My New Blog

Yesterday while I was doing something in the kitchen, I overheard a person on TV say that right after the break they would give us a report on the housing market. Then the pretty lady added that they would tell us a "sure-fire way to sell your home in any market." This, of course, was their hook to keep people from wandering off too far during the commercials. 

When the report came back on, they talked about how home prices overall fell during 2009 from the previous year, although certain markets have seen a slight increase.  Not really news so far.  Then they had some interesting information about what buyers are looking for:  Smaller homes with open living areas.  People have less money to spend, so smaller homes are more in demand.  Also, because of having less money they are spending more time at home so they want houses with open living areas better suited for entertaining.  That's interesting, but not real useful if you have a house you are trying to sell that doesn't fit that description.

Then came the part millions of viewers/sellers were waiting to hear.  It kills me how these "news" channels are always making news out of stuff that isn't.  I am also amused by how they take something that is just common sense and present it as a newly discovered vein in the mine of knowledge. Perhaps in this case the added hype was a good thing, because there are still a lot of people out there who need to hear this. Although I already knew what they were going to say, I wanted to hear them say it, anyway.  The "sure-fire way to sell your home in any market" is to price it properly. 

There are basically two ways that short-sales and REOs are given consideration in an appraisal.  The first way is by straight-out using them as comparable sales.  The scenario I described in a previous blog demonstrates  that at times it's all but impossible not to use them.  In that case distressed sales made up 50% of the comparable sales and 50% of the competitive active listings.  The distressed properties had a clear advantage in terms of lower prices.  When I say "distressed" properties, I don't mean properties in poor condition, either.  I mean properties that are in as good a shape as the subject.  In some cases they are in even better condition because they've never even been occupied.  We hear a lot about bank-owned properties being stripped down to the walls by the former owners.  I would not use those sales in my analysis since they are not comparable to the subject.  They are not comparable because of their poor condition, not necessarily because of their status as a short-sale or a bank-owned property.

Some people feel that you shouldn't ever use short-sales or REOs as comparables.  Their logic is that they are not arm's-length transactions and therefore do not represent "market value."  An inherent assumption in the definition of market value is that neither buyer nor seller is under any duress, i.e., pressure to buy or sell.  It is true that a person who is short selling their home is under some pressure to sell or they wouldn't be short-selling.  They most likely can no longer afford to make their mortgage payment and would like to avoid foreclosure if possible.  However, in this market, isn't it also true that just about everybody who is selling their home is under some kind of pressure to sell? 

What about bank-owned properties?  Are banks under terrible pressure to sell?  Not really.  They simply do not want to be in the business of owning real estate, especially in a declining market.

Let's not forget a basic principal of appraising: the principal of substitution.  Why should you pay my price for my home when you can walk across the street and get one that is virtually identical to mine for 20% less?  If it can be bought for less, it will be.  The appraiser's main concern is the market value of the subject.

The second way that short-sales and REOs are given consideration in the appraisal is in the market/time adjustments.  I will not use short sales or REOs as comparable sales when it is possible and/or appropriate not to use them.  But that does not mean that we escape their influence altogether.  If you ascertain that the market for properties comparable to your subject is declining, you must address that in your report.  It may be that your comparable properties sold recently and the rate of decline is low enough so that any adjustment be unwarranted.  On the other hand, if you determine the market has declined by, say, 12% over the past year and your most recent sale went under contract three months ago, you may have to make a market/time adjustment. 

At this point in time, there are so many short-sales and REOs it would be almost impossible not to be affected by them.  So, even if you do not use short-sales and REOs as comparables, they are probably a factor in your declining market, and their influence shows up in the market/time adjustments.  At the very least, they have probably affected the value of the comparable sales that were used in the analysis.  In any case, short-sales and REO's make up a large percentage of many markets today.  Trying to ignore them altogether could result in a misleading appraisal report.    

There is a Spanish proverb that says, "Regulations are for your enemies."  There is currently a movement afoot to regulate AMCs.  It is gaining momentum here in Florida and in other States, as well.  As of this writing, AMCs are not regulated at all.

