Educate Your Clients with Long-Form Content
At one time long-form content, like the article below, was the go-to strategy for content marketing. Long-form content gives you greater opportunity to utilize keywords and key phrases and get to that coveted page-one on Google. But nowadays, the internet is overloaded with helpful information; there just isn’t time to consume it all.
Most of the time your clients are looking for [insert their subject] cliffs-notes; a quick summary of the information they need. However, there’s still a need for long-form content on your website. Let’s consider the following article as an example.
Suppose you have a seller who’s just accepted a well-above-ask offer on their home. And let’s say you’ve been experiencing appraisal problems because of a hot market and low inventory. A day or two before the appraiser is scheduled to come through you send your seller a link to an article like this.
You can do the same thing with an article about the home design/building process and what to expect, or how to negotiate your lease agreement. Instead of just telling them what to expect or how to prepare, you’re showing them a well-researched article that you wrote. You’ll look like the genius professional you are and your clients will love referring you to their friends and relatives.
So . . . when you’re ready to look like a genius, drop me a line or give me a call.
How Do Appraisers Determine Your Home’s Value?
Whether you’re buying or selling your first home or your fifth, it can be an incredibly stressful event. Home buying and selling emotion levels rank right up there with your wedding day, childbirth and watching the Packers in the Super Bowl. And nothing seems to have the potential to cause everyone involved more stress, than the outcome of the appraisal.
Home inspection challenges can be overcome, credit problems corrected and cold feet warmed. But neither the buyer, the seller, the Realtors nor the lender has any control over the outcome of the home appraisal.
As a Realtor as well as a former SRA (Senior Residential Appraiser) and certified property assessor I’ve been on both sides of the appraisal fence. A good place to start this conversation is with the definition of real estate market value.
What is the Definition of Real Estate Market Value?
Real estate market value is defined as;
“What a reasonably informed and willing buyer, unaffected by undue influence, will pay, and what a reasonably informed and willing seller, also unaffected by undue influence, will accept, for a property exposed to the open market for a reasonable length of time.”
Considering the above definition and the appraiser’s job to determine a reasonable and supportable estimate of market value, consider the following two scenarios and their potential to make life difficult for everyone involved in the real estate transaction;
It’s a super hot market and a home sells within hours of “going live” on the MLS.
A home finally sells after having been on the market for many months with two different Realtors through numerous price reductions.
Does the probable sale price in either case really fit the definition of market value?
If the average marketing time for a home in your market is a fairly typical 60 to 90 days, is the buyer of a home that sells within hours of “going live” on the MLS, unaffected by undue influence?
Isn’t it possible the buyers are – having missed out on a couple of other homes because of the hot market and now made aware they are again in a potential multiple offer situation – affected by undue influence? Are they not potentially inclined to make a better-than-ask offer to assure theirs is the one accepted?
Likewise, isn’t it possible that the offer on the home that’s been on the market for many months going to be lower, possibly much lower, than the asking price? Isn’t it possible those buyers may see the potential of a desperate seller willing to accept any offer?
So just exactly how do appraisers determine a reasonable and supportable estimate of market value?
The Three Approaches to Value
Appraisers have at their disposal, three different approaches to value. Only one of the following three approaches is typically applied when valuing an existing single-family home.
The Cost Approach
In the cost approach to value the appraiser . . . ;
- adds up the costs to reproduce a new home similar to the home being appraised.
- subtracts the effects of any physical, functional or external depreciation.
- adds in the value of the land the home sits on.
Physical depreciation items are things affecting the condition; worn out carpeting, an old furnace, or a roof that needs replacing.
Functional depreciation is something that affects how the house functions as a typical single-family dwelling. It might be a basement that’s only accessible from the outside or the only bathroom in a home being on a different level than all the bedrooms.
External depreciation is something outside the property that affects its value. Think of a home located next door to a gas station or one that’s located on the corner of a busy intersection.
The difficulty in accurately determining the effect of the different types of depreciation makes this approach to value less reliable in the valuation of existing homes more than a year or two old.
The Income Approach
Value via the income approach is based on the potential income that could be generated by the subject property if it were placed on the open market for rent.
Utilizing the income approach the appraiser has available two different methods of valuation;
- Income capitalization
- Gross Rent Multiplier
Using income capitalization the appraiser first determines . . . ;
- the fair market rent for the property.
- then subtracts all expenses found in operating the property as a rental.
- then capitalizes the net income based on current money market rates.
Income capitalization is more commonly used in the valuation of large investment properties like shopping malls and office buildings.
