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Bye-bye 1004MC, hello analysis

man-and-dog-jumping-in-air

On July 31, 2018, at the Appraisal Institute Annual Conference, Fannie Mae announced the end of the 1004MC. News quickly spread among the appraisal blogosphere, and on August 7, 2018, the new Selling Guide showed that the 1004MC was no longer required.

Rejoicing was heard throughout the land.

Although the 1004MC is no longer required by Fannie Mae, the appraiser still needs to support their opinion of market trends, supply and demand, and marketing time. The exact verbiage found in the 8/7/18 updated Selling Guide is:

The appraiser’s analysis of a property must take into consideration all factors that affect value. Because Fannie Mae purchases mortgages in all markets, this is particularly important for neighborhoods that are experiencing significant fluctuations in property values including sub-markets for particular types of housing within the neighborhood. Therefore, lenders must confirm that the appraiser analyzes listings and contract sales as well as closed or settled sales, and uses the most recent and similar sales available as part of the sales comparison approach, with particular attention to sales or financing concessions in neighborhoods that are experiencing either declining property values, an over-supply of properties, or marketing times over six months. The appraiser must provide his or her conclusions for the reasons a neighborhood is experiencing declining property values, an over-supply of properties, or marketing times over six months.

When completing the One-Unit Housing Trends portion of the Neighborhood section of the appraisal report forms, the trends must be reflective of those properties deemed to be competitive to the property being appraised. If the neighborhood contains properties that are truly competitive (that is, market participants make no distinction between the properties), then all the properties within the neighborhood would be reflected in the One-Unit Housing Trends section. However, when a segmented or bifurcated market is present, the One-Unit Housing Trends portion must reflect those properties from the same segment of the market as the property being appraised. This ensures that the analysis being performed is based on competitive properties. For example, if the neighborhood contains a mix of property types not considered competitive by market participants, then a segmented or bifurcated market is present. The appraiser should also provide commentary on the other segment(s) of the neighborhood when segmentation is present.

What does this mean to the residential practitioner operating in the mortgage space? It means that the requirement for analyzing the market remains, and it is now up to the practitioner to support their opinion, without the benefit of a flawed format. Appraisers can now choose how they present their analysis, which may include multiple sources to support an opinion. Fannie Mae is clear that the one-unit housing trends section should reflect properties that are directly competitive with the property being appraised. The following information relates to several different ways to support trends, but is not an exhaustive list.

Appraiser developed trends

sample macro image

The data array above considers all sales other than the “to be built” properties in a specified school district, over a 20-month period. The sales are run year-to-year, advancing on a monthly basis. This way it is possible to see changes in a subtler manner as opposed to year-to-year study, when related to any adjustments that are made for changing market conditions. For example, comparing a property that went under contract in April 2018 to the appraisal effective of August 13, 2018, lines 16 and 20 would be compared. This can be used in combination with the submarket chart, to see what is happening with the market. Ideally both median prices and price per square foot are analyzed.
The columns in the chart relate to the timeframe, number of sales, the median list and sales prices, the list to sales price ratios, gross living area (GLA) and price per square foot (PPSF). The reason that GLA and PPSF are included relates to changes in size affecting sales prices. The final two rows in the chart relate to how many listings are active and under contract as of the date of the study, referred to as the “contract-to-listing ratio” which is relevant. In my opinion, this is one of the most relevant pieces in the analysis, as indications of change are noted before sales close. It also supplies information related to supply and demand.

price over time
Laying the sales price information out in a chart can help the visual reader as well.
It is evident by observing this data, that the market has increased over time — from $328,000 to $355,000 or 8.23% (row 8 to 20) — but in the past year, not as substantial an amount, from $349,900 to $355,000 or 1.46% (row 8 to 20). Price per square foot has increased from $148.08 to $160.49 over the 20-months period (8.38%), and $156.72 to $160.49 year to year (2.41%). What this shows is that, although there was an increase of over 8% in the measured period, the past year does not show as marked an increase, and it could be construed as stabilized or stabilizing, based on the appraiser’s analysis, in particular after studying the current contracted sales.

There is another piece to this puzzle, and that is how many houses are showing as under contract in this macro market, and what the supply looks like relative to demand. This is the “contract-to-listing ratio” which shows 90 houses on the market total, with 22 under contract. This is a ratio of 24.44% in this segment. Through employing this type of analysis on each appraisal report completed, it is possible to see a shift in the market start to occur, before sales prices reflect it. In my market, 24% of sales under contract is indicative of a normal market, one that is neither favoring buyers or sellers. What is also extremely meaningful is the listing prices of the houses under contract compared to the listing prices of the previous segments sales. The listing prices of those properties under contract are now $10,000 lower than the list prices of the previous period, in spite of a small increase in median size. This tells us that we may have a price correction occurring, but before closing, we cannot be certain. We can however use this information and explain to our client, what we see happening in the market.
Fannie Mae wants to see the specific market segment, and not necessarily the macro market — although that is relevant as well since understanding the larger macro market is necessary before an assignment specific market can be analyzed. The submarket in this instance shows an increasing market in prices, but the median asking prices of the contracted sales are 13.33% lower than the asking prices of the previous segments sales. This is in part due to a decrease in median gross living area, and also in part due to a much smaller segment of data for analysis. Nevertheless, the market also shows a greater absorption of these properties than the macro market as the contract to listing ratio shows over forty percent of the properties offered as under contract. We could easily see this market as either stable, or still increasing slightly. It is up to the appraiser to explain their thought process on the conclusion of market trends.

sample micro
It is possible to structure something similar to what is reflected in the chart above with whatever is considered relevant by the appraiser doing the analysis. The appraiser might wish to do year-to-year, month-to-month, monthly, weekly, or whatever period the appraiser considers relevant. Whatever is chosen provides support for the appraiser’s opinion as to market trends. In the event of a change in the market, we have some evidence-based data supporting our market trends conclusion.
Additional sources
As much as we might want to rely on our own data, there are other sources available that can also help with a determination of market trends. Using the same hypothetical property above, it is easy to pull various sources such as Realtors Property Resource (RPR), Realist, Trulia, Movoto and others.
The RPR sample below uses a sale in the same area above, and shows the following graph. The property price increased over time, but is generally stable over the past year. The zip code shows an increasing price, and the county prices increasing steadily, as to, the entire state of Michigan. This is useful additional data to include either in the report itself, or in the workfile for posterity.

