The big deal about rising rents in real estate

Values have been rising and so have rents. Across the country we’ve been hearing of rent increases in many cities (including Sacramento). Why does this matter? If you work in real estate, how do you plan to communicate this trend to clients? Let’s talk through some key points. I’d love to hear your take in the comments.

rising rents in sacramento - by greater sacramento area appraisal blog

Things to keep in mind about rising rents:

  1. Low Inventory: Rents are rising in large part due to low inventory. There has been population growth over the past decade, but very few new housing units have been built since the housing “bubble” burst. This essentially means we have a shortage of housing units. Keep in mind this isn’t an easy issue to solve since building a large number of units won’t happen overnight.
  2. Squeezed Savings for Tenants: Wage growth has been more or less stagnant in the Sacramento area at least, which means rent increases are coming directly out of a tenant’s savings account. Remember, if a tenant is saving up to buy a house, it’s going to now take longer to make that happen.
  3. Investors Holding: There are investors enjoying higher rents, and many will hold on to their properties for now instead of selling. Unless an investor is looking to diversify outside of real estate, an investor’s money is probably parked well right where it is. After all, why would an investor trade in great rentals only to buy something else at a much higher price today (and get the same rent)?
  4. Investors Selling: Not everyone is going to hold on to their properties though. There are many investors who purchased at lower prices from 2009 to 2012 especially, and it’s now time for them to cash out. Quite a few investors are actually selling directly to their tenants off MLS (agents, be there to write up the contract and help guide the process).
  5. Old Numbers: When rents rise quickly, sometimes the rents we see published online from a few quarters ago are simply old. Just like with rising values in the resale market, we have to ask whether the rental market has changed since the most recent data was published. Ultimately it’s important to look to a number of sources to get fresh numbers. Here are some suggestions: Craigslist, Hot Pads, Zilpy, Rent-O-Meter, & Zillow.
  6. Not Every Neighborhood: Like any trend, it’s easy to hear “rents are rising” and think that applies everywhere. Let’s remember some rental markets are hotter than others though. Apartment rents are said to have increased 10% last year in Sacramento and are projected to increase by another 10% this year. A similar dynamic is happening with single family units too, though NOT in every neighborhood.

I hope that was helpful.

Rental Event: By the way, I am helping put together a “Show Me The Money” event at SAR about the rental market. On May 18th from 12-1:30pm a property manager will talk through rental trends and give tips to agents for turning tenants into buyers. This is hosted by the Housing Opportunity Committee (which I chair this year).

Questions: What is point #7? Did I miss anything? What source do you use for rental data?

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Behind the scenes of how appraisals are ordered

How are appraisals ordered? How much time are appraisers actually given to finish the report? What is it like on the appraisers’ side of things? Let’s take a look at what happen before, during, and after an appraisal is ordered for a loan. Knowing how things work can foster informed conversations and help everyone plan for an effective escrow too. I hope this helps.

how appraisals are ordered - by sacramento appraisal blog - image purchased and used with permission from 123rf

My Interview on CBS: By the way, last week I was interviewed by CBS to talk about housing trends. Click here to see the video or scroll to the bottom of this post.

NOTE: The info below is relevant only for how appraisals are ordered in the lending world. Private appraisals do not require use of an AMC.

Before the Appraisal Order:

  • Appraisers typically have to be on an approved list for an Appraisal Management Company (AMC) to be sent appraisal orders. Appraisers apply to be on such a list, submit a resume, a few work samples, etc… In case you don’t know what an AMC is, according to NAR, an Appraisal Management Company (AMC) works with lenders and appraisers to facilitate the ordering, tracking, quality control and delivery of appraisal reports.
  • The AMC puts together a list of what they expect from appraisers. Sometimes the list is just one paragraph, but other times it might literally be three pages long of what they expect on the inspection, or how the appraiser should handle certain situations if they arise. When the order is sent to the appraiser, this list is attached along with the order.

Image purchased at 123rf dot com and used with permission - 14688774_s - smallerThe Appraisal Order:

  • When an appraisal is needed, an AMC will order one from one of their approved appraisers. If there is not an available appraiser on their list, the AMC will try to find an appraiser to add to their list.
  • Some AMCs will send out a blast order to a large group of appraisers. Typically the fee is very low and the turn-time is very quick. The first appraiser to click on the order is the one who gets it.
  • Other AMCs or appraisal departments will send out an order to a specific appraiser, and give the appraiser anywhere from several to 24 hours to accept the order.
  • Appraisers are regularly given about 7 days to finish an appraisal, though some AMCs may require 3-5 days.
  • If the appraiser doesn’t like the fee or turn-time that is offered, the appraiser can negotiate for a different fee and deadline. Some AMCs listen to appraisers and approve higher fees as needed, whereas other AMCs are bottom feeders only searching for the cheapest and fastest service.
  • An appraisal is usually due no later than a specific time such as 12pm, 1pm, or by midnight of the given due date.
  • A rush fee might result for an appraisal that is due several days prior to the normal turn-time or even just one day.

appraisal value - image purchased by Sacramento Appraisal Blog from 123rt dot com 4During the Appraisal Order:

  • AMCs usually want the appraiser to call to set the inspection within the first 24 hours of accepting the order.
  • Once the inspection is set, the appraiser has to update the AMC’s online appraisal platform with the inspection time.
  • The appraiser is usually required to give status updates every 24 or 48 hours.
  • The ordering platform can actually track how well an appraiser communicates and whether deadlines are met, which can result in more or less work for the appraiser.
  • The appraisal might be due in 7 days, but if nobody can give the appraiser access until day 6, the appraiser is likely going to ask for several more days to complete the assignment.
  • If the property ends up being more complex, the appraiser may need additional time or even a fee increase.
  • The appraiser can access the purchase contract and other provided documents in the AMC’s online portal. Keep in mind the appraiser only has access to whatever documents are there though (usually the purchase contract, but rarely the pest report, TDS, or title report).
  • INVOICE: Many AMCs require the appraiser to NOT include the invoice with the appraisal. There can be a big difference between what the Borrower is paying for the appraisal and what the appraiser is actually getting (this point was added thanks to an appraiser who emailed me).

