Appraisal Scoop

The Reality of Price Per Square Foot

GUEST AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc.  Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets.

As appraisers, we talk to realtors on a routine basis. Whether it’s to set up an appointment, verifying data or even just shooting the breeze, their insight can be invaluable as we analyze a property and its
market. There are however vastly different concepts between how realtors market properties and how appraisers observe market behavior. One such example is the use of price per square foot.

As an equation, price per square foot ($/SF) is simply the asking or selling price divided by the gross living area. It has become common lingo among many realtors but is it a reliable indicator of market reaction?

Now as an over-simplified reference point, we may not object to its use however it has been a growing rationale for agents, buyers, sellers and homeowners to establish value.  I must admit when I hear the price per square foot argument as a means to value, my inner-appraiser starts to rev up into high gear. Shakes, convulsions and a flushed face are quickly tempered as I remember that we must educate if we
intend to explain the weaknesses of the price per square foot methodology.

The primary fault with $/SF is that it encompasses every feature of the property and not just gross living area. Only calculating the relationship between size and sales price ignores all the considerations a
potential buyer may make. If we were comparing two properties that were identical with the exception of size, then it is rational that the larger of the two may sell for more and thus the $/SF could be an accurate indicator. On the other hand, if we had two identical homes in terms of size but one had a
larger wooded lot and sold for more, the equation would not be as reliable. As properties have more dissimilar amenities and features, the less reliable it becomes as a function of indicating value. This is simply because other factors are not directly related to gross living area.

The same issue exists for price per acre in residential (non-agricultural) sites. While one acre may sell for a specified amount, that does not necessarily mean two acres will sell for twice what the one acre parcel did. There may be a premium for the excess or residual land but not based on a simple multiplier
factor.     

That being said, price per square foot can be a tangible factor in considering cost. Builders and index providers such as Marshall & Swift do utilize $/SF for construction estimating but it is not a strongly supported methodology for market valuation. The grid technique that is commonly utilized in most appraisals (Fannie Mae 1004) as part of the Sales Comparison Approach allows individual analysis of key amenities for the subject and comparable properties. Market derived adjustments can then be made to comparables for superior or inferior features.  The Sale Price/Gross Living Area field that is a part of the grid section is intended to be a general indication of the overall similarity of the subject to the selected comparables and not a basis for value conclusion.

A few years back, I had a call from a buyer who questioned my method for obtaining the gross living area (GLA) of a property he was in the process of purchasing. After explaining my physical measurements, Fannie Mae Seller Guidelines and ANSI standard Z765, he eventually backed out of the contract because the appraisal reflected a smaller GLA than it was marketed as. This seemed to go against all that we typically assume. He was in effect making his decision largely based on perceived GLA and not based on the features and amenities that the property offered. While he was an anomaly, it is true that buyers have varied motivations for their purchasing decisions.

If price per square foot was truly a common buyer consideration, then it is fair to expect that purchase offers would be made in these terms. Rather than a lump sum price, buyers would submit offers based on the square footage of the property and not a flat price that reflects all features.

If properties become widely marketed on the $/SF premise, is it possible that buyer behavior could evolve? It is unlikely that a simplistic math equation will change the diverse motivations of buyers but it could skew initial listing prices and then filter down through purchase offers. In any case, all parties involved in the real estate transaction process should have a basic understanding of motivation and reaction factors and not implement an overly simplistic formula for price determination.       

AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc.  Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets. He served as a staff appraiser at several local firms before forming AM Appraisals, Inc. with business partner J.M. Massey.

e-mail:[email protected] web address: www.amappraisals.com

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Get It Now: 2013 Cost Vs. Value Report Data Available

The big news: After six years without any sign of improvement, REMODELING's 2013 Cost vs. Value Report shows an overall cost-value ratio increase of 2.9% over the 2011-2012 number. This reflects rises in the cost-recouped percentages for all 35 home improvement projects tracked by the report, with replacement projects leading the way with the biggest gains. Data for all projects in 81 cities is now available, for free, at http://www.costvsvalue.com.