RPR sample
Most appraisers have access to both RPR and Realist via their MLS. An example of market trends from Realist is shown below. This data is not related to the subject submarket, but does include the zip code and city, as well as county, showing mixed trends data compared to the appraiser developed data addressed above. If one relies on this information, the market shows as increasing after a dip over the winter.

realist

Trulia, Movoto and other similar applications are not able to differentiate between the submarket and the overall market, but are useful and provide additional sources of support. Movoto enables the user to observe data trends over different segments of time, and by price per square foot as shown below. It also allows segmentation between single family properties and condominiums. Examples of properties in the same market as the sample discussed throughout this report are shown below.

movoto
(snapshot from Movoto on price per square foot over 2-years)
Trulia allows the user to identify the number of bedrooms, or include all sales.

Trulia
(snapshot from Trulia for Dexter)

Sale/resale
Another way to support change is to observe sales that resell in a defined period. This is particularly useful when the subject property has a recent prior sale. It helps provide a basis for where the property was at the time of the prior sale, compared to the market today. Most MLS have a data export ability, and it is simple to set up a search within your parameters, observe any sales that resold, and then compare possible changes between the sales periods. My research in this market isolated two sales that were within my search parameters over a 2-year period. One set sold 4/17/17 at $399,500 and then again on 4/9/18 for $647,500. That is an increase of 62% and unlikely market appreciation. Looking at the MLS comments and photos, the difference relates to the first sale as a more original property, somewhat tired to today’s standards. The second sale shows a gut-rehab with HGTV style bling. I could use this sale/resale as evidence of value added for a significant remodel, but would not want to rely on it for market change.
My second set of data included a property that sold 8/9/16 for $411,500, and then again on 6/27/17 for $439,000. This is an increase of 6.68%, but the most recent sale was over a year old. The only change noted was a new roof in the interim. Given the data shown in the charts above, the increase was in line with the submarket increase and is further support for the increase that was occurring before January of this year, but does not provide good information for the current trends.
Conclusion
All of this information combined can help support the opinion of where the market is as of the effective date. More importantly, it can help defend the report in the event that the market changes and the appraiser is accused of having ignored market conditions that were noted at that time.
Many participants in the market are concerned there is a shift that is inevitable, either on the immediate horizon, or off a few years. In any event, with the elimination of the 1004MC as a requirement, appraisers are not absolved of supporting their opinion of market conditions at the time of the appraisal report, and all of these tools, and others, are available to the appraiser to better help support the decision.
Let’s view the elimination of the 1004MC as an opportunity to really shine and support our work. After all, we are the neighborhood experts, but we need to be compelling in our decisions when faced with increased computer models and data alternatives. This is our opportunity to show the value that we bring as analytical researchers.

Observe, Analyze and Report – in that order

The more things change, the more they remain the same. We still need to pay attention to our analysis of both sales histories and listing histories for our subject properties and comparable sales.

scales

Observe, Analyze and Report- In that Order
By Maureen Sweeney, SRA, AI-RRS and Rachel Massey, SRA, AI-RRS

Appraisers have always faced objections and challenges to their reports as soon as they leave the office. Some are preventable, such as typographical errors or taking a photograph of the wrong comparable property- after all, we are only human. Others are out of the appraiser’s control, such as a foreclosure or a loan repurchase of a property we appraised.

When a loan is repurchased, the Government Sponsored Entity (GSE) or lender may turn to the original appraisal to evaluate its accuracy and verify that the observations made during the time of inspection were correctly documented. They may look to see if the contract, market conditions, prior sales history and other observations were analyzed, and that those observations, analyses and conclusions were communicated in a manner that was not misleading. Many of us are great at documenting what we see at a property as well as communicating these observations in our appraisal reports. Unfortunately, many appraisers are not as strong at analyzing data and are uncertain of what needs to be addressed, particularly as it relates to prior sales of the subject and the comparable properties included in the report.

To analyze something is to examine and interpret it. For the appraiser, it is the analysis of the data that we collect, examine and interpret. Appraisers need to report their analysis clearly and accurately to prevent future problems; “an ounce of prevention is worth a pound of cure.” Remember, most of our clients are not mind readers and may need to be walked through why there was a price increase or decrease to the subject or one of the comparable properties.

Most residential appraisers whose work is exclusively mortgage related, work mainly with the Fannie Mae Uniform Residential Appraisal Report (URAR, Form 1004), Individual Condominium Appraisal Report (Form 1073), and/or the Small Residential Income Property Appraisal Report (Form 1025). While these three forms appear to be very different, they have many similarities. Each is tailored to a specific residential property type but each includes a Scope of Work, Statement of Assumptions, and Limiting Conditions. We are all so busy that it is easy to forget what is in the Certification that we sign with each report. As such, it is a good practice to read the pre-printed certification and limiting conditions pages occasionally. This is because each time we sign our report we are confirming that we have completed the items listed on those pages.

