Appraisal Archives - annarborappraisal

Challenging a mortgage appraisal

Challenging the results of the appraisal for mortgage financing

The first thing to remember as a consumer or real estate agent, is that the client is the lender, not the consumer. Even though the consumer may pay for the appraisal, they are no more the client than is the credit reporting agency or title company hired directly by the lender.

The lender obtains the appraisal to ensure that the collateral is adequate for the loan (remember the three C’s of credit, capacity, and collateral). The appraisal is for their benefit, but at the same time, the appraiser needs to complete a fair and supportable valuation. There should never be any bias in favor of any party, or value.

Even though the lender is the client, the borrower is by regulation, required to be given a copy of the appraisal report. When a sale is involved, the valuation may be lower than contracted price. This begs the question, what, if anything, can the consumer do about it?

Lenders offer a formal “Reconsideration of Value” (ROV) process. Most have this process as “one and done” meaning the consumer cannot keep coming back with more data, therefore putting forward the best argument at the outset is imperative.

The steps involved in filing an ROV are to first read the entire appraisal report that was completed and examine the comparable sales as to whether they are ones that the consumer would have considered as reasonable alternatives or not. If there are ones the consumer considers more reasonable, then there are three important points that must be addressed:
1) Are the alternatives more recent to the effective date (not after)?
2) Are they more proximate to the subject?
3) Are they more similar in size, age, style, quality, and appeal?

If those alternate sales do not meet some of these criteria, then they are unlikely to be considered. The appraisal does not choose sales based on price, but on similarity to the subject property (with being proximate and recent important as well). Caveat is that sometimes an older sale that is highly similar will be the best indicator, if the adjustments for changing market conditions are analyzed and made.
Reading the appraisal report will disclose why the sales that were used were chosen, and how they compare.

Another possible reason for an ROV would be incorrect information in the appraisal report. This is particularly likely in the age of Covid-19 when some appraisers are not opening all doors and poking around the property as much as they used to. The half bathroom under the stairwell could be missed in that manner. Perhaps something was missed, and the appraiser could address it, but again reading the report will indicate if it were addressed, simply not included in the sales comparison grid that is the focus for most disputes.

If there is adequate information to move forward with the dispute, do not contact the appraiser. Remember the appraiser’s client is the lender, not the consumer or the real estate agent. Contact the loan officer for assistance in submitting an ROV, but remember these processes are mostly one-and-done, therefore be rational and compelling in that first submission.
• Explain how each sale that should be considered is in some way better than the ones in the report
• Limit the number of sales to three if possible
• Do not be confrontational
• Address any inaccuracies noted and support for that position

Most appraisers will respond to the ROV as a normal part of their business. Some will refuse to consider what was offered, but that is rare. Chances are the sales offered were already considered but not included, and the appraiser will respond as to why not, but sometimes a good valid sale is missed, simply because the geotagging or MLS area number were incorrectly inputted on the listing, and it did not show on the appraisers search. Sometimes there are sales that were showing as under contract as of the effective date of the appraisal that had closed. Sometimes errors occur since humans are human. Sometimes a value dispute will result in the appraised value increasing, sometimes it will result in no change, sometimes it will result in the value decreasing.

Do not assume the appraiser will refuse to look at the request. Put your best foot forward by providing solid data for consideration in a professional manner. If the value remains the same, then it is time to renegotiate or move on. Remember the appraisal is for the benefit of the lender to ensure there is adequate collateral for the property they are lending on.

Probate – proceed with caution

Probate can be a complicated process for the personal representative, who likely only handles this type of situation once or twice in a lifetime. For some people, such as the attorney, or the agent who handles many estate related sales, the process makes sense. To the individual tasked with being the representative however, they likely only have a cursory understanding of the process. A proper assessment of the value of the decedent’s real property is particularly difficult for the layperson anyone who is unfamiliar with real estate transactions.

When determining date of death values for the decedent’s assets, the temptation may be to use assessment data in order to arrive at the opinion of value as of the date of death, but is this working in anyone’s best interest? Is the assessment data a good indicator of value? Does having a value that is substantially higher or lower than actual value hurt those involved?
In order to determine whether or not these sources are reliable, I pulled twenty random sales in the area, and compared their sales prices to the assessment data. The TCV is the True Cash Value.

This random sampling of twenty sales that occurred in the area, compared to assessment data, shows assessment information both above and below sales price, and only two instances within a five percent variance (which is the variance that most appraisers consider the tolerance they look for in terms of acceptability). That means that assessment data would only have been useful ten percent of the time, depending on what was considered an acceptable variance.