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Source: Remodeling

Nice Guys Finish LAST! Clients file complaints after getting appraisers to "Second Guess" their own appraisals.

T.J. McCarthy, of T.J. McCarthy & Associates, Tinley Park, IL has the following assessment of the AMC and Lender practice of making post-closing calls to appraisers to question how some of the adjustments were made and get appraisers to second-guess their original appraisal process.  The following is being reprinted from an Illinois Coalition of Appraisal Professionals (ICAP) alert.  

Good afternoon Appraisers,

I am writing to our residential members regarding a growing problem that ICAP is concerned with regarding lenders and AMC’s filing complaints against appraisers.

THE SETUP:  You receive a call from a lender or an AMC who wants to talk to you about an appraisal assignment you recently completed for them.  The call usually comes from the QC Department at the post closing stage of the loan.  They start questioning you on your line item adjustments.  All the comparables are on smaller lots then the subject property and they feel your adjustment for lot sizes seems a bit high.  You want to be a good little appraiser and not upset your client so you agree that pe rhaps they could have been a little lower.  While they have you on the phone, they also ask you if you think your time adjustments were a little aggressive.  Again, not wanted to upset a good client, you tell them that maybe you were a little aggressive (even though you really don’t think you were…you’re just trying to appease them), and you state that you will try to find another public data source in the future that is more conservative.  Your client thanks you and even tells you to have a nice day.  You hang up the phone thinking you handled that rather well. (The following is simply a hypothetical situation used to get a point across)

FAST FORWARD:  A month later you receive a letter from the Department of Professional Regulation – Appraisal Division.  Your great client filed a complaint against you stating that you openly admitted to them in a phone conversation that you falsely inflated the value of your appraisal by using inappropriate site adjustments.  You also stated that you often use non-traditional data sources to intentionally report market trends that are lower than normal to arrive at higher value conclusions.  YIKES!!

THE REALITY OF THE SITUATION: This is really happening to appraisers and since the Dodd-Frank Act more and more lenders and AMC’s are sending in complaints on appraisers. 

MORAL OF THE STORY:  There is no question that the appraiser is getting slammed here for trying to be a “stand up” guy, attempting to clear up gray areas in their report.  They’re engaging in what they perceive to be an honest dialogue with the QC department (long after the loan has been funded). Unfortunately, at the post-closing stage, the lender isn’t looking for you to have a change of heart on your final opinion of value. There are no changes that should be made, but now you have given the QC department ammo for a state complaint.

Also, you should never change parts of your appraisal because you think it will make your client happy.  They don’t drive the process.  Perhaps you don’t even realize that you are giving someone a reason to file a complaint against you when you agree to the slightest alteration or allow someone elses opinion to dictate how you will complete your assignment.  In the meantime they are on the other end of the phone writing down everything you are saying as they prepare to turn you and your report into the state.

DISCLAIMER:  I certainly am not telling you to ignore errors and omissions on your reports when a client discovers them and asks for corrections.   Nor am I telling you to be unethical.  But, by trying to be accommodating, you could be creating a problem for yourself where one never existed.

I can assure you that the State of IL is receiving these types of complaints.  I can’t tell you [which] lenders or AMC’s are filing these complaints.  Also, I am not saying that all lenders and AMC’s support this type of practice. 

It’s getting pretty scary out their folks.  We don’t have to make it harder on ourselves by reverting to a submissive position every time an angry client calls.  We are appraisers not pacifiers!