Some have argued that it would not be in the appraisers' best interests to regulate AMCs.  Their reasoning is that regulation will tend to limit the number of AMCs doing business.  The more AMCs that are out there, the more they will have to compete with each other for the dwindling number of appraisers.

That may be true in the long term, however, in the next few years I believe the competition among AMCs will be more focused on getting the lender's business.  This means promising the lenders faster and cheaper appraisals - bad for appraisers.

The State is concerned with public safety, not so much that they believe fast and cheap appraisals represent a danger to the public (although I think they do) but, rather, the fact that anybody, including appraisers who have lost their licenses for producing fraudulent appraisal reports, can turn around and start up an AMC.  This, one could easily argue, represents a danger to the public.

A lot of appraisers want to see AMCs regulated.  They resent AMCs for taking their clients and then charging them for the privilege of doing so.  Then the AMCs add insult to injury by demanding unreasonable turn-around times and throwing in additional "requirements" that seem to serve no purpose other than to make the appraiser's job even more difficult.   

I know some appraisers who do AMC work, but I don't know any who like it.  Appraisers are scattered, and we have very little influence over our industry at this time. This will not always be the case, since more appraisers are getting together to see that changes are made.  Eventually, we will take charge of our industry.  With so many enemies out there, the regulation of AMCs is inevitable.       

  I often get asked, "Will short sales and foreclosures affect my appraisal?"   The answer is a definite, "It depends."  It depends if short sales, REO's, foreclosures, and pre-foreclosures, etc., (I'll collectively refer to these types of sales as "distressed sales") are a factor in your market.  That is, if they are affecting the value of properties that would compete with yours for a buyer. 

  For example, I recently appraised a town home where 15 comparable properties had sold in the past year and five of them were distressed sales.  Now, that fact in and of itself may not mean that distressed sales are a factor affecting the current market value of the subject, but all five were the most recent sales that had closed in the past 90 days.  In other words, you would have to go back over 90 days to find a sale that was not a bank-owned property or pre-forclosure short sale.  Furthermore, there also happened to be 15 comparable properties currently listed, and seven of them were distressed sales.  The list prices of the distressed sales were, on average, 18% less than the list prices of the non-distressed sales.  With that much difference in price, the chances are good that the distressed properties will attract buyers before the non-distressed properties. 

  This is clearly a case where distressed sales are affecting property values in this particular market segment.  Anybody wishing to sell a town home at this time and in this market will have to compete with these lower-priced properties.  In theory, after the distressed properties are bought up, property values will increase.  This could be as short a period as a few months to a year.  I say "in theory," though, because other factors may come into play to keep property values depressed.  These may include such things as more distressed properties coming onto the market and/or a decrease in the purchasing power of the typical buyer due to such things as rising unemployment and higher interest rates.      

  I recently completed 30 hours of continuing education to renew my appraiser's license.  I sat in class with some 50 - 60 other appraisers for three fun-filled days of education and camaraderie.  Believe it or not, I actually enjoy getting education in a classroom rather than online when it's practical to do so.  I enjoy the opportunity to meet other appraisers and talk shop.

  Many of the appraisers I talked to told me that they hadn't received an order in weeks or even months.  Many had already taken other jobs.  On day two, during a break, I asked the instructor if she would ask for a show of hands as to how many appraisers had either left the business or were seriously considering leaving.  When she did, about half the class raised their hands.

  In talking to many of these appraisers, I noticed a few things in common.
When I asked them what were they doing to market themselves, they said "Nothing, really."  When I brought up important issues facing the industry such as the HVCC, they knew very little about it.  When we talked about performing a market analysis, measuring the rate of decline, or extracting adjustments from market data, it was evident that they were struggling with these issues, still trying to do things the same way they had done them for the past 5, 10, 20 years or more.

