Why is an appraisal necessary?

Most appraisals are completed as part of the mortgage lending process, with the lender being the entity to request the appraisal. If you think of it this way, a bank has most of the money on the line. Before lending it to a borrower, they want to know whether that the property is worth the amount of money being borrowed to purchase it. The banks want to be sure that if for some reason the borrower stops making payments on the mortgage and stop paying off the loan, the bank can repossess the house and sell it in order to recoup the money lent in the first place. If an appraisal comes back to lender for far under the contract price, that would raise some concerns that the borrower is attempting to borrow more than the property is actually worth. Along with checking a borrower's credit score, debt-to-income ratio, etc., the appraisal helps the lender assess risk. This is known as the loan-to-value ratio. If a borrower is fronting 50% of the cost of the home for example, that means less risk for the bank. But if the borrower has a very small down payment and is borrowing 90% to 100% of the cost of the property then that is much more risky for the bank.

Other common reasons for an appraisal:

    • Estate Appraisal (Also known as a “Date of Death Appraisal”): When an estate transfers ownership because of a death or inheritance, in most cases a real estate appraisal is needed for tax purposes and often to determine a listing price for the home. (click here to read more)
    • Divorce Appraisal: For many couples, the marital residence is the largest asset obtained during the marriage and an accurate appraisal is extremely important (click here to read more)
    • Financial and Estate Planning: Financial and Estate Planners are often relied upon by their clients to provide sound, well-informed advice and the value of the real estate assets are often needed to develop the best and most effective strategies for their clients (click here to read more)
    • PMI Removal: If you purchased your home with conventional financing and put less than 20% down, it’s likely you’re paying PMI. If your property value has appreciated, providing your lender with an appraisal can help remove this additional cost (click to read more).
    • Tax Assessment Appeals: Most real estate and property taxes are based upon the value of the property. When the taxing agency values your property at a higher rate than the actual value, you are paying too much in taxes (click here to read more).
    • Pre-listing, Pre-Purchase, FSBO’s: When trying to establish a fair list price is often difficult to sift through all of the market data to determine a true value for your home. Itt’s common for homeowners and realtors to rely on appraisers for assistance when establishing a list price for the sale of their home (click here to read more).

A few words from our clients

Paul Rowe is a consummate professional. In appraisal work there are hard facts and there is nuance. Paul does not ignore factors that are outside of the facts that could influence the value of a piece of property - such as litigation regarding the property, conditions of the immediate neighborhood that might not be affecting other similar properties a few blocks away. Paul digs in, does his due diligence and is able to come up with a number that not only can be relied upon but can stand up in court (and has). Absolutely one the top appraisers in the Chicago metropolitan area.

Erica Minchella
Attorney

Use Rowe Appraisal if you are looking for a knowledgeable and helpful company.

Jamie Bernhardt
Real Estate Agent

Call us today for a free consultation.

Real Estate and Price Per Square Foot

Realtor Tip: Multiple Offers? Tell the Appraiser!

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.


Why should an appraiser want to know this information?

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. 

  1. Is the contract price above list price? Multiple offers could help explain this. We are required to analyze the sales contract and listing history for the subject property. In most cases our clients require a comment/explanation when a contract price is higher than the most recent list price. Knowing that there are multiple offers indicates a strong demand for the property at that specific price point. If a home was only listed on the MLS for 5 days and has multiple offers, it most likely indicates that the list price is at or below market value. Or it could signal that inventory levels are low and buyers have very few alternatives. Or maybe both.
  2. Multiple Offers will alert a good appraiser to dig deeper.  If I am analyzing comparable sales and they are indicating a value below the contract price, maybe I need to call the agents on the listings and see if I am missing something (perhaps one or more of the comparables were distressed or estate or relocation sales and sold below market value). Maybe I need to look deeper at the current market conditions. Are inventory levels low? (Typically below 3 months would raise a red flag.) Maybe I need to look further into the median sales prices and see if the trend is showing significant price appreciation. In an increasing market, the appraiser should adjust comparables that sold several months ago upwards to bring that sale price to today’s market conditions. However, this needs to be supported by market data. (Infosparks can be a great tool for this if used correctly. Stay tuned for an upcoming post/video showing how it works and how you can use it in your practice.)