The most reliable and defensible number will come from a formal appraisal, conducted by a certified real estate appraiser. Throughout the valuation process, the appraiser analyzes and reconciles the collected data to arrive at conclusions regarding the final value opinion. In the final reconciliation, the appraiser considers all the available data and uses knowledge, experience and professional judgment to arrive at a final opinion for the property.

The cost of an appraisal is minimal compared to the potential tax burden of an inappropriately provided basis. Equally important, a report of this caliber may help substantiate your claim that the values within the report are well-founded and accurate.

April 1, 2019 Washtenaw County market snapshot

4/1/19

Mixing up my monthly run related to how the market is doing (not looking at prices, only supply and absorption).

The current monthly stats, run today, show most markets with limited inventory compared to the past 12-months sales, with only Dexter and Saline running over three months’ worth of inventory. Both of these markets have an abundance of new construction and that is considered to be partly to blame for the higher supply levels. Since I started running the information including “to be built” properties months ago, I have decided to keep running this particular data in the same manner for consistencies sake.

Below is a snapshot of how this Washtenaw County market looks right now, with a shortage particularly in Whitmore Lake, Milan, Lincoln and Ypsilanti, and very high absorption (firmly in a seller’s market) for Chelsea, Whitmore Lake, Lincoln, Milan, Ypsilanti and Ann Arbor.

The next image is that of comparison of month to month, color coded to show where activity has been since I started tracking this on 9/1/18. Green is go, meaning seller’s market. Orange is slowing down, in a buyer’s market, and yellow is in between, what I would consider “balanced”. Looking at this color chart, it looks like spring is shaping up to be very active again, but as we tip towards more inventory, could reverse, such as what is currently seen in Dexter.

Of course, within each of these areas there are market segments, and the information provided only shows the entire school district sales and listing activity, for residential single-unit properties. I could run this on condominiums and in market segments as well, but since what I am looking for on a monthly basis, is the broader overview, this works well for me, and I hope for you.

Hope you all find this useful, and remember, if you have any appraisal referrals for people who need a valuation for estate, probate, divorce, asset division, relocation, cash sale, or any other reason that is outside of mortgage lending, please think of me.

Happy Spring!

Belser Estates and Chelsea Ridge

Description
Belser Estates and Chelsea Ridge are connected to each other through common streets, and tend to function as one neighborhood. The neighborhood is made up of two phases of Belser, plus Chelsea Ridge site condominiums. Belser Estates had 28 sites in the first phase and 46 sites in the second phase. Cook Builders developed Chelsea Ridge to the immediate east which contains an additional 60 sites. There may be additional land to the east but not part of this brief neighborhood description.

The oldest houses I found in the Belser Estates was from 1989, and newest in 1997. The newer houses in the of Chelsea Ridge began around 2002 up through 2005. One newer house in Belser was noted, built in 2015. The housing is a mixture of single-story ranches, colonial style, some contemporary properties and a couple Cape Cods. Chelsea Ridge mainly has colonial style around 2,000-2,500 sqft but with variety.

The northern boundary of the neighborhood is Dexter-Chelsea Road and the Railroad tracks adjacent to it. The railway is active and includes both Amtrak passenger trains, as well as freight trains. The southern boundary is a field south of Darwin, and Meadowview Dr just south of that. To the west is Freer Road, and to the east is undeveloped land which appears to have been slated for an expansion of Chelsea Ridge based on street extensions. This neighborhood is on the far east side of the city of Chelsea, within city limits, and serviced by the municipal water and sewer lines. Schools are proximate with the middle school around a half mile west, and high school about 0.75 miles south. The downtown corridor is less than a one-mile walk.

Changes over time
So, what has happened in this local market over the years? I took information from the Ann Arbor Area Board of Realtors MLS through a map search and laid out the adjusted sales price and adjusted sales price per square foot since 2005. The data is presented in two graphs below. Both show a dip in prices from 2005 through 2010-2012, and then increases since that time. Overall, both are showing higher today than prices from 2005. The earlier top of the market seems to be 2006 related to price per square foot and 2005 on sales price. This does follow what most area agents and appraisers have tracked, that of the market starting a decline in late 2005 locally, although it appears slightly later in this neighborhood based on these sales.