After the Appraisal Order:

  • The appraiser is thanked profusely and lauded with praise by everyone involved in the transaction (kidding).
  • An AMC’s review department will look over the appraisal and ask the appraiser for any clarification or additional comps if needed. Appraisers typically are asked to complete revisions in 1-2 days.
  • If deemed necessary, the lender may hire a second appraiser to do a second appraisal when a house is complex, the value is suspicious, or the house has been flipped recently.
  • Most lenders have a rebuttal process, and the appraiser will typically be given 2 days to look at any new information or data that is submitted for the appraiser to consider.
  • Appraisers are usually given a 2-3 day turn-time for a re-inspection.
  • Appraisers are often paid between 30-60 days of doing the appraisal. It depends on the client.

Three Important Considerations:

  1. Backed-up AMC Communication: Appraisers are often blamed for a slow escrow, but in reality an appraiser might hit all deadlines that were given without being tardy. The problem is that a loan officer might submit an order to the appraisal department, but the appraiser might not actually see the order for a few days if the ordering department is backed up. Moreover, if the appraiser is dealing with a complex issue and reaches out to the AMC for conversation or direction, but it takes the AMC four days to respond to the appraiser, it can certainly delay things. The same thing happens when appraisers request documents that should be easy to get, but they end up taking many days.
  2. Remembering the Past: I remember working in an appraisal office in 2002 and at the peak of the busy season we had a 4-week turn-time, and we would do 2 or 3-week “rushes”. The turn-time was simply longer because that was the market at the time. It seems right now we are locked into a much faster turn, which is nice, but when the market gets hot, that may need to change.
  3. Picky Appraisers: When appraisers are overloaded with work, many appraisers might say NO to appraising a complex property. This means an AMC might have to reach out to many appraisers before finding someone willing to take on the assignment (hint: pay the appraiser for the additional complexity as money tends to talk). For instance, a 7-day turn time in the beginning of the year was actually not enough time for many appraisers because they were backed-up with so many other appraisals. Thus when both an easy order and a very challenging order would come into the appraiser’s pipeline, the obvious choice was to take the easier route because the hourly rate would be far better than how much more time it would take to complete the complex appraisal (that makes sense, right?).

My Interview on CBS:

Questions: Any thoughts, stories, or points to share? Agents, does anything surprise you here? Appraisers, did I miss anything? I’d love to hear your take.

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5 things to know about appraisers choosing comps

What makes a good “comp” for an appraiser? Are there certain guidelines appraisers have to follow when choosing comparable sales? Let me share with you five principles to know about stemming from the Fannie Mae Seller’s Guide (pages 597-598). This can help you understand some of the guidelines appraisers use when choosing comps, as well as give you some direction in case you are planning to share sales sales data (comps) with the appraiser during the inspection.

how to choose comps - sacramento appraisal blog

5 things to know about comps straight from Fannie Mae

  1. Bare Minimum: Appraisers must use at least 3 closed sales as comps.
  2. One Year: Comps need to have sold within the past 12 months, though an appraiser can make an exception if there is a good reason to use older sales (custom home, no truly recent competitive sales, etc…).
  3. Subject as Comp Four: The subject property can be used as a 4th comp if it sold recently. This might seem strange, but I’ve done this before when sales were extremely limited.
  4. No 90-day Rule: Appraisers do not have to use sales in the past 90 days. If there are better comparable sales (but older), the appraiser can certainly use those instead of using less similar newer ones. In fact, when speaking of comp selection, Fannie Mae gives the following example: “It may be appropriate for the appraiser to use a nine month old sale with a time adjustment rather than a one month old sale that requires multiple adjustments.” Of course many lenders do have a 90-day comp guideline, which makes it seem like appraisers need to use this guideline, but it’s really not a Fannie Mae rule.
  5. No One-Mile Radius: There is no such thing as a one-mile radius from Fannie Mae. Many lenders want appraisers to stay within a one-mile radius for comps in a suburban area, but that is NOT a Fannie Mae requirement. Appraisers should use the most competitive sales available. Bottom line. The question then becomes, “how far should an appraiser go for comps?”, but the better question is, “where should an appraiser go for comps?” Sometimes tracking down the best available comparisons means staying within a few streets, while other times it might mean traveling multiple miles away. A one-mile radius can actually be a dangerous way to search for comparable sales anyway because you could easily have many different markets within one mile (this is why I use the polygon search in MLS). When appraisers or real estate agents use the wrong sales for comparison, it’s easy to have an off-base value or price. If you want to gauge comparability, ask yourself the following: Would a buyer likely purchase this “comp” if the subject property was not available? Is this “comp” located in the same neighborhood or a truly competitive neighborhood? Do you think other people in the market would consider your sales as comparable to the subject property?

A quick video on the “one-mile radius” I shot a while back. Watch below (or here):

Private appraisals may be different: Fannie Mae and lender rules do not apply to private appraisals for divorce, estate planning, tax grievances, pre-listing, etc… Some of the guidelines are reasonable of course in that appraisers ought to use the best sales available, but otherwise appraisers do not wear the lender’s leash for private appraisal work. For instance, I had over a dozen divorce appraisals last month, and my reports didn’t have to explain to a lender why some sales were outside of a 90-day time period. I simply used the best sales to help illustrate the market. Bottom line.

Question: Any stories, insight or questions? Please comment below.

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