TJ McCARTHY AND ASSOCIATES, LTD.
Real Estate Appraisers and Consultants
7903 West 159th Street, Suite B
Tinley Park, Illinois 60477

Email: [email protected]
Phone:  (708) 614.7200      
Fax: (708) 614.7228

Bring Back the Cost Approach

Bring Back the Cost Approach: The Cost Approach to value has been discounted and even eliminated in residential real estate appraisal in recent years. Here are some reasons why it needs to be revived.   By Harry E Davis

In the last few years there has been a trend toward a complete discounting of the Cost Approach to value in residential appraisal. For owner occupied homes, the sole technique is now the Sales Comparison Analysis, which involves selecting and comparing individual property sales to a subject property.

Many lenders and government agencies no longer require the Cost Approach technique, even on new or nearly new construction, and appraisers are often instructed to omit it completely, or not to place any reliance on the results. When a lender does require that the Cost Approach be completed, it seems that this is only so that a proper amount of homeowner insurance can be determined. This is, of course, something critically important to the lender as well as the homeowner, but should not be the only criteria for the use of a cost-depreciation analysis.

Years ago a Cost Approach was always required for an appraisal report. The basis of this approach was the Principle of Substitution, which holds that a prudent buyer will not pay more for a home than the cost to acquire an equally desirable substitute home. Accordingly, the reproduction or replacement cost new of a home set the upper possible limit on value, particularly for an existing preowned home. So this analysis served not only as an additional means of estimating value, but also as a governor on runaway home prices.

The cost approach also served an important function as an educational tool for appraisers. To perform this approach, an appraiser had to have at least a minimal working knowledge of residential construction and to carefully observe the quality and condition of the various components of the home. Cost data services, which still exist today, provide continuously updated information on the various costs of construction involved in a home and some are quite accurate.

One service publishes a manual with a wealth of good data and information, complete with descriptions and photographs that illustrate the differences in quality and appearance for different types of homes, which is a great way for new or inexperienced appraisers to familiarize themselves with these features. In recent times I have come across reports by relatively new appraisers where no cost approach was done and it was painfully obvious that the appraiser knew very little about construction or how to evaluate the differences between their subject and the comparable sales they used in the Sales Comparison Analysis. I suspect we have a new generation of appraisers out there who have this deficiency and that's a bad sign for the future. The best appraisers know something about construction and can immediately spot differences among homes as to their quality level. This ability is also critical for the appraisal reviewer.

The Cost Approach is not without its weaknesses. The primary weakness is in the estimate of depreciation, be it physical, functional or external in nature. These things are difficult to estimate, but again, the appraiser who learns how to do this becomes more knowledgeable and competent, both in the Cost and Sales Comparison methods. Another weakness is in estimating the land value. Actual sales are often not available as a means to determine what buyers are paying for a similar lot and so market abstraction (also called extraction) is used to estimate the ratio of land value to dwelling value from market sales of already built homes. Improperly done, this technique is subject to serious errors. The general rule for the Cost Approach is that it is most accurate when the dwelling is not very old and sales of nearby similar lots are available.

I am of the opinion that the majority of foreclosures involve relatively new homes and that this is where the largest amount of lending losses occur. At least, that's how it is in my local market which has always had a lot of new construction. There are many reasons for foreclosures, but certainly one is upgrades.

Builders typically offer various home models at "base" prices and offer upgrades for both the home and the lot. Buyers can choose from a wide variety of options to enhance the home and can choose lots that are different in size or that have more trees or other desirable aspects. This is great for the buyer but can become a nightmare for the lender when a foreclosure happens because so many of those nice upgrades do not hold their value in subsequent foreclosure sales, and often do not hold their value as the distressed homeowner desperately tries to sell the home to avoid foreclosure.

The homeowner finds out they are "upside down" meaning the home cannot be sold for as much as the mortgage amount, especially when the initial down payment was very low or when financing costs were included (rolled into) the mortgage, necessitating an increase in the sale price. Another problem is inflated upgrade cost where some builders mark up the prices of upgrades well beyond normal prices that consumers pay at retail stores, even with installation added on. This is similar to what many service contractors (plumbers, car mechanics, etc.) do because they want to make a profit on the "parts" as well as the labor. The problem comes when the markup is excessive.