Analyze This
There are pressures that appraisers face daily, including time pressure, ever-growing engagement letters that require all kinds of additional details and information, and the constant battle for reasonable fees. Many of us have developed language and statements that help us save time in writing appraisal reports. One thing that boilerplate and drop-down menu statements cannot help us with is data analysis. This is one timesaving corner we cannot cut.

As much as we would like to think that presenting the facts about a sale is analyzing data, it is not. Analysis is more than a statement that a property sold on such and such a date, for such and such a price. The analysis includes how that sale was positioned in the market at the time of transfer or sale. Was the sale at arm’s length? Was it a REO sale in need of a total overhaul? Was the sale under duress because of some need to sell? Was it one family member selling to another? We need to address why it sold for what it did in relation to what the current appraised or final sales price is. We must analyze the prior sale as well as the current contract, if applicable, and explain and report the results of the analysis or explain why it was not performed.

As markets are rarely static, we need to analyze the current market and any changes to the market since the prior sale. This analysis of the market, and how it has fluctuated, is a basis for part of the analysis of the prior sale in comparison to the current market value. Because of the requirement by the GSEs to use the Market Research and Analysis Form (1004MC), sometimes there are inadequate data within the report to support a trend which might otherwise help paint a picture of an increase (or decline). When there is inadequate data to adequately complete this form, there is nothing stating we cannot include additional information outside of the MC form.

Often, those who look to find fault with an appraisal turn to this section first, because sometimes appraisers do not analyze the data presented in the 1004MC. Boxes may be checked, boilerplate statements may be added, but the data analysis is not summarized. The appraiser knows the market and knows what is occurring, but did not add a summation of the analysis or trends that may be reflected in the data. Are foreclosures and short sales an issue in the market? Appraisers may click the box “yes” yet not report the impact of those foreclosures and short sales in the subject’s market. When analyzing the market conditions, analysis is not a “should,” but a “must.” As appraisers, we are often so busy and it may seem so self-evident, but six months or a year down the line it may be very difficult to remember precisely what was happening in the market at the time. This extra bit of communication of what we observed in the market at the time can be very helpful, not only to our clients, but to ourselves in the event of a challenge to our work, months or even years down the line.

This analysis of the market conditions is used when analyzing the prior sales of the subject, as well as all comparable sales. Currently Fannie Mae and Freddie Mac require a minimum 36-month sale and transfer history of the subject to effective date, and 12-months for all comparable sales since their most recent closed date. After September 14, 2015, the FHA requires 36-months for the subject and 36-months for all comparable sales. We are starting to see more ”flipping” again as the market has improved in many parts of the country. There are often examples of houses being purchased below market because they were in need of repair and then rehabbed or renovated, and resold.

Were any of the comparable sales sold previously below market value due to their condition and lack of modernization? Did these houses sell for a higher, similar or even lesser amount after improvement and is this consistent with the market conditions analysis? Sometimes this cannot be determined by looking back 12 or 36-months. Perhaps the comparable prior sale sold 40-months ago, but sold at a similar time as the subject’s prior sale. Would comparing that prior sale to its current sale further support the changing market conditions? Would it support the information presented in the Sales Comparison Approach to value? If the prior sale was a “trashed-out” REO sale and there are photos in the MLS, consider including a few of these photos, in addition to the narrative, as they can add needed support for the change. As appraisers, we may have to go beyond the minimum time and reporting requirements to accurately analyze the prior sales in order to develop credible assignment results.

Analyzing a Sale
How does one analyze a sale? The following is one simple example:
“Comparable sale 1 sold on 01/01/2015 after being exposed to the market for 7 days. It was bank owned, and in need of significant work, including replacement of all cabinetry, flooring, light fixtures and paint. It also needed a new roof and furnace. The water heater was in working order and the electric had previously been upgraded. The house was listed for sale for $99,000 and sold under a bidding war for $105,000. The purchaser of this property gutted what was remaining, replaced cabinetry, flooring, light fixtures and windows, as well as installed new siding, roof, and furnace. The entire interior was painted and the owner had the property staged for sale. It was offered for sale on 06/01/2015 for $225,000 and received three offers according to the listing agent. The house sold in 5 days on the market for $230,000 without concessions. The increase in price of $110,000 was partially related to the increasing market but in larger part due to the remodeling that took place in the interim.”

In this example, the appraiser analyzed the prior sale, then reported this information in the body of their appraisal report. This sale, which would have generated many questions, did not. The appraiser communicated their analysis in writing instead of only keeping notes in the work file. There was no need for questions by the appraisal reviewer, especially since MLS photos showing the prior and current condition were included in the report.

The Working RE story Supporting Market Conditions has one example of how to complete a market analysis outside of the 1004MC form. In short, if there are insufficient data points to provide any type of robust market analysis, include additional information supporting the position of how the market is changing or has changed, before the effective date of the report. Let the client know what has happened in the market since the prior sale of the subject as well as what has happened to the subject itself. Part of our jobs as appraisers is to help clients understand the market.

Should Do/Must Do
The appraiser’s job has changed dramatically in the past 10 years. We are under increased scrutiny by all parties in the mortgage industry as well as state regulators, attorneys and borrowers. Those of us still in the industry are paying for the sins of individuals who were part of various financial crimes, some even appraisers. Many of those who were guilty of these sins were not appraisers, yet many in the industry, the media, and the public insist on pointing the finger at us.

