Link to article in Working RE
I just fielded a call from a potential client who was curious about how an appraiser would go about extracting an adjustment from the market, in this case specifically basement finish. In the discussion I explained that there is no factor that appraisers use, but that we turn to the market to try and show us what buyers are paying. Because different markets can act quite differently, I thought putting up a couple of examples of this type of extraction might be useful, both to my potential client, as well as my audience in general.
The following show two different examples of an extraction for basement finish, one in Ann Arbor related to a generally newer house in the $400,000 or so price range, and the other in Lincoln school district in the under $200,000 price range. Both use the same methodology and both show substantial differences in final results, which is why an appraiser cannot just provide a number. Instead the appraiser has to look at the market.
The first sample I went back two years and narrowed my market data to houses between 2000 and 3000 sqft, built between 1990-2010 on the west side of Ann Arbor (used areas 82, 83, and 84) and then downloaded all these sales to Excel and segmented the sales between houses with finished basements and without. The results were 37 sales without finished basements and 62 identified with finished basements. I looked at median and average sales price differences and median and average amount of basement finish, and came up with between $21,647 and $24,500 difference in price favoring those with the basement finish, and between $24.24 per sqft and $27.75 per sqft of basement finish. This provided me with some support for my adjustment. I don’t recall what my adjustment was, but I think anywhere between $20,000 and $25,000 is supported based on this data. That and in my experience, basements in this area cost about $40 per sqft to actually finish.
Here is what it looks like on a spreadsheet:
The next example is using sales in the Lincoln school district, and in this one my isolated properties were between 1,200 – 1,700 sqft in size and built between 1985-2010, also going back two years. I had 48 sales without basement finish and 36 with basement finish, and the median difference in price was $8,953 and the average price difference was $14,420. The median size of finish was 625 sqft and the average size of finish was 703 sqft, supporting adjustments per sqft of $14.32 to $20.51.
As you can see, there are differences in price between the areas and the sizes, as would be expected. Cost remains about the same to complete. Each appraisal may be different, and the numbers found here in these two samples could change depending on how far back the appraiser goes on their data research and what they set as the perimeters for the data search. I offer this to you, my readers, as a simple study showing how I often go about trying to extract an adjustment from the market.
A final word of caution; I would not expect to see an appraiser put this analysis into their appraisal. They will likely do it, and say something in the report about the adjustment being analyzed through market data. This is what they likely mean, but won’t put the actual results into the report, instead they will have it in their files, be it in the office in general, or specific to an appraisal they were working on.
Hope you all enjoyed this simple explanation, and if you have questions about appraisals and appraisal processes, please feel free to contact me. Easiest way to reach me is via email at rach mass at comcast dot net.
Well, not if you look outside (or step out into this crazy weather), but doing my normal Open House sleuthing, it was pretty apparent that the pent-up demand is driving buyers in droves into the market.
I looked at three disparate properties; a small ranch in the Lincoln school district, a larger contemporary home overlooking Gallup Park trails, and a mid-century modern on the west side of Ann Arbor on a semi-busy road. On each of these visits, there were not quite wall-to-wall buyers – quite surprising for March 1st.
The Ypsilanti Twp (Lincoln school) property had three sets of buyers at the house already when I got there and as I was leaving another was coming in the door and two cars were pulling up. Not shabby for having opened only ten minutes earlier. The house overlooking Gallup had two sets of buyers at it, another one leaving, and a couple of people waiting in a car, likely waiting for their agent to show up. The listing agent, who is a personal friend of many years, had little time to actually talk because he was busy fielding questions. This is an excellent sign. The last house was crazy. It had come on the market two days before and apparently already had three offers (it showed up as under contract today). I got blocked in the driveway and couldn’t leave for a while, and potential buyers were having to park down the street to come in.
Why do I write about this? Because I think it is important, as an appraiser, to stay in touch with your market. How better to stay in touch than to see it from the perspective of buyers, as well as agents who are active in the market. Agents may tell me they are busy, but I can see it first hand if I am at Open Houses and can barely get through. The opposite can also be true, as agents could tell me they are getting a lot of activity, but be happy to have a visitor at the open house.
Right now it looks like our early spring market has hit. This is common in the Ann Arbor market in March, but it feels a couple weeks earlier than normal.