There is little an appraiser can do about upgrades when it can be shown that buyers often do select upgrades with their new home purchase. In the absence of current resales or foreclosures to compare with, it is not possible to estimate the resale value of upgrades, and values are estimated as of a given date, not the future.

The Cost Approach long served as a reasonable basis for making adjustments to market sales in the Sales Comparison Analysis for individual items. If a home needed a new roof, the appraiser had a handy source for determining the cost for this. Likewise for appliances, HVAC equipment, a garage and the like. Removing the Cost Approach and the good data that comes with it forces too many appraisers to have to guess at these kinds of adjustments and the results can vary wildly from one appraiser to the next.

Long ago homes were valued only by a Cost Approach. The Sales Comparison Analysis (formerly known as the Market Approach) came later. I don't believe it is a coincidence that foreclosure rates and personal bankruptcies caused by unaffordable mortgage amounts and runaway home prices seem to have increased so much in recent years while the use of the Cost Approach has declined at the same time. Not do I believe it is a coincidence that the decrease in emphasis on cost minus depreciation began about the same time as tremendous inflows of capital into the marketplace encouraged every sort of easy money credit scheme that allowed so many people to buy homes they couldn't actually afford and that has severely damaged not only the US economy, but the entire world. Mountains of money to lend tend to push caution to the side.

I believe that the Sales Comparison Analysis is surely a good valuation technique, but its down side is that there are too many clever ways for market participants to smuggle hidden costs, fees and even fraud into sales contracts, which make their way silently into market data services and onto appraisal reports. The same can be true for unhidden costs like seller paid loan discount fees and other monies paid toward buyer closing costs. At a minimum, an accurate Cost Approach serves as a useful check on the results of even the most thorough and detailed Sales Comparison Analysis where the appraiser is carefully searching for and analyzing such things. Undesirable things can and do happen in real estate and some can slip past even the best Sales Comparison Analysis because they happen quietly and incrementally.

An example of this is what I call closing cost price compounding. A real estate agent provides a seller a pricing analysis where the agent has found 20 recent sales of similar homes in the area and averaged the prices to arrive at a figure he or she believes is correct for the home. The home is then marketed at that price. Along comes a buyer (perhaps from a higher cost market) who lacks cash, needs some assistance with his closing costs, and makes an offer at or very near the asking price. The seller counters with an offer in which he adds the amount of assistance the buyer asked for to the price.

But what if this type of assistance turns out to be normal for the area and is already reflected in the selling prices of those 20 homes used to set the asking price to begin with? The new sale closes at the upwardly adjusted price and is then used as a "comp" by other agents and by appraisers and the process continues with every repeat occurrence of the needy buyer, causing home prices to rise, affordability to lessen, creating more needy buyers, and setting in motion a snowball effect where prices to rise eventually to the point that they exceed even cost new. This is not unlike interest compounding on your savings account. Over time your balance goes up faster and faster. Combine this with other inflationary market tendencies and you get a nasty bubble that will some day burst to the peril of us all...again.

Obviously, this could be avoided by competent sales agents who understand that those 20 sales already included heavy seller costs and inform their clients of this, but many do not and there is a built in incentive to push prices as high as possible among people working on commission. An accurate Cost Approach would tend to catch this anomaly immediately or at least decrease its effects down the line in future sales because when home prices begin to exceed what it would cost to build an equally desirable substitute home brand new, the competent appraiser knows that something is wrong and that they need to dig deeper into the market data.

A Cost Approach is also a great lie detector for fraudulent appraisals. If an appraiser included a Cost Approach and is using a known cost source or manual that others can subscribe or view, then the estimated costs shown in the appraisal can be reproduced from that same source by someone reviewing the report. So if the appraiser has fudged on cost, that can be detected simply by examining the cost source and parameters the appraiser had described. Moreover, even if the appraiser showed the correct costs, the fraudulently inflated appraisal will exhibit inflated land value in the Cost Approach with little or no support as to where the land value estimate comes from or why it is so high. In fraudulent appraisals, the Cost Approach is "plugged in" with numbers to match the Sales Comparison Analysis. That's because an honest Cost Approach would have indicated a significantly lower value for the home.