Some of the bad apples left the industry, by their own choice or through the encouragement of their state appraisal licensing boards. Because of this, what once was a “should,” has turned into a “must.” It is important to observe what is at the property and what is happening in the market, analyze that information, and provide at least a short summary of our analysis. Because of the massive amounts of information we are required to know and the constant changes that we see in the industry, sometimes we know much but don’t report enough. Sometimes we have to show our work. By showing our work and including our data analysis, objections and challenges of our reports will be a thing of the past. This is particularly the case related to prior sales of the subject property and the comparable sales included within the report.

Note, this originally appeared with WorkingRE 2.5 years ago, but the sentiment remains very much the same. This has been republished with their permission. Please visit the original at Here if interested.

Changing markets

By Rachel Massey, SRA, AI-RRS

It is easy to miss the market. Sometimes subtle changes are occurring and it is too early to pick up on a trend. Or there is conflicting information indicating both an increasing and a declining market at the same time, depending on the market segment.

If appraisers had crystal balls into the future, we would be doing something other than appraising. The money would be in predictions, not in measuring the current market. We are expected to be in touch with the market however, but basing our opinions on past, closed transactions is not necessarily the current market. This is one reason analyzing current offerings, pending sales, expired and withdrawn listings, and listening to the chatter of those involved in real estate sales is important.

Between 2007 and 2010 much of the nation experienced significant declines in real property values. Some appraisals that were developed and communicated in that period indicated the market was stable, even with evidence to the contrary. Appraisers were reluctant to mark the declining trends box on the form reports, due to very real concerns of losing lender business by doing so. The 1004MC form, that became mandatory after April 1, 2009, came to being in large part as a way to help ensure that appraisers analyzed the market. Like it or not, this provided structure and direction to lead the appraiser to look at what was happening in the market, at the time of the appraisal. Although many appraisers state this form is woefully inadequate, few supplement it with additional information supporting their market trends decision. This is the thesis of this short article; to be aware of other elements to observe in addition to the MC document, as well as what to watch for as the market starts to change. Because change is inevitable.

Ten years after the market decline, large parts of the country are experiencing significant increases in real property values. Some markets have surpassed the previous highs, and many appraisers are concerned about a repeat cycle reminiscent of the 2007-2010 market. How do we as appraisers, protect ourselves against being accused of incorrectly measuring what market conditions are? How can we analyze what factors are driving the market, and what should we be aware of as possible bellwether indicators of a changing market?

Although not exhaustive, below is a list of some of what is driving an increasing market in many of our individual areas.

Low inventory
Low rates
Few builder specs
Builder entry prices (due to labor shortages and increasing costs)
Owners converting housing to rentals
Taxes making moves difficult (resetting to higher assessments)
Need to sell to buy and lack of opportunity to do so – making downsizing difficult
Owners holding on to their residence due to no desire to change circumstances
Fear of rising rates causing panic buying
Optimism that prices will continue to increase

Being aware of what is driving the market is a good first step to being aware of what could ultimately change the market. Each of the points above can cumulatively or individually result in a change to market conditions. In addition, the following factors should be watched.

Incomes not keeping pace with price increases
Increased inventory
Rising rates
First time buyers priced out of market deciding to opt out
Property taxes exceeding allowable write-off

Ways to check what is happening

Contract to listing ratios
Expired and withdrawn listings
Days on market
Price reductions or increases
Listing prices lower than comparable sale prices
Widening gap between list and sales prices
Comments in listings “bring offers” “priced below recent appraisal”
Agent interviews – agent chatter
Falling rental prices
Incomes not keeping pace with price increases
Increasing relocation assignments

Contract-to-listing ratios are a concept that agents use, but most appraisers do not seem attuned to. It is simply taking a pool of competitive properties into consideration, and looking at the percentage of the listings on the market at that time that are under contract. If the determination is that the competitive market for the subject property is a 1,000 – 1,500 sqft ranch house built between 1940 and 1960 in such and such an area, the appraiser may find there are 100 listings on the market, but of those 100 listings, 40 are under contract. That is a 40% contract to listing ratio, and indicates the market is strong and houses are absorbing into the market. If on the other hand, there are 100 listings but only ten are under contract, that is a 10% contract to listing ratio and is weak, showing the market is not strong. This can be used to measure whether the market is favoring buyers, sellers, or is generally balanced. Through keeping track of this type of information in various market segments over time, it can be used to predict near-term changes in the market. For example, price pressure may show all the listings 20% higher than the sales, but if very few are under contract, it is unlikely there is going to be a jump in prices, but if most are under contract in spite of the spike in prices, it is likely they will close higher and it affords a chance to be left behind. Take for example, this sample that I ran (by price, not by market segment for the simplicity of this article) for my market on 2/16/18 and run again on 3/18/18 for comparison, to see what areas in the market were experiencing the greatest pressures:

Overall the market shows extremely tight, with less than 2.75 months’ worth of inventory as a whole in the entire school district, and by price, in the same realm through to the $500,000 price range. Over that, there is more inventory and a much lower contract to listing ratio, at 24.53% compared to 32% for just a bit lower priced, between $401,000 and $500,000, and even greater at 57.14% in the $301,000 – $400,000 range. How does this type of information help inform the reader of the current market? It simply shows what inventory is like as well as how active the market is. It doesn’t show price increases if they are occurring, but it is pretty unlikely that a market with 50% of the houses on the market under contract is going to be either stable or declining. If your opinion of value on the property was $190,000, there would be no active competition as of this date and it would be a good bet that the house would be in high demand. Conversely, if your opinion of value was $650,000, there would be much more competition and the expectation would be a longer marketing period. In addition to how the subject of the appraisal might be positioned, keeping track of ratios over time can be useful in noticing a trend before it becomes well known in the market, realizing that figures could vary in a day. In the example above however, the trends appeared similar, showing the highest levels of activity in this market in the $201,000 – $400,000 range, with no inventory under $200,000.