Now if only the actual weather would follow…
As in much of the United States, our local Ann Arbor market has experienced a significant decline in the number of bank-owned sales (known as REO for “real estate owned”) compared to the number of regular arms length sales. In graphic format, this is what it looks like on an annualized monthly basis:
In brief, the percentage of REO sales have gone from 10.26% of the market (MLS only) in the Ann Arbor school district, to 2.84% as of February 1, 2015. Ann Arbor hasn’t been hit hard by the foreclosure market as was much of the rest of Washtenaw County, but it still did make up a portion. I find that using graphics to show my intended users what a market is doing, is helpful, but only if there is some analysis that is offered alongside it.
To run my market data, I set up a spreadsheet and track the number of sales, the list price to sales price ratio, the median gross living area, median price per square foot, and days on the market as the following example shows:
What is telling to me, more than anything, is what is happening in the market as far as contracts. For example, look at the number of sales that occurred for the entire Ann Arbor market, from 2/1/14 through 2/1/15 – a total of 1,059 sales. This means, if the market is moving at the same general rate, the expectation is of 88.25 sales per month, rounded to 88 sales per month. With 124 active listings, not under contract, that is a supply of only 1.41 months of inventory. When inventory is this low, very often prices will be pressured upward due to limited choices. If you look at the number of houses under contract, compared to the total on the market (79 under contract plus 124 active for 203 total) and divide the contracted sales into the total listings, 38.92% of the listings on the market are under contract.
I have been using this “contract-to-listing-ratio” in one iteration or another since @ 1992, and am comfortable saying that with 38.92% of the houses on the market in the MLS under contract, we are in a rocking hot late winter/early spring market, at least for the overall Ann Arbor market.
Each appraisal that I do, looks at both the macro market (such as the entire Ann Arbor school district) and micro market, which is the market in which my subject property is operating. Sometimes they are moving in different directions, or at different levels. This is the type of analysis, that in my opinion, is important for the appraiser to take in order to keep with the market. In addition to working these types of graphs, I find it critical to talk with the local REALTORS who are active in the market, as well as attend Open Houses to see what activity is taking place.
When you hire an appraiser to value your most important (or one of your most important) assets, why settle for anything less?
This blog belongs to Tom Horn, a Birmingham AL appraiser who has lots of good content. He gave me permission to post his blog, so I am copying the link here:
In essence, he gives four reasons to consider getting an appraisal even when you are paying cash for a house.
1) To verify that you are not overpaying
2) To know how your house compares to the rest of the market
3) As a tool for negotiation
4) For lower taxes
I hope you enjoy his article.
Not 100% sure if we can post our own material that was published elsewhere so instead am placing a link to it here if anyone is curious:
Courage of your convictions
…….Or put your money where your mouth is
As an appraiser who works a very small area, and has for many years, I am fortunate to have quite good relationships with the agents in my community. Because of this, I get a lot of calls and emails asking for help when they run into situations with appraisals on their sales. Often the situation involves an appraisal that is under sales price where the agent is adamant that the appraisal is wrong.
Yesterday I had an email from an agent who told me that she had done her CMA and had arrived at an estimate of $325,000 for a sales price and that the house went under contract for $321,000, so pretty darn close to what her estimate was. The appraisal came back at $286,000 which is quite a bit lower than sales price, and the buyers and sellers were in negotiation to have the seller come down in price and the buyer bring more money to the table. The agent was adamant that the appraisal was faulty and used old sales that she did not think were appropriate. I offered to do a review of the appraisal as well as provide an opinion of value, all for a fee of course.
In this instance the agent balked and said that she didn’t want to spend the money; that the seller didn’t want to spend the money. My question is why? If you are convinced the appraisal is wrong, why not spend the money to either show that indeed the appraisal is wrong, or to provide a second opinion that the appraisal is actually correct? If there is $35,000 difference at stake, isn’t $500 or so for a second appraisal or review a worthwhile use of money? Or, is it possible that the reason that the agent didn’t want to spend the money, is in examination, that the appraisal might be fine?
What I really want to know from agents is why they don’t take the route of getting a second opinion from a local appraiser who knows the market well? If the review indicates there is a problem with the appraisal, then the agent can share it with the lender to see if there is recourse, such as a new appraisal, or a review from one of the lender panel appraisers. If the appraisal is shown to be fine, then there is a level of comfort that the agent and seller can have to negotiate, or move forward (or not) with the transaction.