  Like Bob Dylan said, the times, they are a-changin'.  The days of sitting in your office and letting the business come to you are over.  Marketing is more important than ever.  Changes in laws and policies that are affecting our industry are coming at us so fast that those who are not keeping up will be left out.  The requirements for appraisers to provide meaningful and defensible market analyses means we can't continue doing things the old way.  We need to take advantage of the tools and technologies that are available to us.  We can no longer simply rely on the paired set analysis of three sales.

  Yes, the times, they are a-changin'.  But I see this time as an opportunity for us to improve our skill sets and become better appraisers.  I see this time as an opportunity for appraisers to band together and start setting the industry standards for themselves.       I see this time as an opportunity for those who are serious about appraising to rise to the top of their profession and set themselves apart from those who are not willing to change.

  There are a lot folks who think that there are too many appraisers out there.  To them I say, don't worry, they're leaving as we speak.  I believe that within a year or two the number of appraisers who are still working in the business will be half of what it is now.  But I also believe that if you're not willing to change, you won't be one of them.   

  A lot of my work lately has been doing appraisals involving situations where people have either lost their homes to foreclosure, or are under the threat of loosing their home to foreclosure.  That is, I have been appraising houses that were either being sold by the lender that foreclosed on the house, or the owners are selling the house as a short sale. 

  A short sale is when a homeowner, who cannot make their monthly mortgage payment, makes a deal with the lender to sell the house for whatever they can get.  The net proceeds from the sale go to the lender to satisfy the mortgage.  If the outstanding mortgage amount is more than the amount owed, the lender may or may not agree to eat the difference.  It's not quite as simple as all that, but that's essentially it. 

  In both cases though, I see the high cost of denial.  Denial is what occurs when people list their homes for what they wish they could sell it for rather than for what it's actually worth.      

  But here's the reality: Whatever you paid for the house, or whatever you owe on it, has nothing to do with its current market value.

  In a declining market, the longer a house sits unsold, the less its worth.  Many people base the list price of their home on what the need to pay off the first mortgage, the second mortgage, the credit cards, the car loan, the boat loan, and leave a little left over to get into something a little smaller maybe.  Six months latter they're wondering why they haven't gotten any offers.  They're in denial.

  If you need to sell a property within a reasonable length of time you need to know what its current market value is and price it accordingly.  If you list your house for it was worth back in 2005 it might sell for that much, but your grandchildren will probably get tired of holding out for that price. 

  Even in this market, a house that is priced correctly will usually sell within about 90 -120 days.  In some market segments the marketing time may be a little  less, and in some it may be a little more.  But rarely is the marketing time, for a home priced correctly, more than 120 days.  If a house has been on the market for longer that 90 days and there has been little interest shown and no offers, it's most likely over priced.

  There are thousands of overpriced houses sitting on the market out there waiting to be sold.  They will not sell until one of two things happen:  the sellers lower their prices to within the affordability range of potential buyers or;  the economy turns around and another housing boom begins.  Which do you think will happen first?      

My home and office is in beautiful Ponte Vedra Beach, Florida. We have been in the “cone of concern” since Fay was a wee depression in the Caribbean.

By the morning of Monday, August 18^th, it was certain that we would get a spanking. It was only a question of how much it was going to hurt. Still, most people around here didn’t seem to be too concerned.

I started making my preparations Monday morning. I divided my time between my appraisal work and getting ready for the storm. I went out to do property inspections and stopped to pick up bottled water. While on my way to take comp photos I stopped to fill up the car and fill up five 5-gallon gas cans for the generator. I already had plenty of flash lights, batteries, etc., accumulated over the last four or five hurricane seasons.

On Tuesday afternoon the forecast took an ugly turn. The storm was to head out over the Atlantic, strengthen into a Category 1 hurricane, and then turn west for a direct hit on us.

And for a while there, people got very concerned.

A run on the Ace Hardware store here in Ponte Vedra Beach made the local evening news. Some people actually fought over flashlights and batteries! Not fisticuffs, mind you, more like dirty looks and impolite language.

The end of the day Tuesday was actually very beautiful. High, wispy clouds colored orange and gray, a nice tropical breeze. I finished up a few last-minute items. I put away some flower pots and made sure the generator would crank up if I needed it later.

