HOW DOES THE APPRAISER MEASURE THE HOUSE?

Posted on April 4, 2011 by admin

If you look at the blueprints of a house, the outside measurements are of the exterior part of the foundation wall. The framing of the house and the exterior siding can extend beyond the foundation wall.

When an appraiser is measuring a house, I feel it is best to approximate the foundation wall dimensions. Therefore, if a wall being measured is 24 feet nine inches long, it might be better to call that a 24 and 1/2 foot wall. Rounding back three inches would put the measurements closer to representing the exterior foundation wall, rather than the measurements of the siding. More importantly, it would be inappropriate for the appraiser to round the 24 foot nine inch measurement to 25 feet. By doing this the appraiser would be including space that is not contained in the house.

Garages and other attached or detached areas are usually measured separately. An important reason for this is that a garage usually is not finished to the degree of the living area of the house. The garage seldom has bathrooms, or kitchens and usually no finished flooring. For this reason the garage would need to be analyzed separately, therefore measured separately.

Today there are very good sketching programs that allow the appraiser to enter the house dimensions and have a very accurate representation of the dimensions of the house.

Ralph Olsen

pwas.net

APPRAISAL METHODOLOGIES

Posted on April 4, 2011 by admin

I have been asked to describe the methodologies that appraisers use when estimating the market value of a house. There is a lot to be said about that topic, but I will briefly describe the methods here. With houses as the frame of reference, I will describe the three appraisal methods with the least reliable first and the most reliable last.

First, the Income Approach to value is used when a property produces an income stream to the owner. This approach is more viable with apartment buildings, shopping centers, office buildings, etc. All these property types are designed to produce a revenue stream. Houses, on the other hand, are mainly built to house an owner occupant. A small percentage of the housing stock is rented. For this reason, it is difficult (but not impossible) to develop a value estimation based on revenues generated by the property. Also, to do this type of analysis there must be plentiful information from houses that sold while rented. It is from recent sales of rented houses that the Gross Rent Multiplier is developed. Since this data is not plentiful, the Income Approach to value is not often very reliable for house appraisal analysis.

Second, the Cost Approach to value is used in most residential appraisals. The idea is to estimate the site (land) value, add to it the cost to build the house, and from that subtract the depreciation on the improvements (house). A new house has no accrued physical depreciation. Older houses have more or less depreciation depending on their age, how well they have been maintained, and other economic influences. Although the Cost Approach is generally useful, it is not what the market uses to set house prices. So, it is not as reliable as the Sales Comparison Approach, but often more reliable than the Income Approach.

Third, the Sales Comparison Approach is the one that best reflects the activities of the market. This technique looks at recent sales of houses near and similar to the house being appraised (subject property). After gathering the most recent, near and similar sales data, the appraiser will go through an analytical process to compensate for differences between the subject property and the other sales. For instance, if the subject house has a one car garage, and one of the sales that was nearby and recent had a two car garage, yet was otherwise very similar to the subject, the appraiser would subtract the value of the second garage space from the sales price of the house with the two car garage. This effectively accounts for the difference in value of a house with a one car garage compared to a similar house with a two car garage. After all the details of this process are completed the appraiser will have several “adjusted” sales that give value indications. After completing this process the appraiser has to decide which of the data is most similar to the subject property and then determine a value conclusion.

This whole process leads to the value conclusion that the appraiser presents in an appraisal report. The process is simple and straight forward. If you ever read an appraisal report, and you don’t understand how the value conclusion was reached, either the appraiser was not a good report writer, or someone is tying to fool someone. There are properties that are so unusual that it is difficult to make sense of them. Then, the appraisal report may be more difficult to follow. But, generally, an appraisal report is very logical and funnels down from the general information about the property and the market it is in, down to the specific value conclusion.

Ralph Olsen

pwas.net

DISTRESSED PROPERTY RATIOS

Posted on March 25, 2011 by admin

I had an investor ask me to supply him with some information about residential properties in Clark County. He had a specific set of search criteria. They were: all of Clark County, one story houses, built since 1970, with three bedrooms, two bathrooms, attached garages, between 1,100 and 1,500 square feet of living area.

Doing the search there were 120 results. Out of those results 18 (15%) were bank owned and 67 (56%) were short sale offerings. That is a total of 71% of that market segment that is now short sales or REO (bank owned property).

Not such good news.

Ralph Olsen

pwas.net

Foreclosure Rate Still High

Posted on March 11, 2011 by admin

Clark County continues to have a lot of foreclosure activity. The charts shown in the January 4th post indicted very high rates. Now, you can add the numbers for January and February. They were 262 and 225 respectively.

These numbers are down a little bit from the recent averages. But, it will likely be some time before these numbers drop significantly.

Ralph Olsen

pwas.net

COMPARABLE PROPERTY, A DEFINITION

Posted on February 18, 2011 by admin

Writing to appraisers and underwriters, I am proposing a definition of a “comparable sale” in the residential sector.

First I must say that the word “comparable” in the residential real estate industry, is used by many who have no idea what it means. All of us appraisers receive e-mails and phone calls now and then asking us why we did not use a certain “comparable” in our report. Then, when we look at the sale that is being suggested as “comparable,” we find it is not at all similar to the subject.

My definition of a residential Comparable:

“A combination of land and house that is, compared to the subject property being analyzed, more similar in size, style, age, and location than any others in the marketing area of the subject property, and that sold more recently than others.”

So, for a sale to be a comparable, the house and land compliment should be similar to the “subject” property (the one being analyzed or appraised). Also, for a sale to be a comparable, the property should serve the same market as the subject property. And, for a sale to be a comparable, the house should be of similar age and style as the subject. And, for a sale to be a comparable, the sale of the property should have been more recent than other sales that would otherwise qualify as comparable.

