This blog post goes out to all the Realtors who have had a deal fall through because the appraised value was below the contract price. Some of you may even had multiple offers with most of them were even above the appraised value. If this has happened to you, first and foremost: I feel your pain! You are thinking to yourself, “If I have 4 different buyers willing to pay $400,000, how could the appraiser say that it is only worth $390,000?” Well, there is nothing wrong with that logic. But keep in mind that as appraisers we are tasked with giving our “opinion of value” and that value MUST be supported by facts and market data. We can’t just say that we THINK it is worth $400,000. We have to prove our case supported by facts and market data (aka Comparable sales, listings, and market trends).
Now, I know what you’re thinking, “Aren’t four separate signed contracts considered facts and/or market data?”. Absolutely they are! It is a fact that 4 different buyers are willing to pay $X and this is certainly considered to be data from the market. A good appraiser will take those facts into consideration in his/her analysis.
How can you prevent this from happening again? Tell the appraiser. Bring him copies of the offers to the inspection. Email him the offers. Why? Here are couple of main reasons.
I also want to be clear that I’m not telling you that if you have multiple offers you are guaranteed the appraisal will support your contract price. However, this information can be a significant piece of the appraisal puzzle. Because an appraiser must provide support for their value opinions, it’s critical that they seek out and receive as much information as possible. That’s where you, as real estate agents, come in. In my practice, I make it a point to ask if there were multiple offers. But even if the appraiser who is appraising your listing doesn’t ask, I highly recommend you make them aware that there have been multiple offers. To take it one step further, I strongly suggest you provide the copies of the contracts so the appraiser can keep them in their Work File as further support for the value conclusion. Anyone can say they had multiple offers but we can put much more weight on those offers when we know for certain they exist.
Remember, appraisers can’t just go out on a limb and appraise a property at the highest possible price. Our definition of market value tells us we must appraise it at the most probable price (here is a previous post which goes into more detail - Market Value: Probable vs. Possible). When we are finished adjusting our comparable sales, we typically end up with a range of values. The dispersion of that range can vary (typically less than 10%), but let’s just say for this example we started with a contract price of $400,000. The range of adjusted comparable sales prices is $380,000 - $405,000. If the appraiser was handed four signed contracts with contract prices of $390,000, $395,000, $400,000, and $405,000, it may give them that extra support they need to reconcile their final opinion of value at the upper end of the range. After all, we are supposed to be determining the most probable price for which a property will sell. To take it even one step further, if the appraiser analyzes the market and determines that there is a shortage of inventory and prices are increasing, they may be even more inclined to be more aggressive with their opinion of value.
But without actual support and evidence, the appraiser can’t go out on a limb alone. Information about multiple offers may not make a huge difference in the appraised value, but it could make enough of a difference to get your deal closed! Providing information about multiple offers to the appraiser is not just a service to him or her but also a service to your client! For more information see my post on Tips for Real Estate Agents to Avoid a Bad Appraisal.
I have created a Facebook group for local Realtors who have appraisal questions. I will be sharing some great information that will help you understand things from an appraisers perspective and some tips to help you in your business. You are encouraged to jump in and ask any questions you have. Just click below and then click the "Join Group" button.
Often before a property is purchased using a loan from a mortgage company, it must be appraised and inspected. Many homeowners confuse the appraisal inspection and the home inspection and ask me what the difference is. Here are some of the main ways that appraisals and home inspections are different and also overlap.
Different End Goals: Value vs. Condition
The main thing to know is a real estate appraiser’s focus is on determining the value of the home and those factors that will influence that value. A Home Inspector’s main objective is determining the condition. The Home Inspector is tasked with determining the condition of the property in terms of structural soundness and quality/safety of electrical and plumbing systems. The Home Inspector has an obligation to be accurate in their assessment of a home’s condition but they also act as advocates for the buyer. Their job is to point out any deficiencies with the house such as outdated/unsafe wiring or obvious problems with the foundation so that their client (the buyer) can make an informed decision about whether to purchase the house, negotiate a lower contract price, or just walk away all together. See the graphic below for many of the items a home inspector will be looking at (Source: www.gqre.com).
While an appraiser’s inspection of the property may take into consideration many of the things a Home Inspector looks at, his/her ultimate goal is to provide an opinion of value. The appraiser’s job is to provide their client (the lender) an accurate, well-supported, unbiased opinion of value. This usually includes commentary on the condition of the property since that is tied to value. For example, a 1960’s ranch home in original condition will most likely have a lower value than a 1960’s ranch home in the same neighborhood that has an updated kitchen and bathrooms. The appraiser’s job is to give the bank their opinion of market value (I go into this in more detail on a prior post - Market Value: Probable vs. Possible) which helps them determine if the mortgage be a good, sound investment for the bank.