I got this generator last year. I also had a power transfer switch installed next to the panel box in the garage so I can run most of the electrical in the house from the generator. Even a Category 1 hurricane can cause major property damage and the power can be out for days or even weeks.

By sunset, it was time to go inside, get a shower, a glass of wine, hunker down, watch the Weather Channel, and wait for the storm to hit. Dr. Steve Lyons, the head hurricane honcho, had some good news. He said he didn’t think Fay would make it far enough out into the Atlantic to strengthen into a Cat 1. Whew! That was a big relief. Suddenly, instead of feeling anxious, I felt more like I was looking forward to enjoying a few days off.

Wednesday, Thursday, and today have been a mixture of some work on the computer, listening to the rain, doing some catch-up reading by flashlight, watching a couple of favorite movies, and watching the trees in the woods behind my house swaying in the wind. These past three days have been the most relaxing that I have had all year.

     Thanks to everyone who tuned in to the show today at mytechnologylawyer.com/radio.  I'm told this was a very popular show in terms of the number of listeners, e-mailers, and people who called in or tried to call in with questions and comments. 

     This is a very hot topic among appraisers, so much, in fact, we've scheduled two more shows on this topic.  The next show will be August 21st at 2:00 p.m. and then another show will be on August 28th at 2:00 p.m.  If you missed today's show, you can listen to it or download it from the mytechnologylawyer.com website under "past programs."  I will also have it posted on my web site soon. 

     Thank you for your kind e-mails and support.  I hope you can catch the next show live.  Blog you again soon!

Marco

  Well, this is my first blog.  I've waited to use that word until it was safely out of quotation marks and firmly wedged into the vernacular.  I've always hated the word "blog."  It sounds like a shortened form of "blah, blah, blah, who cares?" It sounds like the perfect word for a lot of opinions and conjectures nobody really wants to hear.  So, I'm not anxious to be accused of being a "blogger."  

  But I will write this because it is important, and people should hear what I have to say.  And I want to thank every one of you who took precious seconds out of your lifespan to read this. (Thanks honey, thanks mom.)

  First things first. The HVCC.  Briefly, it stands for the Home Valuation Code of Conduct.  This is not a law, but a policy that FNMA and FHLMC have agreed to adopt in order to settle a lawsuit brought against them by New York Attorney General Andrew Cuomo.  It is purported to be a measure to create appraiser independence and thereby protect consumers from borrowing too much because the appraised value was inflated.

  In point of fact, it will do just the opposite.

  The HVCC puts a barrier between the lender and the appraiser.  That is, the lender cannot directly order an appraisal from an appraiser but must do so through a third party.  The third party will most likely be an Appraisal Management Company (AMC.) 

  The flaws in this solution are numerous but here a couple of cold, hard facts that you need to be made aware of:  The AMC works for the lender; the appraiser works for the AMC.  The lender pressures the AMC; the AMC pressures the appraiser.  The idea that appraisers working for AMCs are independent, i.e., immune from pressure to inflate values, is naive at best.

  In fact, what started AG Cuomo on the warpath was a suit against one of the nation's largest lenders and one of the nation's largest AMCs in which the evidence that turned up clearly showed the lender pressured the AMC to have their appraisers inflate values. 

  Now it seems AG Cuomo went to these same guys and asked them to draft a solution to the problem.

  Also, you need to understand that AMCs compete for the lender's business by offering appraisal reports delivered quickly and at the lowest possible price.  This means the appraiser who has lost all of his/her lender clients because of the HVCC is now having to work harder to get their reports out quicker for a lot less money.

  The net result of this "solution" is that honest, hardworking appraisers who take pride in their work and want to do thorough research and analysis are going to be driven out of the business in favor of appraisers who'll turn out low-quality reports fast, cheap, and at whatever value they're told to.

  This will be a disaster for the appraisal industry and for consumers who will no longer be able to have any confidence that the appraisal that was done when they got their loan wasn't inflated.

  There is a whole lot more to say on this issue, but I'm told to keep it brief. So, we'll talk about it in my next post.