Things I’ve Been Thinking About Recently
This week I thought I would share some random thoughts I’ve had recently. As busy as the market has been over the last year and a half it feels like I pretty much eat, drink, and sleep appraisals.
Every assignment brings a new challenge so I thought I would do a brain dump of things I’ve run across in recent assignments or maybe seen in the news. Can you think of any other appraisal thoughts that have been swirling around in your head? Leave a comment below and lets’s discuss.
1) Off-Market Sales – We need to find a way to compile “off-market” sales so that appraisers have more information to work with in this crazy market. I’ve spoken with numerous real estate agents recently who told me that there are a good amount of home sales that do not even make it in the MLS.
The homes sell before they even hit the market because it is so hot right now. This is not good because appraisers do not have access to these sales unless they are made aware of them and this can limit the accuracy of the appraisal assignment if all available information is not considered.
One suggestion I would like to make is for agents to keep track of these sales so that they can pass them along to appraisers who may be appraising a listing of theirs. If we know that a house sold we can easily look up the information.
Each real estate office will probably have its own list of “off-market” sales that go through their brokerage. This will help appraisers to consider all recent sales in their appraisal reports.
2) The lowest appraisal is not always the wrong appraisal – In my 30+ years as an appraiser, I have never had anyone complain that the higher appraisal was wrong.
Appraising is not an exact science and there may be differences between two appraisals on the same property. This may be caused by the education and experience level of the appraiser or the accuracy of the data they use.
Of course, there are some people that want the appraisal to be low, such as those clients who are using it for a tax appeal. And then there is the person who is buying their spouse out in a divorce case. I guess it depends on your motivation for getting the appraisal.
I mention this to remind everyone to keep an open mind and not to automatically think that just because one appraisal is lower than the other that it is wrong.
3) Not all areas appreciate at the same rate. Just because the news says that home prices are appreciating at 5% per year that does not
mean that every house in every area in every price range will see this appreciation.
We’ve all heard the phrase “location, location, location” when describing the three most important things that influence the value of a home. Because this is true we cannot automatically assume that properties in every location will appreciate at the same rate.
To get an accurate handle on your home’s appreciation and value you must look at what other similar homes in your neighborhood have recently sold for. If no recent homes have sold in your immediate area the “comps” you choose must be in a similar competitive market area that a buyer would look if a home were not available for sale in your specific subdivision.
4) Cost does not always equal value – If you spend $50,000 on a kitchen remodel it may not result in a $50,000 increase in its value.
This is not a new concept but it is one that many people do not think about when considering how much of an impact some home improvements will have on their home’s appraisal value. Most people believe they will get a 100% return on their cost.
You can check out how much cost you can expect to recoup on various home renovation projects at Cost vs Value. As in no. 3 above, the amount you recoup will depend on where the property is located as well as the size of the project.
5) Basement square footage should not be lumped together with gross living area – This is one of the most frequently asked questions I get.
If you combine the two areas and search for comps using this square footage it will be wrong. You will not be comparing apples to apples.
Not all square footage contributes the same amount of value to your home. Porches and patios do not add the same amount of value as the main level living area and this is true for basement rooms as well.
Most MLS systems separate these two areas and you should too when you are searching for sales comparables. If you do not you run the risk of overpricing the property.
6) If you list a home at $250K and it goes under contract at $300K don’t be surprised if it doesn’t appraise. I have found this situation to be occurring more and more in the current market we are in.
Performing a CMA (comparative market analysis) helps agents to price a home based on comparables that have recently sold in the area. This helps them to price their listing to the market, which is the smartest way to arrive at a list price.
If you have done this correctly the price you list the home at should be in line with what has recently sold as well as what is currently available for sale. In a normal market, the home would most likely go under contract for between 97-99% of the list price.
We are not in a normal market and it is not uncommon for homes to go under contract for much higher than their list price. The contract price and the appraisal value may be vastly different.
If a CMA has been done and it is lower than the contract this is a good indication that it may not appraise. The only difference may be a home that has sold since the CMA was done.
It is not an appraiser’s job to support the contract price but rather to provide a market-supported educated opinion on the market value of the subject property. I am starting to see sales contracts with no appraisal contingencies and statements that the buyer will pay the difference between the appraisal and contract should it not appraise.
Any Thoughts?
Do you have any random thoughts you would like to add? I would love to hear your take on some of the thoughts I have shared so leave a comment below and let’s keep the conversation going. As always, thanks for reading.
Like Mark M, my market (Southern California) often includes sales input FOR COMP PURPOSES ONLY in the MLS, though it isn’t necessarily required, and there are many off-market sales that never make it to the MLS. I will often do a public records search as well, just to make sure I haven’t missed anything that wasn’t listed in the MLS. These transactions often involve reduced commissions (or no commission if no broker/agent involved), so an adjustment for this factor might be appropriate.