When markets are tight and increasing, it is just as important to discuss the market and any changes that are evident, as it is when the market is declining. Ignoring an increasing market is just as incorrect as ignoring a declining market. Stating that one only adjusts downward for declining markets, but not upward for increasing markets is an incorrect procedure. Document the changes and include what you can in the report.

Document, document, document, as silly as it may seem, using Trulia, Realtor.com and other online tools can help you with keeping a record of trending information on top of what you present in your report. Realtors Property Resource has a tool which provides trending analysis for the property under consideration, the zip code and the county. Realist also provides for price trends, as do Trulia, Realtor.com, Movoto and other sources. Although these data sources provide broader market data, simply having the information you pulled related to trends in the market, in your workfile, is helpful in the event someone comes back years later saying you should have marked declining on the report when all indications were that the market was stable to increasing at the time you completed the assignment.

Markets can change overnight. For those of us appraising in 2001, we can remember how the world stood still on 9/11, and how it took a month or two for the country to breathe again and get back to doing business. Significant market changes can happen quickly, and we have to be able to be aware of what is going on in our market, even with these events. Agents who are active in the market will be in a perfect position to talk with us about what they are seeing as well. It is a good idea to build trusting relationships with agents, who will share their concerns as well, even if it is “off record”. These relationships do matter.

If the market in your area begins to decline, do not be afraid to report what you see – even if the short-term repercussion is decreased work from such and such lender. The long-term benefit of being truthful is more important. Appraisers must work with integrity and not be afraid of losing business for doing the right thing.

This post has been copied in its entirety (well, without ads) from the original source of publication, WorkingRE, with their permission. Original link below. Please visit their site often as well 🙂

here

Appraising Lakes, Beyond Front Footage

2017-08-13 20.48.44

When attempting to determine the value of lakefront property, there’s so much more to the equation than just measuring waterfront space. Here’s what appraisers and agents need to know.

As summer approaches, activity on lakes—large and small—increases. But in my experience as a REALTOR® and certified appraiser, it is apparent that many agents, brokers, and appraisers have not acquired all the knowledge, skills, and perspective needed to accurately evaluate lakefront property. In the hope of filling in some of the gaps, here are some tips on how appraisers can provide a more defensible appraisal on these complex properties as well as some of the nuances that agents who are new to lake properties should consider.

The Why of the Buy

Both appraisers and agents alike need to be aware of the motivations that result in sales. Appraisers need to be in touch with the vagaries of the different submarkets in order to adequately analyze the properties they appraise, and agents need to understand that there is much more to selling lake property than front footage.

What motivates a buyer to purchase a lake property? Is it the tranquility? The beauty of the water? The excitement of a speedboat and waterskiing, or casting a line into the water in hopes of landing a trophy catch? It is all of these things, and none of these things. The motivations are almost as numerous as the buyers looking for a lake house are, and one buyer’s paradise is another’s hell. Different types of lakes attract different buyers, and the buyer looking for tranquility is going to be very unhappy purchasing a house on a lake crowded with jet skis and powerboats. The same would be true for the avid motorist who buys on a small, quiet fishing lake.

Quality Over Quantity

While some depend on how many “front feet” the property has on the water to determine value, that is not necessarily the best course. The amount of frontage usually relates to space between neighbors and how much area is available for docking and beach toys. But consider the house sitting on the edge of a bluff, with 200 feet of frontage and 100 steep steps down to the water. What if the shoreline is also rocky and reedy? Five lots south, the topography has sloped in to a gentle, almost level lot and the frontage itself is a natural sandy beach. This lot has only 50 feet at the lakefront. Which is more valuable?

The value of a lake property could be tied not only to the ease of the access and the quality of the frontage but also to the lake itself. For a clean swimming lake, the narrower 50-foot lot might be much more valuable than the less accessible 200-foot lot. But for a lake that is picturesque but not good for swimming or boating, the 200-foot lot with the elevated views might be the more valuable site. It all depends on the lake and why buyers might be interested in that particular spot.

Present and Future Demand

I live and work in Michigan, a state surrounded by lakes of all kinds. The Great Lakes are a treasure, but not exactly the bastions of privacy and quiet you see on some of the smaller inland lakes. Many of our inland lakes are massive in size, deep, and clean. Some are shallow, reedy, and mucky, making them more of a viewing amenity than anything else. Some lakes allow all the toys and others only a kayak or canoe. Some are merely ponds in buyers’ eyes.

There are many questions that buyers, real estate agents, and appraisers should consider in addition to the present appeal of the lake itself, because these issues contribute to whether the lake remains appealing into the future. Some lakes are manmade in that they are the result of damming a river. Some municipalities are considering removing such dams—in that case, what happens to the manmade lake? Some lakes have been invaded by unwelcome species such as zebra mussels, Eurasian watermilfoil, and other nuisances. Lakes with public access sites tend to have more trouble with these invasive species, though they do also travel naturally through waterfowl and other means. Could a lake with an invasive species problem become less desirable than one without? Is there any guarantee that a pristine lake will remain so? What about the life cycle of a lake? Is it a dying lake, or is it likely to stay in similar condition for the foreseeable future? How is the management on the lake? Is there an active association that seeks to ensure the health of the lake? Are septic systems monitored? Does the association have prohibitions against fertilizers?