Appraisal Inspection vs. Home Inspection
So how will you tell the Appraiser and the Home Inspector apart when they come to your home? Probably they’ll introduce themselves as either the Appraiser or the Home Inspector. Just kidding!
The appraiser’s site visit will usually take around 30 minutes and they will measure your house and look at all of the rooms including the basement. They will be noting the quality and condition of the finishes, the layout, bed and bath count, etc. They will take pictures of each room to include in the appraisal report. In some cases, like for an FHA loan, the appraiser may inspect crawl spaces and attics or test the basic appliances. But he’s probably not going to crawl under the house to inspect the foundation or get on your roof and walk around looking for leaks.
Appraisers try to look at the property through the eyes of the most probable buyer for that particular property – not only which features and attributes they find desirable, but also to what extent would the typical buyers be “inspecting” the home? A more simplified way to look at it is to ask yourself: “If I were looking to purchase this house, what are the things I would look at and what things would I hire someone with professional experience to check?” You may open a cabinet or two, look at the ceilings for leaks, take a look at the mechanicals to see if they are newer or may need replaced soon. But in my experience, very few buyers will be going into crawl spaces and bringing their ladders to get on the roof. They are mainly interested in the functionality of the house such as how many bedroom and bathrooms, whether they like the layout of the floorplan, etc. Here is a great video from a Portland appraiser, Gary Kristensen, that shows you what you can expect when an appraiser visits.
A Home Inspector will really get into the bones of the home. They will get on the roof, get into the crawl space, and analyze the structural integrity. A good Home Inspector will be able to find possible issues that the Appraiser may not such as termites, faulty electrical wiring, plumbing that is not up to code, structural issues, leaky roof, mold, etc. Now that I’ve scared you with all the things that could be wrong with a house you’re looking to purchase (!), I highly recommend that if you are buying a home you hire a licensed Home Inspector to complete a full home inspection because they will be able to tell you things about the home that the typical appraiser is not going to. If you don’t know a good home inspector in Chicagoland, we recommend Inspectrum. Click here for their website and contact info.
I love when I have the opportunity to meet the listing agent at the property, but as you know, that’s not always possible. This fillable/interactive form allows you to make sure the appraiser has all of the information they need to complete a thorough appraisal of your listing. I’ve broken this form up into two sections with the first covering the recent updates to the property and the second related more to the market area and ways in which your listing shines. Each section/question is designed to help you communicate pertinent information to the appraiser that will be helpful is the appraiser determining the most accurate opinion of value.
By completing this section, you can make sure the appraiser knows about updates and improvements made to the property as well as their approximate cost. Obtaining the approximate cost of the improvements can be helpful in supporting a significant increase in value if the home had recently sold prior to these updates. While cost does not always equal value, knowing the cost of improvements assists the appraiser when analyzing the contributory value of each improvement. These updates are broken up into 5 year increments as this is how appraisers are now required to report the updates to the kitchen and baths in the appraisal report.
Here is your opportunity to provide the sales/listings you used to determine the list price -- essentially potential comps for the appraiser to consider. You can also address in the 2nd question major selling points. A good appraiser should already know certain benefits of a property’s location but you, as Realtors, often have more detailed or nuanced information about what prospective buyers are looking for. Think of what is most discussed or brought up by potential buyers when you are showing the house. Was it the large master bedroom suite, walking distance to the Metra or Blue line, proximity to downtown’s shops and restaurants, the best school district in the area? All of this is great information for an appraiser to have.
More specific questions, such as the one about multiple offers, may ultimately help the appraiser support an opinion of value that takes into account current market demand that may not be reflected yet in recent sales prices (possibly an indicator that values are increasing). Lastly, there is an area for anything else you want the appraiser to know.
for Real Estate Agents
We also do a ton of “non-lender” work, so I also created a modified version of this form to give to homeowners who call me directly for appraisals for divorce, pre-listings, estates, etc. Click below for a copy of this modified version to help you ascertain the recent improvements when putting the MLS listing together and pricing the property.
Real estate agents and appraisers alike often struggle to define the architectural style for unusual or unique properties. Have you ever gotten a new listing, took one look and started scratching your head and asking yourself how you are going to describe this to prospective clients?
Even more basic properties can present a conundrum when they nod to more than one typical style. The web offers some great resources to both educate yourself on architectural styles and help make a decision once you start completing the listing form on the MLS. The National Association of Realtor’s website offers a good starting point (http://realtormag.realtor.org/home-and-design/guide-residential-styles). This article covers common styles across the country but since many architectural designs end up including a number of different styles, it’s good to know your Craftsman from your Colonial. Sometimes it’s just a little bit of detail that turns a standard Cape Cod into a Tudor.