Only MLS sales were tracked as I do not have the ability to pull information on for sale by owner data onto the spreadsheet. Normally most sales do go through the MLS. The most recent sales closed in August and September 2018, at $334,900 and $325,000. Two houses are on the market within the development, both under contract, both have asking prices above that of the recent sales at $349,000 and $349,900. We have to wait and see what they sell for. The fact that houses are under contract with higher asking prices than the recent sales can again indicate an increasing market.

There are indications that our local market is quite active again, including the number of properties under contract in addition to any changes in price (there were two sets of properties in Chelsea Ridge that sold and resold between 2017 and 2018 which indicate an increasing trend in that period but do not necessarily equate to today). Open house activity can give a great view of how active the market is, as do absorption rates. Lack of inventory can cause overbidding when there is simply not enough supply to meet demand. Every market segment can be different, and one market within the same community may have adequate supply and not be experiencing overbidding, while others may exhibit a shortage. With only five MLS sales in Belser and Chelsea Ridge in 2018, it is not showing as a very active market, but with both listings under contract, there is no supply either.

When in need of valuation services, consider contacting your local appraisal expert. Appraisers provide unbiased, independent, and competent researched opinions.

Saline MI – Wildwood

Every town seems to have a neighborhood which has broad appeal. In Saline, Wildwood is one such neighborhood. Here occupants find wooded lots, walkout basements and proximity to many area amenities. What I thought my readers would find interesting is how this specific market has changed over time, measured over the past 12 plus years as well as what I see happening now. The sales information is gleaned from the Ann Arbor Area Board of Realtors MLS and does not include For Sale by Owner properties.

This first image is a scatter graph of the adjusted sales price of each sale from 2006 to 2/28/19. Prices are clearly trending upward.
The next graph shows the adjusted price per square foot in the same period. Price per square foot is meaningful, in that in a data set that contains different size properties, it can normalize some of the increase that might show if the recent sales are larger properties.

This graph also clearly shows an upward trend in price in Wildwood.
Another way we could look at this is with a chart laid out in how many sales per year occurred, what the average and median sales prices were, the average and median sizes, and average and median price per square foot. This type of information could be useful in showing where the majority of change occurred. So far 2019 has only two closed sales, but these were on average, smaller houses.

The graph that follows uses the average and median sales prices compared to each other from the data above. The blue bar is the median, which is my preference in measuring a market. This layout is helpful in seeing there was a slight dip in the market between 2008 and 2011, with the greatest increase in 2016.

Continuing in the same vein, price per square also shows an increase, but with 2018 running slightly below 2017 in general. If an appraiser indicated the market was slowing, based on this data, they would be correct, to an extent. The past three years showed similar gross living area both in the average and median sizes, with 2017 having slightly smaller sales than 2016 and 2018, meaning the expectation is that the price per square foot range would be higher. That is precisely what shows below, while the graph above shows an increase.

What is the saying? There are three kinds of lies: lies, damned lies, and statistics.

As of 3/1/19, the MLS showed no active available listings in Wildwood. There were three properties under contract. The lack of available properties in a subdivision that has steady turnover, indicates higher demand than supply, which in turn tends to drive prices upward.

All of this information is to help the consumer understand the various elements of the market an appraiser may study to measure what is happening with the market at any given time. Since appraisals are snapshots in time, understanding the market is a major component of the analysis.

You can access my website for information about appraisals, and what services I can provide. Please think of me for your private appraisal needs. https://annarborappraisals.com

For my appraiser friends

I wrote this piece for WorkingRE as I figured the reach would be great there. Seems it has had limited reach as well, so am pressing it here too.

Private appraisal work

What is important to remember is that people who use our services directly normally have little experience with the appraisal process, so we have to craft our work in such a way for them to understand our reports. In my opinion, we owe our customers a very high level of due diligence, and of reporting.

Go forth with competency

Monthly market snapshot

Mixing up the way I do the monthly report a bit. In addition to the normal information about the absorption rates and where activity is as of a certain date, I have also included a two-year summary of price changes in each area. Hope that you all find this interesting, and as always, if you have questions, reach out to me, either via phone or email.

Without further ado, the monthly inventory in each market is showing from as low as 1.13 months, to as high as 3.56 months depending on the area. The area with the most inventory however, is actually showing as such due to the abundance of new construction exposed as “to be built”. This means the properties are not immediately available. Since I have run this data in the same manner consistently, I am carrying on with including all market exposed properties through the MLS, but Saline is not as saturated as it appears at first blush.