But just as bodies of water can change, so too can our perspectives on them. Is it possible that we are starting to see a shift, as our population ages, to the desire for quiet lakes that do not allow gas motors? It used to be that these quiet “no-wake” lakes had less appeal, but in many instances, they are now attracting buyers that would not have considered them 10 or 20 years ago. There is something to be said for the quiet of a lake without loud motors and loud reveling at all hours of the day and night. On the other hand, these lakes have limitations of use, and buyers who want to have it all might find the sportier lakes desirable, in particular if there are limited year-round residents. The lack of year-round residents could mean that the owner has quieter weekdays, with increased activity on the weekends and over holidays.

The Tools at Your Disposal

The Department of Natural Resources maintains lake maps in most areas. These maps show the topography and composition of the lake bottom. DNR maps will also show public access points, existing housing, and other features. Appraisers and agents alike should become familiar with these maps. Plat maps are also available in many areas, and these can be used to examine other features, such as ownership issues where a third party may control the frontage in between a property and the lake shore. Another concern that can impact value is keyholing or funneling, where backlot owners have rights to a parcel on the water. Just being aware of some of these issues can help you be a better advocate for your client and know when to direct them toward legal counsel to help determine whether they have water rights.

Not All Sales Are Comparable

If possible, it’s best to find comparables on the same lake, but remember, lakes also have varied topography, both on shore and to the lake bottoms, and just because the potential comparable property is on the same lake might not mean that the properties are actually comparable.

Appraisers need to understand the lake itself and which lakes are reasonable alternates if nothing is available on the lake upon which we are doing our appraisal. Know your market and write about what is important to the target audience. How large is the lake? How deep is it? What types of activities are allowed on the lake? What are the other lakes that the buyer for our property would reasonably consider and why? Fully describe the topography, frontage, and access to the water at the subject site. Write about whether the beach is sandy, mucky, rocky, reedy, and so forth. Document sunrise and sunset views, parking, and docking. Agents don’t have the same communication requirements as appraisers do here, but they should be aware of what appraisers are considering and what they are reporting, because such factors affect the pricing conversation as well.

Determining logical comparable search criteria is incredibly important in lakefront homes because buyers may consider properties on lakes that are 20 or 30 miles apart, something that might scare some of the most experienced underwriters if not properly explained. A smart appraiser will set the stage ahead of time through the narrative in the report, which will help the underwriter and reviewers understand the thought process for the choice of comparables. Once the appraisers have spelled out the reasons that have drawn a buyer to the subject lake, discussion follows about the lakes that are competitive and why they are competitive. This can justify the use of sometimes very distant comparables.

Agents can help by providing appraisers with information about the lakes that the buyer considered and why they considered them as competitive. If your buyer would only consider one lake, explain why. While it might not be possible for the appraiser to stay on that lake due to lack of recent sales data, the buyer’s motivations to that lake over others can still be helpful.

Summer is coming and lake buyers will be out in force again soon. Be prepared to have a lake appraisal take longer and be costlier than a regular subdivision job. Take the extra time necessary for these lake deals to research the lake and the site, in addition to the improvements on the site. Hopefully the extra effort will pay off and you’ll be better able to enjoy your next lakeside sunset or cool dip in the water.

beyond front footage

Walking at work

It certainly would be ideal to have a magic pill that would allow one to stay in shape, at the same time as staying productive at work. The advent of the treadmill desk and its increasing popularity is making this magic pill seem a real possibility. Imagine being able to work, talk, research and type, all while walking. Sounds great doesn’t it? It is, but there are limitations. The set up can be awkward, and if you are vertically, or space challenged, there can be limitations with the workspace. If you are a bit of an overachiever, like I have a tendency to be, there can be real limitations to the physicality of the system.

I purchased my first treadmill desk in 2011 in an effort to get up off my seat and ease my aching back. Sitting was causing a whole host of physical issues, not the least of which was an increasingly widening girth and backside. I already owned a good solid treadmill from the days when I was a runner, and trained on this workhorse of a machine. The desk itself was something that could go on top of any treadmill and that was very appealing because it made the set up much less expensive than buying one of the combination treadmill desks that have gained popularity in the marketplace.

This brings me to the first limitation: space! If you have a large scale treadmill then it is not going to have a small footprint. If you are going to be using one of these beasts upwards of four or five hours (or more) per day, then it darn well better be a workhorse or the motor and/or deck and/or belt are going to wear out very quickly. So the big treadmill takes up space, and the desk itself can take up a lot of space as well. The area that contains my treadmill desk takes up eight by seven feet and this doesn’t include any of the office peripherals such as bookshelves, printers, cabinets and so forth. While you may be able to get by with a smaller workspace and treadmill, most people want to have at least two monitors at their disposal, and therefore the larger workspace may be imperative.

Another limitation to the setup is the treadmill itself. Treadmills that are for runners and exercise are not designed to do long hours at slow speeds and the motors can burn out quickly, in particular if you have something like an orthopedic belt to soften your tread. If the treadmill deck is too narrow, or two short, drift may cause you to step on the rails and crash, not a pleasant experience. A good wide deck that is long enough to have your body close to half way back, in order to accommodate the desk, and a treadmill that can take hours of use every day at a low speed, is going to cost a pretty penny. At the same time, if you buy one that is not robust enough to handle the stress, it will burn out far sooner than desired and the expense of purchasing a new one is often cost prohibitive. There are some brands that have both treadmill and desk combined, with a treadmill that is built specifically for the long hours of use at a slow speed, and these, while expensive, are often the best solution.

Limitation number three, at least for me, is height. At 5’2” I am a bit vertically challenged, and my treadmill desk does not go low enough for me to work at a good ergonomic height. As such, I had to purchase a laptop that had a wide and comfortable keyboard that included the integrated touchpad in the center of the computer so I didn’t end up with carpel tunnel from repetitive motions, i.e., no mouse. That and sometimes my shoulders are touching my ears, not a good thing for ergonomic design. The large laptop and a smaller monitor next to it work well though, without me having to look down.