From time to time I receive questions asking why I did not use “this comparable” in my report. In every case, the so called “comparable” sent was completely unlike the subject property, and, not comparable at all.

I have not been told where the people who submit this misleading information that they call comparables get them. But, whoever is supplying it should be questioned.

So, underwriters, please don’t send trash and ask us appraisers to defend ourselves with reasons we did not put trash into our reports.

And, please memorize the definition of “comparable.”

Ralph K. Olsen

pwas.net

BANK OWNED V. SHORT SALES V. NORMAL SALES

Posted on February 15, 2011 by admin

I did a study of several Clark County MLS districts to see what the difference is in Short Sale prices as compared to Bank Owned prices. I also did a study of all sales that were not Bank Owned or Short Sales.

Here is what I found.

Compared to the sales of properties that were not in distress (Bank Owned or Short Sales), the Short Sales and Bank Owned sales showed the following discounts.

Short Sales Bank Owend

-15.23% -16.10%

-12.18% – 8.09%

-13.65% -15.06%

-17.60% -13.54%

The average for Short Sales was -14.67%.

The average for Bank Owned was -13.20%.

As you can see the Short Sales and the Bank Owned properties all suffer in the market. Short Sales take a bigger hit than Bank Owned do.

In the analysis I threw out the outliers. I only used areas where there were ample numbers to make the results statistically reliable.

Ralph Olsen

pwas.net

INVESTORS LEAVING MONEY ON THE TABLE

Posted on February 10, 2011 by admin

I have seen many examples of investors that have bought, rehabbed, then sold a property and left tens of thousands of dollars on the table.

It appears that many do not do their homework well when analyzing the current market value of a property. I have seen houses that were very well rehabbed that sold for less than the average house was selling for in the area.

The rehabbers need to be more attentive to what the value of properties are when they put them up for sale.

You can use www.whatsthepropertyworth.com here in Clark County. It works very well.

Ralph K. Olsen, MAI, SRA, IFA

pwas.net

HOW TO INFLUENCE A REAL ESTATE APPRAISER

Posted on February 7, 2011 by admin

There has been a lot of talk lately about how lenders, Realtors, borrowers, etc., are not allowed to talk to an the appraiser. This idea is misguided.

It is perfectly fine to talk with the appraiser. And, most appraisers would welcome the input.

First, let’s look at what an appraiser is and does.

An appraiser is an investigative reporter. The appraiser of houses specializes in residential real estate economics. We appraisers, by law, are charged with the task of becoming familiar with the property being analyzed (subject property). Then we conduct market research to find the data that best addresses the question, “what’s the property worth.” Then the appraiser analyzes the data. Then the appraiser writes a report to reveal their findings.

If you are a borrower, seller, investor, lender, Realtor, or any interested party to a transaction that requires an appraisal, there is no problem with you showing the appraiser sales data that might be useful.

I recommend, to borrowers, sellers, and investors in particular, that, if you can find good, useful data, give it to the appraiser when he/she arrives for the property inspection. We appraisers are human. We know that if someone provides us with data that they say is appropriate to use in the analysis of a property, we would be wise to review the data.

If the data supplied to the appraiser is junk, the appraiser will be ready to respond to questions about it, and tell why it was not useful. If the data supplied to the appraiser is good, useful information, the appraiser will likely use it in the analysis.

The idea that two heads are most always better than one applies. An experienced, well trained appraiser should not miss useful data while conducting their data search. However, good data can be missed from time to time. This is due to various search parameters that might be used or neglected while gathering data.

There are, of course, inappropriate things to say to an appraiser. It is illegal to try to manipulate the appraiser or to coerce the appraiser into committing fraud.

A good way to find data and also estimate the current market value of a property you are interested in is to use www.whatsthepropertyworth.com here in Clark County Washington.

Ralph K. Olsen

MAI, SRA, IFA

pwas.net

RMLS Area 15 Statistics

Posted on February 4, 2011 by admin

I did an analysis of the MLS area 15 to see what portion of that market was distressed sales. I also looked at listings.

There were 80 residential single family detached properties sold in this area in the last six months, through the RMLS. Of these 16%, or 20, were bank owned. There were 16 short sales, or 20%.

There were 164 listings, of which 53, or 32% were short sales and 12%, or 19, were bank owned.

Forty percent of the sales during the last six months, in this market area, were distressed sales.

Forty four percent of the current listings are distressed properties.

I’ll keep looking at these numbers and let you know how they change.

Ralph K. Olsen

MAI, SRA, IFA

pwas.net

Geographic Competance and Appraisal Practice

Posted on February 2, 2011 by admin

This whole thing about “Geographic Competence” is a load of crap.

It seems that we appraisers get pounded every time the lending industry gets itself into trouble. We don’t lend the money. We don’t even have the money. But, we often get blamed for the industry’s problems.

I do know that there are bad appraisers. There are appraisers that think that whatever they say about a property is simply what is so; even when they are expressing their own prejudices and personal preferences. That’s a load of bunk.

As appraisers we are “investigative reporters specializing in residential real estate economics.” If we are asked to go somewhere we have never been, and do an appraisal there, it is our job to get familiar with the market and analyze it appropriately.

I say that the appraisers who have produced crummy appraisals in markets distant from their offices also produce crummy appraisals in their own neighborhoods.

As a result of the current misguided requirements that appraisers should not travel more than about 30 miles from their offices to inspect properties, I have stopped doing work in areas I have been very active in since the early 1980′s.

It is frustrating, as a professional, to be told I am not qualified to do an assignment because it is too far from my office. It seems to me that the weeding out process to get rid of bad appraisers needs to be improved.

Anyway, this is just a rant, so ignore it.

Ralph K. Olsen

MAI, SRA, IFA

pwas.net