The market overall is undersupplied, with most areas around two months or less. Since this data includes every listing and sale within each school district, for submarket data, it does not apply. It is useful in measuring where activity is, but as always, you have to look at the market segment in which a property operates.

Based on the contract to listing ratios (CTLR on grid), the greatest activity is in Lincoln school district, followed by Ypsilanti and then Ann Arbor. The areas that are showing as leaning towards a buyers’ market are Manchester and Dexter. Saline is tilting towards a balanced market. Chelsea, Whitmore Lake, Lincoln, Milan, Ypsilanti and Ann Arbor are in seller’s market territory again.

It looks like spring may have sprung.

What about changes in price over time? Again, this is larger market data, not specific to any particular submarket section. These are arrayed by school district, and each data point is one-years’ worth of data at a time, moving forward in a monthly manner. This eliminates seasonality and is useful in seeing more nuanced changes. Looking at this information, it is easy to see that Dexter increased, but there is a decline over the past couple of months. Stability in pricing is seen in Chelsea, Saline, Ann Arbor and Ypsilanti based on the trend lines over the last four or so months. Prices have increased across the board in the past two years but also have slowed or even declined in places. Still, in comparison with two years ago, we are increased on the macro market segments.

If I take this information and put it on an easy to read grid and it is easy to see that over a two-year period, most of the markets are in the double-digits in increases, however the past year was not so kind to Manchester, Dexter, Saline and to an extent, Ann Arbor. The increases in these areas were smaller, and in some cases, negative. The largest increases in the past year were found in Milan, Ypsilanti and Whitmore Lake. This makes sense when observing the median prices, which are lower in those areas, with the outlier being Manchester. My take on this is that as some markets have become expensive for the average buyer, they have moved into different, lower priced markets, which are putting pressure on increases in those areas.

I am continuing to observe our market on every appraisal I develop and communicate. Markets can change quite rapidly, and each market will have a number of submarkets within it. All of this information is presented in a broad manner for ease of reading. All information is culled from the Ann Arbor Area Board of Realtors MLS and is assumed accurate.

Is the sky falling?

As an official geek, I really like looking at what is going on in the market by numbers. One simple way to look at this is through a one-year data run that moves forward one month at a time. This is an annualized monthly trend, and it helps to eliminate the seasonality that is seen through analyzing data presented one month at a time. That method is also valid, in particular in measuring when the market is most active.

Take a look at the information that follows. The columns refer to the date range, number of sales, median list and sales price, median size, and price per square foot. This is useful in showing how much a market has changed and is one way an appraiser may base a market conditions adjustment they make, or don’t make, on an appraisal report.

This chart is the Saline market, Ann Arbor Area Board of Realtors MLS data with all sales exposed through this source only. The to be built and new construction properties are excluded. I excluded these new houses, as the trends did seem to be a bit skewed due to the number of new houses that are being placed in the MLS at this time, many of them not immediately available for occupancy.

January 1, 2016 through January 1, 2017 there were 310 sales with median sales price of $335,000 and median price per square foot of $152.13. One year later the median sales price was $358,875 and price per square foot median was $162.46. This means that in this one-year period, the market increased 7.13% in price, and 6.79% in price per square foot. The change from 2016 to 2017 in this market could be easily measured through this method, and correlated anywhere between that 6.79% and 7.13% range. Of course, markets do not move on a straight-line basis, therefore depending on where a sale fell in that period, the appraiser could use that information for an adjustment.

Between January 1, 2018 to January 1, 2019 the market showed a median sales price of $360,000 and median price per square foot of $168.86. Based on the previous years data, this means the median sales price increased 0.31% and the median price per square foot increased 3.94%. Neither of these shows much of an increase, in particular as the median size of the most recent period is 3.49% lower than the previous year. Because smaller houses tend to sell at a higher price per square foot due to the cost of land and development, and diminishing returns, this means there could be little to no movement in price. If the 2018 inflation rate is 1.9% (based on the US inflation calculator), did properties even increase at a rate equal to inflation? What about the current sales price median lower than the last eleven months? Even the past three months before showed a lower median price. Are we seeing a correction?

Considering there are 18 properties under contract with a median asking price of $364,950, it is in line with the last four months asking prices, but the median size has jumped by 11.30%! To me this indicates the market is not going up in general, and could be pointing downward. Hard to tell until the contracted properties sell, but it is worth watching.

