Real Estate Investing

I used to think appraisers were like the Free Masons in the DaVinci Code … a secret society that guarded their secrets closely.  I thought they had a magic document that equated the worth of every home feature — an extra bedroom is worth $10,000, garage $7,000, full basement $20,000, granite counters $5,000.  But after listening to Danny Wiley earlier this week describe the appraisal process, I think you’d have to shake a big stick at me and threaten to convince me to go into the business!

A bad appraiser can knock something out quickly - drive by a house, pull a number out of a hat.  But a good appraiser work his or her tail off! In addition, to going to the home, appraiser put in a lot of hours manually going over figures.  They - of course - look at specific products.  If they appraise a townhome, they compare it to townhome sales from the last six months to year.  If it’s a new construction, it’s comped to other new construction homes.  Appraisers try to stay close to home … they want to use the neighborhood a home is in first, but they will go out less than a mile in an urban area and less than five miles in suburbia and rural areas.

In addition, a good appraiser digs deep.  They look at comparable homes using a variety of sources:  school districts, zip codes, number of stories, size … everywhere a buyer would look when purchasing a home.

Finally, in EVERY appraisal the absorption rate is examined.  That is, how many homes sell over a specific period of time.  Physical depreciation (age of home) is important, as is external depreciation (is it worth less than what it costs to build).

Appraisers do welcome conversations with real estate agents, but Mr. Wiley assures us that calling to yell at them will not further your cause.  A coherent, logical conversation will more likely lead to appraisers taking a second look at the data you provide.

But remember… it’s apples to apples, baby.  Not apples to oranges!

One would think that the blood, sweat and tears of today’s appraisals are by the buyers, sellers, and their agents, but the appraisers are also sweating it out and pouring their lifeblood into getting it right these days.  Danny Wiley, an appraiser from the Middle Tennessee area, spoke at our office earlier this week and assured us that appraisers want a home to appraise JUST AS MUCH as everyone else wants it to happen.

His credentials:  From 2001 through 2006 Mr. Wiley served on the Appraisal Standards Board, which produces and promulgates the Uniform Standards of Professional Appraisal Practice. Since 2003 he has served on the International Appraisal Standards Board.

Mr. Wiley said the problems we are experiencing today were caused primarily by “The Good Days” of 2004, 2005, and 2006 with out-of-control home values on the rise, and the business model appraisers have. As an example of what happened in those glory days of home sales, he cited on home that was listed at $825,000. The sales price landed at $1.8 million (or double the list price) and it then appraised at $1.8 million.  This type of rampant disregard for proper conduct in the world of appraisals triggered the new Home Valuation Code of Conduct (HVCC): you can’t show any preference in selecting an appraiser.

The business model could be the impetus that triggered the wild, wild west of appraisals.  Typically, there are 1.2 employees in an appraiser’s office - meaning the average appraiser works alone with just a handful of clients.  If an appraiser loses a client because they were not cooperative, they stand to lose 30 to 40 percent of their business - a blow that could literally put someone completely out of business.

As a result, the HVCC dictates that appraisers are randomly chosen - a requirement often managed through a “middle man” company.  While this seems like a good solution, problems arise when these middle management companies just go with the least expensive appraiser … often an appraiser who doesn’t know the area.  When they are from another area, they do not have access to the local MLS and have on idea what’s happening in a specific neighborhood and to specific homes in specific neighborhoods.

The good news is that REALTORS are still allowed to talk with appraisers and if they honestly think an appraisal is off, they can offer other comparables.  Appraisers will try to work with agents - within reason.

Part Two Coming Soon: What do appraisers look for?

Photo by Larry Page via Flickr Creative Commons.  Hard to get an appraisal in this town!

I had to laugh (that or cry) at an article in the most recent magazine I received from the fine folks at The Real Estate Buyer’s Agent Council.  They offer a section called “60 Days” that features little vignettes of real estate news from around the country.  So we see there will be problems ahead for the housing rich, a county in Florida has begun buying and selling foreclosed homes (which I’ve preached to my own local community to no avail), and how one real estate company in Spain is offering a one-stop shop: houses, title company, divorces.  Wow.

My favorite tidbit by far, though, was about the squatter who was removed from an almost-million dollar home in Jupiter, Florida.  Apparently a woman had moved in to a home in January that had been on the market for more than two years.  She removed the for sale sign and had all the utilities turned on.  Then she redecorated!   When the listing agent went to check on the house, the woman was removed.  The squatter said she worked at a title company tha tdoes business with the homeowner, but the seller denied authorizing the move-in.

I wonder if she paid rent?

Plus I’d think she was doing the homeowner a favor … the insurance rate is less for an occupied home than it would be for a vacant home.

I do think renting is a strong option for many home sellers these days.  It just kills me to see a perfectly nice house sitting vacant.  They get that empty smell.  They stand as bait for criminals.  When a seller does opt to rent, they can have the credit of a renter checked and also get references from both work and former landlords.  It’s a viable option for homes that just won’t sell no matter what.

Photo from Standing Firm.