Fortunately, Chicago definitely has some set, easily identifiable housing types. Big Shoulders Realty, a boutique brokerage firm in Chicago, has an excellent page on their website that provides brief histories and descriptions of housing styles common to Chicago that can be helpful when describing a property on MLS (click on the image above to go to the page). Then click on the housing style and you are taken to a page that also shows you actual houses in Chicago that are of that style. It really is the best resource online I have found for the Chicago market (it should be called “Chicago Housing Styles for Dummies”).
But what do you do when you have a more recently constructed property? How do you avoid using the catch-alls “Traditional” and “Contemporary”? Really, I’m asking. Feel free to comment below! General consensus has it that “contemporary” means “of this time” or moment. Something funky, modern-looking or new could fall under that category. For a property where “traditional” seems like the only option, maybe pull out the most prominent feature, like a turret or full front porch or examine the roof line for any elements that point in one stylistic direction or the other.
Rowe Appraisal Group specializes in “non-lender” appraisals and we complete pre-listings appraisals for real estate agents and homeowners all the time. Don’t hesitate to reach out to us if you ever have any questions. You can reach us at (847) 863-5776 or email us at firstname.lastname@example.org.
A couple of days ago I was sitting down to start writing a blog post on how to streamline the initial appraisal process, specifically gathering information on the subject property prior to doing the inspection. Over the weekend I listened to an episode of the podcast “Voice of Appraisal” where Phil Crawford mentioned an improvement worksheet that the Ohio Coalition of Appraisal Professionals (OCAP) has distributed to local area realtors. I recently contacted him and Steve Papin, the president of OCAP, who was kind enough to send me a copy. Here is the PDF (Property Questionnaire), or you can email me and I can send you the Word Doc that is formatted properly).
The main purpose of the questionnaire is to gather information that might otherwise be difficult to obtain. As you can see, the form provides the listing agent an opportunity to list all recent updates and any other details they would want an appraiser to know. Instead of springing all these questions on the agent at the time of the inspection, by emailing a copy in advance they can have the time to do any necessary research and talk to their clients about the property before you even go there. And since it’s fairly often that a property is on a lock-box, you may not even meet the Realtor. Finally, at the end of the day you’ll have a document that can easily be saved to your work file.
In doing more research on these types of questionnaires, I saw that Ryan Lundquist of Sacramento Appraisal Blog, has also shared a “cheat sheet” that you can download here. This morning I was all set to wrap up my blog post by outlining even more benefits to these forms when I saw that Tom Horn, appraiser and author of the Birmingham Appraisal Blog, posted his own version of the “Property Questionnaire” here. So, clearly something is in the air folks! Tom’s blog post, as always, is top notch and has lots of good tips and suggestions for agents and homeowners alike.
I will most likely be creating my own form based on these three examples to include a section for any other additional features that the agent feels adds value to the property, or specific neighborhood info that the agent thinks is important. I suggest you do the same. Choose your own adventure or tailor one of these questionnaires to fit the Real Estate Agents in your own market! Once I’ve gotten mine whipped into shape, I’ll post it to my blog.
I recently came across this interesting animated GIF from an article from RealtorMag regarding land values over the last 40 years. It followed the overall housing market by peaking in 2006 and bottoming in 2011. When thinking about land value it is important to understand a fundamental concept of surplus land vs. excess land. Jonathan Montgomery also wrote an excellent post with some additional information on this topic you can read here.
EXCESS LAND is the portion of the lot that is not necessary to meet the existing zoning requirements AND could possibly be sub-divided and sold off as a separate parcel.
SURPLUS LAND is not large enough to be separated from the existing parcel and therefore, does not have as much value as excess land.
The trick I was taught to remember this is excess land is excellent. Let's look at the following two slides below from a recent class I took from the Hagar Institute (which I highly recommend for all appraisers).
Source: How to Support and Prove Your Adjustments by Richard Hagar
Source: How to Support and Prove Your Adjustments by Richard Hagar
In this example, a 3000 sq. ft. lot is valued at only $3 per sq. ft. as it is considered unbuildable and has minimal utility. Once you get to 5000 sq. ft. the value per sq. ft. increases to $40 per sq. ft. Therefore, a 3000 sq. ft. lot would have a market value of around $9000, while a 5000 sq. ft. lot would have a market value of $200,000.
Remember that when appraisers are analyzing land values, we are NOT making adjustments on the total size, but instead the incremental change in size. This same theory can be applied to many other features of real estate as well (GLA, first bed or bath, first 50' of water frontage, etc.) If you have any questions please feel free to call me at (847) 863-5776 or leave your question or comment below.
I recently came across this map posted on Twitter by Max Galka of Metrocosm.com. It shows a map of the U.S. with the land area of each of the individual counties being substituted by the total market value of the housing. Keep in mind that this is the sum of the values for each county, which is going to be skewed by population; nevertheless, this GIF is way too cool not to share.