There are other examples of how the Cost Approach could eliminate or reduce runaway home prices, and even detect fraud. I believe it is a foolish mistake to take away or encourage the disuse of any type of analysis or tool from appraisers that has a basis in market data. An analyst in any field of study should be willing and enabled to use as many ways as possible of looking at a problem. Focusing on just one method encourages tunnel vision. I say bring back the Cost Approach and let appraisers decide how useful or accurate it is on a case by case basis. It is not the end-all be-all solution but it is a valuable and worthwhile tool.

AUTHOR: Harry E. Davis is a Texas state certified residential real estate appraiser in business since 1975 and serving the Austin Texas metro area. His web sites are located at Austin Texas Appraiser and Round Rock Texas Appraiser.

Article Source: http://EzineArticles.com/?expert=Harry_E_Davis
http://EzineArticles.com/?Real-Estate-Appraisal---Bring-Back-the-Cost-Approach&id=2542175

Appraiser Joan Trice Authors New NAHB Primer Aimed at Helping Builders Work More Effectively With Appraisers

With builders around the nation continuing to grapple with faulty appraisals that jeopardize sales of their new homes, NAHB is adding an “Appraisal Primer” to its collection of resources aimed at helping association members strive for the best possible outcome from today’s less-than-perfect appraisal process.

The newly published primer from NAHB discusses in detail the appraiser’s role in the financing of new homes.

“There is a lot behind the scenes that affects the way appraisers must conduct their business,” writes Joan Trice, an appraiser and author of the primer; editor and publisher of Appraisal Buzz, an email publication; and the host of the Alterra Group’s Valuation Expo, which is the largest annual conference for the appraisal community.

Trice is also consulting with NAHB on the association's efforts to resolve appraisal problems.

“Understanding the regulations, methodologies and task of the real estate appraiser will provide home builders with the necessary knowledge to discuss valuation issues with appraisers before they become valuation problems,” Trice says.

Beginning in 2009, NAHB has held a series of four appraisal summits at the National Housing Center in Washington, D.C., attended by representatives of federal banking regulators, the appraisal industry, the housing finance industry, the real estate and housing sectors and others for discussions of deficiencies in the current system of evaluating homes and how to address them.

While much more needs to be done to reform the system — which is expected to be a long-term undertaking stretching far into the housing recovery now beginning to materialize in specific markets across the country — NAHB has made substantial headway on key appraisal issues.

Covered in detail in the Nov. 7, 2011, issue of Nation’s Building News — which was devoted to what NAHB has been doing to fix the broken new-home appraisal system — builders have seen progress on such key concerns as their ability to communicate with the appraiser and the right to have their homes appraised by individuals who are qualified to do the job.

In conjunction with the release of the “Appraisal Primer,” NAHB has updated its “Appraisal Guidance for Builders,” which summarizes information on:

• the selection of appropriate appraisers,
• the use of comparable sales in determining the value of new homes,
• what builders can and should do to ensure accurate appraisals and
• actions they should take if an appraisal was conducted improperly or contains errors.

In a FAQ section at the end of the new primer, Trice answers some specific concerns that builders have been voicing over appraisals.

Among the questions she addresses:

• What should an appraiser do to determine the value of a new home with options and upgrades that do not appear in other homes recently sold in the local area?
• Will the appraised value support the additional costs of expensive geothermal heating and other green options?
• What are some of the problems that builders can encounter when appraisers are selected by national appraisal management companies (AMCs), which may be looking for appraisers who charge the lowest fees so they realize the highest margin on the referral?
• Is it true that under the Dodd-Frank bill builders cannot communicate with appraisers?