It's not a magic bullet, but it could make the all the difference.

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.


APPRAISER / REALTOR FACEBOOK GROUP

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.

Real Estate Agent Property Questionnaire

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.


Section 1 (Improvement/Updates)

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.

Section 2 (Market Information)

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.

Multiple Offers and Additional Info

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.


Property Questionnaire

for Real Estate Agents


Questionnaire for Homeowners

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.

Chicago Housing Styles

 

Chicago style bungalowReal 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.

Chicago housing styles via Big Shoulders Realty

Chicago housing styles via Big Shoulders Realty

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 roweappraisalgroup@gmail.com.

Property Questionnaire for Real Estate Agents

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.

Land Value: Surplus vs. Excess

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. 

The Housing Value of Every County in the U.S.

The Housing Value of Every County in the U.S.

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.



Market Value: Probable Vs. Possible

Market Value DefinitionThe CU (Collateral Underwriter) is obviously a hot topic right now and there are many excellent blog posts written by fellow appraisers that point of many of its flaws (see the bottom of the page for links to those posts).  On a recent positive note, Fannie Mae recently sent a letter to its lender clients that included the statement, “Before asking the appraiser to consider any alternative sales, it is imperative that the lender analyze the relevance of the sale and determine if the use of such a sale would result in any material change to the appraisal report.  If the lender determines that there would be no material change, then they should not ask the appraiser to make revisions.”

But what I want to touch on in this post is that the existence of the CU will more than likely change the approach of many appraisers (in a good way).  Why would this change an appraiser’s approach?  One of the answers lies in the definition of market value as defined by Fannie Mae.  Sometimes as appraisers, we may need to be reminded of one of the most important parts of this definition.  Fannie Mae’s definition is as follows:

Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  • buyer and seller are typically motivated;
  • both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
  • a reasonable time is allowed for exposure in the open market;
  • payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  • the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
The key part of this definition that I am focusing on is “the most probable price”.  Not the highest possible price, the most probable.

As was recently pointed out on the Voice of Appraisal with Phil Crawford recently, “Possibilities and probabilities are two totally different things”.  Prior to the HVCC, it was not uncommon for appraisers to be asked by loan officers, “What is the highest value you can appraise this property for?”.  The HVCC eliminated much of that by adding a layer of protection (and in-consequently taking a chainsaw to our standard fees).  However, there were still appraisers that would search the neighborhood and cherry pick a few of the highest sales in an effort to support the purchase price.  However with the CU, if only the 3 comparable sales with the highest sales prices are used, the CU will most likely bring that to the attention of the lender, who could in turn bring it to the attention of the appraiser.  If you are appraising a home that has 10 similar sales in the neighborhood and you use the three highest, the appraiser better have support and be prepared to explain why their value is at the upper end of the range.  That is not to say that in certain circumstances it should not be at the upper end of the range (superior condition, superior quality of construction, larger lot size, superior view, larger GLA, etc).  But if the subject is in the middle of the range when compared to the comparable sales in terms of many of the factors that affect value (GLA, condition, quality of construction, bed and bath count, view, location, basement area and finished basement area, lot size, etc), then the final opinion of value should not be at the extreme high or low end of the range.  Again, our job is to determine the most PROBABLE price the property would sell for, not the highest POSSIBLE price.  This should also help keep artificially inflated appraisals out of the refinance and home equity markets.

How this plays out over the long term remains to be seen.  I know most appraisers have much bigger concerns with CU and how it will impact our profession in the short and long term, as do I.  It’s just that these issues have have all been written about by other appraisers.  I just thought I would suggest a revisiting of the definition of market value.  The “most probable and not highest possible” portion of the definition is also something that appraisers can point out to educate your clients and even real estate agents when your opinion of value is below a contract price.

Links to additional articles on the CU:

 

Rowe Appraisal Group specializes in real estate appraisals for divorce, estates, pre-listings and more throughout the Chicagoland area.  If you have any real estate appraisal questions, please feel free to call us at (847) 863-5776 or email paul@roweappraisalgroup.com.

Paired Sales in the Chicago Condo Real Estate Market

Chicago Condo Garden

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:


Chicago real estate apprasier

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 paul@roweappraisalgroup.com.