When the income approach is utilized in the valuation of residential properties the appraiser will more likely utilize the gross rent multiplier method.
In the gross rent multiplier method the sale price of a comparable property – that was rented when it was sold – is divided by the rent that was received at the time of sale.
For example; a home sells for $120,000 and it was rented for $1,000/month at the time of sale.
$120,000 / $1,000 = 120 GRM (Gross Rent Multiplier)
If enough reliable data is available the appraiser can apply the gross rent multiplier to the potential rent that could be generated by the subject property to arrive at a value via the income approach.
The challenges here, in appraising the typical single family home are;
- finding enough single-family rental data to establish fair market rent
- finding sufficient sales of single-family rentals to establish a supportable gross rent multiplier
The Comparable Sales Approach
Comparing the subject property, to other homes that have sold recently, is the commonly accepted method of determining residential real estate value.
In the comparable sales approach the appraiser will gather data on homes sold in the recent past that are as similar as possible to the subject property and then make adjustments for the differences.
In theory, the adjustments the appraiser makes to the comparable sales are based on an analysis of paired sales.
A simplified paired sale example;
In his research the appraiser finds sales of two – nearly identical – split foyer style homes;
- Sale Price: $175,000
- Sale Date: 11/15/2019
- Bedrooms: 3
- Bathrooms: 2
- Fireplace: 1
- Deck: Yes
- Garage: 3-car attached
- Sale Price: $170,000
- Sale Date: 11/10/2019
- Bedrooms: 3
- Bathrooms: 2
- Fireplace: 1
- Deck: Yes
- Garage: 2-car attached
The only measurable difference between the two properties is the garage; sale #1 has a three-car garage and sale #2 has a two-car garage. The difference in sale price is $5,000.
Based on this paired sales analysis the appraiser can determine that an extra garage stall, in split foyer style homes in this market, adds $5,000 to the value.
The Paired Sales Analysis Adjustment Applied
So now the appraiser is valuing your split foyer style home, which has a three-car garage. He has three sales he’s going to compare to your home to establish the value.
Sale #1 sold for $166,000 and it has a two-car garage, which in essence means this first sale is one garage stall inferior to your home. Through the above-described paired sales analysis the appraiser has determined that an extra garage stall adds $5,000 to the value of a home.
The appraiser makes a “plus” $5,000 adjustment to the sale price of this home. $166,000 + $5,000 = $171,000 being the indicated value of your home from this comparable sale.
Sale #2 sold for $173,000 and it has a three-car garage. The appraiser does not make any garage adjustment to this comparable sale.
Sale #3 sold for $167,000 and it also has a two-car garage. The appraiser makes the “plus” $5,000 adjustment indicating a value via this comparable, of $172,000.
In the end, the adjusted values of the three comparables are;
#1 = $171,000
#2 = $173,000
#3 = $172,000
If these are the only differences, and the appraiser isn’t an idiot, he’s probably going to arrive at a final value estimate somewhere between $171,000 and $173,000. Considering sale number two didn’t require any adjustments his value will probably be $173,000.
And Then Reality Rears its Ugly Head
If this had ever happened to me when I was an appraiser – that a garage space was the only measurable difference between the subject property and three comparable sales – I would have jumped for joy, knocked off early for the day, made myself a bloody mary and retired to my deck. It just doesn’t work that way.
Rarely do the subject property and the comparable sales differ by only one item.
One sale may have three bedrooms – but only two on the main level and the third in the lower level.
One of the comps may be located on a corner lot at the entrance to the subdivision while the subject is on an inside lot on a cul-de-sac street.
Maybe one of the sales has a four-car garage – but that doesn’t necessarily mean it warrants a $5,000 negative adjustment (based on the above paired sale analysis example) because the average buyer probably doesn’t place as much value on a fourth garage stall as they do a third stall.
And therein lies the rub in valuing residential real estate. Single-family homes, their locations, conditions, and amenities are as different as a football team that actually wins Super Bowls and one that doesn’t.
Three Major Comparable Considerations
When appraisers start their search for comparable sales they’ll likely first consider three major attributes;
- Time of Sale
- Home style
Think about the time of sale as an example.
Earlier we talked about a home selling in hours – not days or months – in a hot spring market. Let’s say you’re the lucky seller (and hopefully I’m the lucky Realtor). Your home listing goes live on the MLS at eight o’clock Tuesday morning March 22nd and by five o’clock Tuesday afternoon you have three offers; two at asking price and one for $5,000 more than ask, with no contingencies. It’s a no-brainer which one you’ll accept.