For more information, email Steve Linville at NAHB, or call him at 800-368-5242 x8597.

SOURCE: National Association of Home Builders (NAHB) - Nation's Building News

 

Land Valuation: Extraction Has No Traction

ARTICLE SOURCE: Vol. 4, Issue 1, January 2012 of the Illinois Appraiser newsletter from the Illinois Department of Financial and Professional Regulation.

“Land values were based upon the extraction method.” Look familiar?

If I had a nickel for every phoned‐in Cost Approach that had this sentence or one like it, I’d be Warren Buffet

The Dictionary of Real Estate Appraisal defines [the Extraction Method] as:

A method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land; most effective when the improvements contribute little to the total sale price of the property.

The underscored portion says it all. Usually this technique is used in rural settings. Perhaps when appraising some hunting shack on a couple of hundred acres of scrub.

But no, we see it in the middle of suburban Hinsdale, Belleville, Taylorville, and other places where the residence is easily a significant portion of the total value.

By definition, extraction doesn’t really work in cities and suburbs where improvements tend to drive value.

Also, some Cost Approaches are so poorly cobbled together that we seriously doubt the appraiser’s ability to extract anything.

Don’t just toss extraction into a report.

If you cannot demonstrate an ability to depreciate reasonably, then you certainly won’t be able to support an extraction application.

The board strongly suggests that you find a course that teaches a more reliable technique.

ARTICLE SOURCE: Vol. 4, Issue 1, January 2012 of the Illinois Appraiser newsletter from the Illinois Department of Financial and Professional Regulation.

 

APB: Exposure Draft: Adjusting Comparable Sales for Seller Concessions - 10/3/2011

The Appraisal Practices Board (APB) is seeking public comment in response to this exposure draft and based on the comments received, may make revisions to the guidance and issue subsequent exposure drafts. Once the Board believes it has received all relevant comment on this topic, it may vote to adopt the material as official guidance from the APB.

Download Adjusting Comparable Sales for Seller Concessions Exposure Draft Final

The Draft includes comments and detailed examples on:

• Verifying Concessions
• When Does an Appraiser Adjust for Concessions
• Methodology
• Concessions and Non-residential Property (other than 1-4 unit properties)
• Impact and Application of Concessions in the Cost and Income Approach

All interested parties are encouraged to comment in writing to the APB before the deadline of December 2, 2011. Respondents should be assured that each member of the APB will thoroughly read and consider all comments. Comments are also invited at the APB public meeting on December 12, 2011, in Atlanta, Georgia.

Written comments on this exposure draft can be submitted by mail, email and facsimile.

When commenting on various aspects of this exposure draft, it is very helpful to reference the line numbers, fully explain the reasons for concern or support, provide examples or illustrations, and suggest any alternatives or additional issues that the APB should consider.

Mail: Appraisal Practices Board The Appraisal Foundation 1155 15th Street, NW, Suite 1111 Washington, DC 20005

Email: [email protected]  

Facsimile: (202) 347-7727

If you have any questions regarding the attached exposure draft, please contact Staci Steward, Practices Administrator at The Appraisal Foundation, via e-mail at [email protected]  or by calling (202) 624-3052.

 

When Do Distressed Homes Sales Become "The Market" ? - Using REOs for Market Value Appraisals

Guest Author:  Matt Cook, Torrance, CA

A poster to the Inland California appraiser's forum posed an appraisal problem regarding distressed sales. 

 

He stated that the market for a particular residential assignment included 88% "distressed sales of one kind or another" and thought that perhaps by dominating the market, the distressed sales would exert downward value pressure on all the properties in the market. 

 

He was wondering if and how to include these distressed sales in his analysis?

 

 

 

My response was:

 

If the distressed sales are truly making the market, then two comparable homes--one a distressed sale and one not--should sell for the same amount.  Unfortunately, there is not a monolithic "distressed market;" there are vast differences in seller motivation.  That is the difficult but essential factor that must be analyzed.