I found this map is really hypnotic. Several times while typing this post I have found myself zoned out just staring at it. Anyone else?
Also, I would love to see this type of map that separates out all of the Chicago neighborhoods and suburbs. My guess would be the North Shore, downtown and Lincoln Park in Chicago, and the Hinsdale/Oakbrook area would be the largest.
With all of the discussion regarding the CU (Collateral Underwriter) and using regression analysis to support adjustments, I thought I would share a recent, good old fashioned Paired Sales Analysis (Matched Pairs) to determine an adjustment for a Garden unit vs. a high first floor unit. The idea behind paired sales is to find 2 or more sales that sold around the same time, in the same location, that are the same with the exception of one feature. The difference between to the two sales price should give you a supportable adjustment. The best thing about condo conversions in Chicago, is that when they are converted from apartments, the building and units are often rehabbed and resold around the same time. Even better, they are often rehabbed by the developer with similar finishes in each of the units. When the garden unit has the same floor plan as the units above it, it creates a perfect data set to extract a matched paired sales adjustment. You have similar location (same address), they typically sell with a few months of each other, and are similar in bed and bath count, GLA, etc.
I was appraising a garden unit in on the northwest side of Chicago. While I was able to find other recent sales of garden units for comparable sales, I needed to use a non garden unit to bracket a particular feature. After pulling 3 recent garden unit sales, I found out when the buildings were converted and look up the sales prices of each of the units at that time. Here is the data below:
As you can see above, I have four different paired sales to analyze. One building actually provided two sets as the two units both sold again recently within 2 months of each other. The percentage difference ranged from 9.2% – 15.3%. After average all four percentages, I was able to come up with a 12.5% adjustment for the difference between a garden unit and the unit above it. When the CU comes back and I am asked why I gave such a large (or small, who knows with CU) adjustment for floor level, I can cut and paste this into the addendum. Or better yet, just put in into the report in the first place and hopefully avoid the hassle.
While this ended up working out really nice and neat for this appraisal, my fellow appraisers will attest to the fact that finding good paired sales in all circumstances in just a pipe dream. I just thought I would share one example in which it worked out really well. I have been testing many of the recent regression tools available for appraisers and have found a couple to be really promising. Once I learn all of the nuances and techniques, I believe they will be extremely helpful in many situations. But those of you who have tested them know, they often give some crazy results and other methods will still be necessary. My favorite so far is PAIRS, by Gandysoft. Please leave a comment and let me know which software you are finding to be the most useful so far.
Rowe Appraisal Group specializes in real estate appraisals for divorce, estates (date of death), pre-listings and more throughout the Chicagoland area. If you have any home appraisal related questions, please call us at (847) 863-5776 or email email@example.com.
I recently read an excellent blog post by Gary Kristensen (click here to read). I thought I would similarly take a look at the Chicago market and try to graphically depict the best time to buy or sell in the Chicago real estate market. As we all know real estate is seasonal in most markets with the school year being a big factor, but more so in Chicago due to the blustery winter months.
I exported every monthly data point from the S&P/Case Shiller Home Price Index dating back to 1986 (that’s 336 total data points and 28 monthly data points which should be a large enough of a sample to account for any outliers). I then averaged each month and charted the results…..
As you can see, it appears as if the worst times to sell would be January through April (all below the yearly average). Also, keep in mind that these are closed sales which most likely went under contract 1-3 months prior. So while August appears to the best, those homes most likely went under contract in July and originally listed for sale in April or May (assuming a 60-90 day marketing time).
As Gary astutely points out in his post, most people who are selling a home are also buying a home. Therefore, in these cases, trying to time the market isn’t necessary. For those who are only selling, it looks like listing in May or June would be best (assuming we add 60 day marketing time and 2 months to close). I have also heard an interesting thought from one Realtor who said he loves to list a home and have an open house the Sunday in February after the Superbowl. He said he does this to get ahead of the market and also he gets a tremendous amount of traffic. He thinks it is because many women who want to get a head start looking at homes are finally able to get their husbands out of the house on a Sunday. This is clearly anecdotal evidence (and kind of funny), but an interesting approach nonetheless.
Oddly, December had the second highest average that I could not account for. I showed this to a few other real estate appraisers. They weren’t sure either and thought this could be corporate transfers coming in prior to years end for write offs to people trying to close before the snow comes. If you have some thoughts are what is causing this spike, please add them to the comments below. Also, when is your favorite month to sell.
Rowe Appraisal Group specializes in appraisals for divorce, estates (date of death), pre-listings and more throughout the Chicagoland area. If you have any questions, please call us at (847) 863-5776 or email firstname.lastname@example.org.