The final, but most limiting of limitations for me was repetitive use and the development of tendinitis in one of my feet. Because I have a tendency to overdo things, I thought that if walking four hours a day felt so good, walking six hours a day would feel even better. At first it did. I lost weight, I felt great, my energy was superb, but within a year of having upped my walking to six, and sometimes seven hours a day, I developed a roaring case of tendinitis that sidelined me from walking for months. Now over a year after taking a couple months off, I cannot walk the way I used to without aggravating my tendinitis, and am happy walking only two or three hours a day, and nowhere near the speed I used to walk. Unfortunately the weight has come back, and with it, the feeling of sluggishness. That said, when I walk, I feel great, and my mind is clearer and I am able to concentrate better.

The limitations that I described above are all just cautionary for those who are thinking of a treadmill desk setup. Four years into using one, I cannot imagine returning to sitting for more than a couple of hours at a time, and hope to be able to use one of these desks until I decide to turn in the keyboard. Limitations that arise are nothing compared to the benefits that are gained in my opinion.

The treadmill desk is a magic pill to a stationary office worker, as long as moderation is used and forethought is exercised in setting up your workstation. Remember a good solid treadmill with a wide and long deck is key, and no orthopedic belts because they will burn out the motor faster. Think how you will use the desk, and make sure you have a place to sit in between periods on the treadmill because most of us cannot spend a full working day walking, without consequences.

Originally published with AppraiserNews in 2015

I am not “just” a residential appraiser

This article was originally posted in AppraisersBlogs (http://appraisersblogs.com/not-just-residential-appraiser) and I am resharing as it needs repeating. If you are searching for an appraiser to handle a residential assignment, look for someone with ample experience, who goes above and beyond the minimums related to education. There are countless appraisers out there who fit that bill, all you need to do is interview the appraiser about their education and experience related to the property, location, and intended use of the assignment.

I am not “JUST” a residential appraiser!

There is no doubt that moving to obtaining a certified general appraisal license opens doors to varied and interesting work. If it is in one’s capacity to obtain this level, it is a great idea. That said, the idea of being “just” a residential appraiser has got to stop. A good professional residential appraiser who studies the market, knows how to analyze and solve a problem, and can communicate effectively and succinctly, is a very valuable appraiser at that!

As professional residential appraisers, we constantly work at honing skills. We work at becoming better appraisers every day, realizing that learning never ceases if one is open to it. As professional residential appraisers, we exceed minimum qualifications and minimum education requirements. Many of us have earned designations that take significant study and testing. Many of us spend a lot of time, money, and resources honing our skills and trying to improve every day. We work with most people’s largest single assets, and we are aware of that. We must be aware of nuances in buyer preferences, and how they change and evolve. We must be very aware of what is happening in our markets and pay close attention to changes as they start to occur.

Homeowners hire us because they have a real need. They need to have someone who is independent, impartial, and objective help answer questions they have. They need someone who knows the market, knows how to analyze segments of the market, and who can present their findings in a way that makes sense and is usable, regardless of the opinion of value. Homeowners hire us to answer questions as varied as “what will this proposed addition add in terms of value” or “what will my value be after I split off five acres from my seven-acre tract of land” or “will it be cost effective for me to complete the list of improvements recommended by my REALTOR prior to listing my house for sale”? There is a myriad of reasons a homeowner would want to hire us directly to answer questions.

Attorneys hire us to answer questions as well. They might need to know what the value of a property was as of the date of a marriage in 1992, and what the current value is. They may need to hire us to address what a property would be worth if there was no construction defect, as well as with the defect indicated. They need someone who is not only independent, impartial and objective, but someone who is knowledgeable about retrospective valuation, or understands construction properly, and can complete a report based on both the as if value, and as is value.

As residential appraisers, we often come under extreme pressure. Pressure to ignore issues with a property, pressure to turn in assignments too quickly and to cut corners, pressure to meet sales prices that are too high, pressure to appraise lower than market value to accommodate some interest or another. For someone who is proud of their work ethic and quality, and is independent, impartial, objective and knowledgeable about the work they do and how to support it, we will never be “just” a residential appraiser. We will forever be standing up for doing our work the right way and not bending to pressures. This is the mark of a professional. This is the mark of someone who takes the profession seriously and understands how important our work is.

For those of us who treat being a residential appraiser seriously, and as a significant responsibility, we will never be “just” a residential appraiser. Think about that next time the word “just” crosses your mind. We must change this narrative from within. Be professional, be the best you can be. Be proud of being a residential appraiser. I know I am!

I have Google Earth and I know how to use it

Originally published in Appraisal Today, thank you Ann O’Rourke for allowing me to republish

I have Google Earth and I know how to use it

Seriously though, as a reviewer, it is one of the first tools I reach for when I look up the property that is the subject of the appraisal I am reviewing. Assume all reviewers do. We use it to make sure that the property does not back up to, side against, or face some type of externality such as a major 8-lane freeway, massive shopping mall or toxic waste facility. Hopefully the appraisal that has one of these externalities addresses it. Sometimes the appraisals go to great length to discuss externalities and any effect on marketability and value. Sometimes there is a sentence or two. Sometimes crickets.

Yesterday I pulled up GE on the house that was the subject of an appraisal I was reviewing and it backed up to a bunch of buildings. Looked possibly to be a school, but the street view maps took me around the side and to the entrance of what turned out to be a large condominium complex. Absolutely no big deal, but there wasn’t one single word related to this in the appraisal. I asked a group of appraisers whether they would make a comment if their subject property backed up to a condominium complex, and the responses ran the gamut from “of course”, to “no way, it is already covered in the neighborhood check boxes”.