 

When you separate out the price ranges of the REOs, short sales, and "typical" sales, what do you see?  If the REOs and short sales are ALL "distressed" sales (implying below market), you should see that their value ranges will be below the 12% of typical owner sales.  On the other hand, if you see that the upper price ranges of the REOs and short sales are similar to the price ranges of the typical sales, that MAY indicate that there are REOs and short sales that are not being affected by poor condition, atypical seller motivations, or fraud, and can be used in support of your analysis and conclusion of market value. 

 

Good news!  If the ranges are not similar, this may be the first step in allowing you to derive an adjustment for distressed sales that can be used in your sales comparison analysis.  Here are some other suggestions for ferreting out sales from that 88% that can still be used.

 

REOs:  Often, distressed sales--especially REOs--are in poorer condition than typical owner-occupied, owner-sold properties, so they would have lower average sales prices.  Sometimes they are also "dumped" at below-market prices.  If you can analyze the REO sales and first separate out the ones that were in good or typical condition, then analyze these to separate out the ones that seem to have been sold without undue duress, you may have some REO comparables you can legitimately use.

 

Some clues that the REO sales MAY be below market are shorter-than-typical marketing times, sales prices above list prices, and out-of-area selling agencies.  Short marketing times may indicate a quick sale at a discount price; sales above list price may mean that the listing agent listed the property below market to begin with, and out-of-area listing agencies often handle all of a particular lender's REOs and may not know the local market, or be as available as a local agent to do the marketing, showings, etc. necessary to ensure getting the best possible price. 

 

If you set aside the REO's with those characteristics, after weeding out the ones that were in poor condition, you may be left with a pool of REO sales that have the potential to be market-value sales.  Investigate these to be sure; agent interviews are a must here.  You may find some REO sales that were in typical condition, sold in normal marketing times by a knowledgeable local agent at a typical discount from list price, verified by both listing and selling agents as being a normally-valued sale.  Viola, a comparable sale!

 

SHORT SALES:  Short sales by definition are only short sales because their MARKET VALUE is less than the mortgage balance, so if they are selling at that market value, they should have sales prices similar to otherwise comparable homes.  Unfortunately, short sales often involve protracted negotiation and settlement times that can translate into discounted sales prices, as the pool of buyers willing and able to endure the delays is smaller and likely differently motivated than the general pool of buyers.  Also, there is a lot of short-sale fraud going on so you have to be very careful.

 

Start by setting aside the short sales with long times in escrow, or the ones that have been in and out of escrow several times.  These conditions MAY reflect unreasonable, unrealistic, or difficult-to-deal-with lenders that will drive "typical" buyers away and result in below-market sales prices.  Again, set aside the sales with out-of-area listing agencies for the reasons above.  Investigate what you have left, and you may find that some of the sales were sold at market value.  A short sale with a reasonable, responsive lender, normal listing history, and an experienced local agent who markets the property correctly can result in a good, market value sale despite its being a short sale.

 

Finally, take a close look at the "typical" market, the 12% that are not REOs and short sales.  If they are priced differently than the 88%, what does it take to get one of them sold?  That is, if the "distressed" sales are selling in normal marketing times for their market but the "typical" sales have extended marketing times, or are selling with seller financing, concessions, or other conditions made necessary in order for them to compete with the lower-priced "distressed" sales, then you may want to rethink whether they are truly "market-value" sales.

 

AUTHOR: Matt Cook, Torrance, CA

Congress to consider the use of appraisals over BPO's and AVM's

From the New York Post article: "HOUSE CLEANING - FRANK TO RIP UP OBAMA MORTGAGE PLAN, GO FURTHER" -

In the run-up to creating the subprime nightmare, the unregulated assessment process used the Broker Price Opinions (BPO), which uses comparable sales but has built-in biases. Among those, appraisals tend to be high because brokers don't earn a commission if a mortgage is unfunded because of a low assessment.