Two weeks later, inspection complete and accepted, the appraiser comes through. When she starts her comparable sales search what does she have to pick from?
If she selects sales from within the last three months – as suggested and often required by mortgage loan underwriters – more than likely those sales will have occurred during the holidays or in the dead of winter right after the first of the year; probably not a time of high demand. Can you see a potential problem?
Yes, appraisers can make time adjustments. Through a paired sales analysis as described above, the appraiser determines that homes selling as of today, on average (for example), are selling for five percent more than they did three months ago. But believe me, a loan underwriter is going to look long and hard at a home value based on three sales all requiring time adjustments to support the sale price.
Equal Parts Art and Science – Objective and Subjective
Valuing residential real estate has been likened to being part art and part science.
Think of the difference between valuing a property via the income approach as opposed to the comparable sales approach.
When an investor considers the purchase of say, an office building, he could care less – emotionally – about its design, how many bathrooms it has, what colors the walls are or whether or not it’s in a particular school district.
For an investor, if the property has positive rental history and – in an ideal situation – positive cash flow (meaning the income covers all expenses and then some) it’s a done deal. It’s a logical investment that will pay for itself and increase in value over time.
As a Home-Buyer You’re (Probably) Not Considering Investment Value
Certainly, your home is an investment and in the average American’s case, your largest single asset. But most likely you didn’t make the decision to purchase your home from an investor’s point of view.
You bought your home because of the number of bedrooms it has, or its location close to schools or the fact it has a fully finished basement with a wet bar, a kegerator, and a built-in shuffleboard court.
The average homebuyer considers an entirely different set of criteria than the investor. Additionally, you may have placed value on items other potential buyers may not have.
What Ads Value in Your Mind May Not in Someone Else’s Mind
Years ago I was appraising a Harold Crawford designed home on a very desirable street in southwest Rochester. The architectural details were amazing, the yard was beautifully landscaped and the home was in excellent condition.
Taking the tour with the owner (this was for a refinance not a sale) we came to the master bedroom. The owner went into great detail about the cost of and difficulty in obtaining the imported Italian wallpaper they had just installed. Imported Italian wallpaper – by the way – that was the god-awfulest purple and gold striped wallpaper you’ve ever laid eyes on.
Are there buyers who would have loved, and therefore placed value on that wallpaper? Sure, maybe. Are there other buyers who would have considered it such a negative that they either declined to even make an offer or discounted their offer based on their opinion of the cost to replace the wallpaper? Of course.
In another refinance appraisal instance I had a homeowner complain I had not considered – in their appraisal – the fact they had Gaggenau appliances; oven, cooktop, frig, etc…
Are there buyers – in particular people who love to cook – who would be out of their minds ecstatic they found a home with Gaggenau appliances thereby immediately placing an offer at full – probably over-inflated – asking price? You bet.
But the average buyer? The you and I who heat up Spaghetti-o’s in the microwave for the kids on Friday night and the only time we use the oven is to bake those delicious Nestle’s chocolate chip cookies they have in the refrigerator case at the grocery store. Do we care or add value because a house has custom appliances? Probably not. And if we do, do we add value anywhere close to the cost of those appliances? (Insert big loud buzzer sound here) NOT!
So as an appraiser using one of the above homes as a comparable sale, how do we know which person bought the home? The one who loved the wallpaper or the custom appliances and so potentially paid more – or was it the buyer who hated the wallpaper or couldn’t have cared less about a custom range?
Take Some Advice From Bobby McFerrin
Don’t worry, be happy. In a rising healthy market like Rochester, Minnesota you will not often have appraisal problems.
The last bank mortgage appraisal I did was more than 20 years ago and certainly, the industry has changed considerably since then. Please understand I am not speaking for any appraisers today but I’ll tell you how I looked at things when I was appraising.
If I was valuing a house that sold for $100,000 and after everything was said and done I was coming in at $95,000 – unless my comps were dead-on perfect – I’d find a way to get to $100,000.
As we talked about earlier, real estate appraising is part art and part science and no appraiser is that accurate that he/she can say a property is worth $95,000 but not $100,000 (Again, unless the comps are side-by-side, same street, unadjusted perfect.)
The appraiser’s job is to assure the lender that the value of the property they’re receiving a mortgage on will cover their risk. And while it’s not the appraiser’s job, her appraisal also assures you that you’re not paying too much for the biggest investment of your life.
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