Appraisal process for consumers

Consumers see only a small portion of the appraisal process. What consumers often see is the appraisers visit to the property, and the written communication. They do not see the process that the appraiser goes through in developing their opinion of value. My hope is that this piece will help consumers understand a bit about the appraisal process, beyond the number that is of vital importance to almost everyone who picks up an appraisal report.

Appraisers start with identifying the problem to be solved, including who the client is, and what the intended use of the assignment results are. It includes the type of value; the effective date of value; the characteristics of the property that are relevant to the problem; and whether there are any conditions that are placed on the assignment that need to be considered. These include extraordinary assumptions (assumed to be true specific to a property, but not known for certain) and hypothetical conditions (contrary to fact). Clients can be lenders, they be attorneys in litigation or consumers who need a problem solved among others. The intended use can be for mortgage financing, for establishing a value in an equitable dissolution issue, or it can be for buying a house without a loan. There is a myriad of reasons someone may wish to have an independent opinion of value. Characteristics of the property that are relevant are those elements that an appraiser considers as contributing to the value of the property. They can be quite varied, and are truly the appraisers call.

From this initial identification flows the appraiser’s decision on what needs to be considered in developing their opinion. Does the appraiser need to visit the property? How detailed an observation do they need to make? What types of sources are they going to consult in the research? These all form the scope of work determination. After that, the appraiser needs to consider data collection and property description, including analysis of the market area, the subject property itself, comparable sales, listings, cost and income if they are relevant.

After collecting all of this information, the appraiser analyzes the data. They analyze the market, including supply and demand factors, and any marketability issues. They study the highest and best use of the property. They research the site value and the different approaches to value are considered. After all of this is completed, the appraiser takes the data and approaches and reconciles it into one or more value indications, and then to one final value conclusion (which may be a point value, or a range, depending on the client’s needs).

The final step in the process is the report. This is where all of the analysis that took place comes together in what you see and read. Reports can be very brief, addressing only the points that are required to be addressed per our standards, or the report can be detailed and address everything under the sun. Of course, the report can be in between as well. The point is that the report should not require the client to take a “leap of faith” to understand how the appraiser got from point A to point Z. It should be completed in a way that is meaningful to the client and does not mislead them with erroneous or incorrect information. Ideally the report will take the client on a journey to understand how the appraiser looked at the data and how they came to their conclusion. Appraisal reports should be clear and help lead the client to a logical conclusion. Even if the client does not agree with the results in the end, they should always be able to understand how the appraiser got to their conclusion.

If you have any questions, please feel free to contact me.

Relocation Appraisal – hire an expert

The reason hiring a RAC member matters

Agents, employers, potential transferees; do you know what RAC is? Do you know why it would be important to consider appraisers who are members of this organization for the employee taking a buyout? In short, RAC is the organization that is dedicated to Relocation appraisals. RAC is the acronym for Relocation Appraisers & Consultants, and it is made up of peer reviewed experts in relocation work or those who have demonstrated expertise in complex residential appraisal assignments.

Why does this matter? It matters because the transferee has the option of taking a buy-out from their employer, facilitated by a third-party company that specializes in seamless employee transfers. The buy-out offer is made after two independent appraisals are obtained that address the positives, negatives, market conditions, and any unusual features of a property. These appraisals are not market value based, but based on a definition called “anticipated sales price”. Anticipated Sales Price (ASP) is actually a projection into the future, as to what a house will sell for within a specified period of time. It is not market value, which is back in time, forward to the date the appraiser views the property.

Appraisers who have expertise in this type of work are aware of the nuances in a market relating to what buyers expect, what types of repairs or improvements need to be made to put the property in the best position to sell, and exactly where it is positioned in the market as of the date of value. This means that odd floor plans are addressed. Dated cabinetry or flooring is addressed. Special features which may sway buyers to that property over others are addressed. The appraiser pays close attention to the market at the time of the valuation, and in particular the competition.

RAC member appraisers have this expertise and are the natural choice for any relocation assignment. When offering advice to your clients on choosing the right appraisers to complete these assignments, asking for RAC members to be included should be one of the first questions the client asks. It makes the transferees life easier, as well as your job as agent who will be handling the transfer. Don’t cut corners, go straight to the best, hire a RAC member today!

The RAC website is www.rac.net and I recommend that it be consulted in addition to the WERC website, with a search for “Worldwide ERC® Appraisal Trained” appraisers. The directory is found at https://directory.worldwideerc.org/18.aspx