Also, the Automated Value Model (AVM), which relies on comparable sales, uses a computer algorithm to come up with a final assessment.

"Appraisal independence is of great importance to all homebuyers and homeowners who own or want to own a home. I have therefore fought to improve appraisal independence for many years and I am continuing to do so. Next week, the Housing Subcommittee will hold a hearing to address mortgage modifications, and I expect that home valuations will be discussed," said Rep. Paul Kanjorski (D-PA), a ranking member on the Finance Committee.

According to mortgage industry sources, the Obama administration is planning to rely on these two models to rescue homeowners from foreclosure.

According to RealtyTrac, foreclosure filings in the US climbed 30 percent in February.

"Going forward, reforming the appraisal process to prevent inflated pricing will be critical to ensure we don't repeat the mistakes of the past," said Rep. Carolyn B. Maloney.

"These two models were instrumental in creating the housing bubble," says James Amorin, president of the Appraisal Institute.

Click here to read the complete article

Source Tip: http://www.ICAPweb.com

Using inappropriate tools for "insurance appraisals" contributes to under-insurance

I believe that use of the wrong cost basis for insurance appraisals materially contributes to the issue of under-insurance that we see following every disaster.

If a lender/agent/property owner uses an appraiser’s market value opinion based on the “cost approach” (or any other approach for that matter) to set their insurance limits, then they’ve misused the data, and the appraiser probably has wording to that effect on their report. But, in cases where the appraiser accepts an assignment specifically for the purpose of generating an estimate of insurable value, are they changing their tools and assumptions to fit the intended purpose, or are they still generating the same estimate they would if asked to provide the “cost approach”?

Many appraisers reference Marshall & Swift cost guides and software (Swift Estimator, Commercial Estimator, and MVS Manuals) (www.marshallswft.com) when generating market value opinions based on the “cost approach”. These estimates are on a “new construction” basis, and include license restrictions prohibiting their use for insurance purposes.

Marshall & Swift / Boeckh (MSB) (www.msbinfo.com) provides different software and data to the insurance industry (RCT and BVS): these generate estimates on a “reconstruction” basis. Neither MSB, nor their competitors ISO/Xactware and E2Value (the dominant suppliers of cost data and claims analytics to the insurance industry) advocate “replacement cost new”. All use “reconstruction” basis for insurance purposes.

An individual underwriter’s willingness to accept a new construction based estimate shouldn’t be used in the defense of the practice. Typically real-estate appraisers don’t know that the insurance market uses a different tool set, and similarly the insurance underwriters don’t know the real-estate market has different tools; all either see is the term “replacement cost” or the Marshall & Swift brand name and look no further. This is not a minor issue: between the valuation basis and inappropriate deductions, I’ve seen advertised “USPAP compliant” insurance appraisals that were 30-40% below 100% replacement cost. If used for reporting values and setting limits, these values will leave the property owners in serious jeopardy of having inadequate limits and coinsurance penalties.

If the appraiser’s insurable value estimate is lower than what is needed to recover from a loss: Will their professional liability cover apply to this type of assignment (if it does, is the limit per building, per assignment, other)? What type of disclaimer should they have on their estimate (assuming the assignment is specifically for insurance purposes)?

If an appraiser has had no specific training on insurance issues, are they in violation of USPAP for accepting this type of assignment? If an appraiser uses a cost guide, that has a license restriction prohibiting its use for insurance purposes, for insurance purposes, is it USPAP compliant?

  Author: John Nixon, Predident, Asperta, Ltd. - John is the founder of Asperta, an independent consulting firm focused on improving the quality of property insurance decisions by policy holders, agents, brokers, underwriters, reinsurers and investors.

He has over 20 years of experience in property insurance, including North American and International HPR loss control and underwriting; primary, E&S, reinsurance and CAT underwriting; and home office product line management, oversight and auditing.