Here is another thought – the definition of market value used for mortgage lending requires “a reasonable time . . allowed for exposure in the open market.” Technically, off-market transactions don’t satisfy this requirement, and there might therefore be arguments to exclude them. I don’t happen to agree with this, but it does reveal the discrepancies in many of the value definitions we use. I do mostly litigation, and the FMV definition used in CA civil cases thankfully doesn’t include this condition. Here is a link to an Appraisal Journal article I wrote on this subject a couple of years ago: https://coastlinerealtyadvisors.com/wp-content/uploads/2018/10/Market_Value.pdf
With regard to basement square footage, I’m going out on a limb to say that I don’t completely agree that basement area shouldn’t be included in GLA. There are many parts of the country where basements have distinctly different finish levels and are not really integrated into the floor plan where it is totally proper to consider this area separately. Here in Southern California, basements are not that common, and lower levels on a downslope lot are often characterized by the assessor as “basement” levels, when in fact these are floors that daylight to a slope and are an integral part of the home. There are even cases where the only structure at grade is the garage, and the entire home is below grade . . . GLA of 0 square feet doesn’t make much sense in this context.
Thanks, Michael for sharing what it is like in your market. You make an interesting statement about reasonable time with off-market sales. That point could even be made for most homes sold today due to the very limited inventory. Many homes are sold before they even go active and do not have a typical exposure time. This is different than the others I mentioned because those did not even make it to the MLS. Some homes are put on the MLS but are not “active”. I think they may be listed in our market as “coming soon”, although I am sure that many people look at these and get ready to put in an offer.
I have heard other people also make a similar comment as you regarding basements. I guess that if you have very similar homes and all of them had basements it might not hurt to lump all of the square footage together IF you do this for all of the sales as well. We also have daylight basements in our area and I believe that the market perception of this type of basement is more positive than a true basement with all sides beneath the ground.
Thanks for sharing your article in the Appraisal Journal, I will take a look at it.
Hey Tom, In my area (North Florida) I see a lot of brokers putting listings on the MLS and then they write “FOR COMP PURPOSE ONLY” in the comment section. They usually don’t put enough information to complete a grid but at least it clues you in that there was a sale. I also, agree that different areas and different properties are not appreciating at the same rates and I urge agents to be careful using reginal stats on their CMAs since our immediate area is not appreciating as fast as the state or regional rates show.
Mark, we do have some agents that do that here as well but there are some sales that don’t even get that far. They sell and they’re not even entered into the MLS. I tell agents that we need to look at these sales fo consideration so maybe they will try to enter more into MLS like you mentioned.
Tom, first I want to tell you how much I enjoyed your thoughts in the $/sf article. For years, I have warned real estate agents about this questionable practice when pricing a property. You excellent article is one of many I have read over the years (29, oh my!) that point out the fallacies inherent in this type of thinking. Also, the 6 thoughts in your current article are spot-on. That off-market idea is a really great one. A colleague and I share FSBOs that we appraise and those can really come in handy. I’m just glad I’m in Louisiana where we don’t have to deal with basements! I just told several people recently that this market makes me crazy (crazier) and wears me out but those 2 hurricanes last year have really caused a lot of market participants (especially buyers) to go nuts: low inventory, high demand. Finally, I evacuated to get out of the way of hurricane Laura late last August and spent 3.5 weeks in Trussville where a friend and I had nice digs in the extra house her mother owns. Please keep sending your thoughts.
Thanks for reading, Steven! I appreciate the feedback. I know you guys have had your fair share of storms and hurricanes. Wow, it’s a small world with you being in the Trussville area. I do a good amount of work in that area of town. Take care and stay safe.
Thanks for all the good info Tom. Yes, at first it was we will pay up to $10,000 over appraisal, even saw one for $100,000 over appraisal on a $1,000,000 property, but now it’s just “we will make up the difference between appraisal and contract price, no qualifying limit amount”.
Some neighborhoods in Frederick County MD appear to have reached their limit, for the time being at least, and we can use sales that contracted up to 4 months ago without needing time of sale adjustments. Nothing goes straight up forever.
Thanks for sharing what’s going on in your area, Albert. Selling for $100K over the contract is crazy but maybe that’s not too bad since it is a $1 million dollar home. I am hearing some talk of the market cooling down a little in some areas but I guess we’ll have to wait and see.
I love your point about the lowest appraisal. I really need to start emphasizing that in my narrative a bit more. Very relevant for today in so many ways.
Thanks, Ryan. Yes, we are seeing more “low appraisals”. They may not be really “low” but below contract, but that does not make them wrong. I chuckle inside whenever I am doing an appraisal and the client says something like “I’ll be okay if it’s low. This after hearing from others who want theirs to be high. I always tell them that I don’t provide high or low appraisals but rather report on what the market is reflecting.