that). It would be nice if there was one quick formula we could apply to spit out a perfect adjustment here, but formulas wouldn’t work in every neighborhood, price range, or market. Like all things in real estate, we have to know how to think through issues and then look to the market for the answers.

I hope this was interesting or helpful.

Questions: Would you recommend paying off Mello Roos? Have you seen a value increase because of Mello Roos being paid off? Anything to add to the conversation?

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