While the check boxes for the neighborhood include multi-family, they do not include condominium, and in this instance, there was nothing in the appraisal even hinting that there was a mixture of single-unit uses in the area. This property didn’t raise a red-flag insomuch as backing to a freeway, commercial shopping center or toxic waste facility, but it did raise a question and warranted a bit more research. This is fine as it part of my job, but as someone who actually reads the reports in front of me, I was just left confused as to why it wasn’t even mentioned. I was even more confused by why so many appraisers say that it is not worth mentioning.

Maybe it is being old fashioned, but I grew up with the understanding that an appraiser was the eyes and the ears of the client, and that anything that would likely raise a question for the client should be addressed. Of course the freeway, mall and toxic waste facility are givens, but wouldn’t anything that was literally in the backyard also be something that would get questioned? How many minutes does it take out of the process to write a few sentences about a condominium complex? Couldn’t it be as simple as saying “The subject backs up to the XYZ condominium complex and has a seasonal view of some of these buildings. There is no negative effect on marketability or value of the subject property related to its location adjacent to this residential use” or some such rot?

While it is easy to overlook potential concerns due to the amount of reporting we have to do (and remember, there is no such thing as a perfect appraisal), stepping into the mind of the client and asking yourself “what would the client be concerned about” is a very useful exercise. While the client may not care about the house backing to a condominium complex because it is a residential use like the subject, they may care about it backing to the complex if for some reason it does affect marketability and/or value. It is up to us, as appraisers, to report and analyze what it is we see, and although we can never catch every little thing, our value is partly measured by our ability to communicate and to analyze these nuances.

Remember, reviewers have Google Earth and other tools at their fingertips, and most use them.

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.

Thoughts?

Market snapshot – Ann Arbor/Saline

Market snapshot – comparing Ann Arbor and Saline

Prologue

I admit it; I am a data junkie. There is something about graphs and charts that I just get all-geeked out about. Maybe it is simply having too much time on my hands, or maybe it is a thirst for knowledge (hoping for the latter, but with understanding it may be the former).

Without further ado, I offer my recent take on the comparison of two markets, because they often compete with each other.

The data below is run as one years’ worth of data at a time, but compared month over month (so if you see a comparison from June 2012 to June 2013 each of those sets has an entire years’ worth of data leading up to the date. In this first graph, I have compared the cumulative days on the market of sales in Ann Arbor school district, as exposed through the Ann Arbor Area Board of Realtors MLS, compared to the same in Saline. I took all sales and looked at the median. In both segments, days on market declined to a low point in May/June 2013, and have since risen and then stabilized. Saline had longer median days on market but shows as stable compared to Ann Arbor, which is slightly increased over the past couple of months.

What about price? On the median price, Saline is ahead of Ann Arbor. On median price per square foot, Ann Arbor is ahead of Saline. Why is this? It is related to median size. The median size of a house in the Saline market is greater than the median size of a house in the Ann Arbor market. As price per square foot is normally higher as size declines, it makes sense that you would see that.

If you compare month to month, for the past five months, the closed sales in the Ann Arbor market show as flat (although that is changing now) whereas Saline has been rising. If you skip down to the price per square foot, the rising prices in Saline are at a slower rate than just by the median price.

Inventory levels as of 4/8/14: Ann Arbor had 152 active offerings in total, compared to 1,176 sales the year before, or 1.55-months’ worth of inventory (not much). Saline had 50 offerings compared to 297 sales in the year prior, or 2.02 months’ worth of supply. In both instances, supply was quite limited, and this limited supply does appear to be driving many multiple offer situations. In both markets, the contract-to-listing ratio shows as favoring seller’s, with Ann Arbor at 40.16% and Saline at 41.18% as of the 4/8/14 run date.

When the contract-to-listing ratio and low inventory favor sellers, prices typically increase. When they favor buyers, prices typically decrease. Markets are very fluid and changeable, and what is apparent a week ago, may well change dramatically a month from now. The market is sensitive to interest rates, employment rates, income changes, and national news, among other issues.

Epilogue

Appraisals are “opinions” of value by educated professionals. They are opinions based on factual data, but in the end of the opinion of a professional. Not all appraisers have equal qualifications and experience, and therefore not all opinions are equal. If you are shopping for an appraiser to help provide you an independent opinion of value, base your selection on the breadth and depth of that appraiser’s knowledge and experience, not the price of the appraisal assignment. After all, it is typically your largest investment, and does it make sense to be penny-wise and pound-foolish?

Rachel Massey, www.annarborappraisal.com

Latest comparison to online valuation models

Latest comparison to online valuation models

It is quite frustrating to see how many people rely on these online value estimators to either price their home, or use it for marital dissolution, or other reasons. As will be shown in a minute, these can be off by a significant amount, either low or high.

I just ran sales in Ann Arbor, in the 48103 area for the past couple of weeks. I then compared the sales prices to two online value estimators and State Equalized Value times two. The only consistency to the information is that these online value estimators overestimated on houses in need of work and underestimated on those houses that were remodeled. In only a small percentage of cases, were the value tools within five percent of the actual sales price.

If you are shopping for an appraiser to help provide you an independent opinion of value, base your selection on the breadth and depth of that appraiser’s knowledge and experience, not the price of the appraisal assignment. After all, it is typically your client’s largest investment, and does it make sense to be penny-wise and pound-foolish?

Rachel Massey, www.annarborappraisal.com