Tag Archives: financing

Mortgage Flowchart…

Garage Values…

I’ve been working on some statistics for valuing additional garages.  It is tough.  They are a specialized addition, not unlike equestrian facilities, pool or tennis courts are for other families…

ROD WORKS SHOP

ROD WORKS SHOP (Photo credit: ATOMIC Hot Links)

Appraisers have been all over the map, but for the last couple of years they have consistently under-valued enthusiast garages.  I have seen $50k-$70k garages valued under $10k during the appraisal process.

A large part of that is due to the fact that actual market value numbers are seldom worked up for specialty garages.  The buyers see the additional value, and of course the sellers see the additional value.  But too often, the appraisal gets in the way of completing the sale.

As a real estate agent, I can NOT do appraisals, but I can provide limited guidance to appraisers to help them see the additional value that should be added for an enthusiast garage.

For a recent property, I worked up an area wide study of similar garages.  The results were a little surprising.  Keep in mind, these were specific to the type of garage I was trying to find comps for… in this case, the house had an attached, over-sized 2 car garage and a detached VERY over-sized workshop garage (around 900square feet).  I controlled price range to be similar to the subject home.  Looking for direct comps was fruitless, but I was able to find other homes with detached garages, generally in the 500sf range.  In each case, there was only one home with the bonus garage.  So, I looked for comparable homes without the bonus garage to compare the difference in prices.

  • Subdivision 1 – Average difference was $23,300.
  • Subdivision 2 – Average difference was $10,500.
  • Subdivision 3 – Average difference was  $53,615.
An aerial view of housing developments near Ma...

An aerial view of housing developments near Markham, Ontario. Photo by IDuke, November 2005. (Photo credit: Wikipedia)

In the case of subdivision 2, there were only two houses, one with and one without the big garage.  The house without the big garage had been fully updated with a new kitchen, granite counters, stainless steel appliances, upgraded bathrooms, etc.  The house with the garage had laminate counters, old appliances and had not been updated for at least 15 or 20 years of its 33 year life.  That would lead me to believe that the market values of the homes was actually considerably wider than it first looks.  And, I believe the opposite to be true of Subdivision 3… the Garage Home was considerable nicer than the non-garage comparables.

However, this shows pretty solidly that the additional garage is more likely worth $20k-$30k, rather than the $5k-$10k that many appraisers will initially allow for the structure.  That also puts it in line with Remodeling Magazine’s annual Cost vs Value study garage data.  That puts the mid-range garage cost at around $46k while the value at sale is around $30k.

Appraisals are great when you are looking at a cookie cutter home.  Those are easy… it’s when the mold is a little different that things get sticky.  Of course… you need an agent that is willing to invest the time to fight a low appraisal.  Even as a buyer, if the appraisal doesn’t come back at a price the seller can work with, you won’t be able to get financing…  Give Lane a call.

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The Appraisal Came Back Low… aaarrgghh!!!

Commonly heard, especially from sellers right now…

Let’s get a couple of things out of the way.

  • Back during the “boom”, it was almost unheard of for an appraisal to come back too low.  The banks wanted them high, and the appraisers were getting paid by the banks.  The thought was “real estate will always go up, so if the value is a little out of line, it’s OK”.
  • Around 2007/2008, that stopped.  There were a lot of big changes in the appraisal world…
  • Appraisers NOW are all but forced to be VERY conservative.
  • Appraisals are based on “comps” sold within the last 6 months… sometimes 12 months.

 

1939 United States Appraisers Stores Building,...

1939 United States Appraisers Stores Building, 7300 Wingate, Houston, Texas 1205201547BW (Photo credit: Patrick Feller)

So, where we find ourselves in the current real estate climate is with price appreciation happening, most noticeably at the entry level end of the market.  Homes are OFTEN drawing multiple offers and selling over listing price.

 

As a byproduct, values are outstripping appraisals.  It isn’t always that the prices are out of line with other homes in the neighborhood… it is often because the appraisal process almost demands that appraisers work with information that is out of date.

On average, after a buyer and seller agree on a price, it may take from 30-60 days for the sale to close.  After that, it may take another 30-60 days for the sale to be recorded with the county.  The local MLSs are a bit faster, generally having the sale information within a week or so of closing.

So, the Appraiser is working with sale prices that reflect where the market was anywhere from 1½ to 4 months ago… at best.  And in the market we are in, there has been about a 10% increase in pricing, dependent on location, price segment, etc.  But much, if not most of that appreciate has been more recent than the 6 months an Appraiser is looking at.

The next issue that we run into relates to condition.  Many of the properties that sold last year, or the year before that were in pretty rough shape.  Much of the foreclosure and short sale inventory has been worked through, but a year, and even 6 months ago, it accounted for a large chunk of the sales.  Now, with constrained inventories, that isn’t the case.

 

Housing

Housing (Photo credit: james.thompson)

Appraisers DO adjust values based on condition… but the problem is that often the adjustments are based on a limited amount of information available in an MLS listing for a bank-owned property.  Sorry, but many of the “REO Agents” left minimal information for the appraiser to work from.  It wasn’t uncommon to see a bank-owned listing with 4 pictures, and NO details about condition of the property.

 

Subsequently, the Appraiser might not know that the house that sold a year ago in the subdivision for $75,000 less than the house you are dealing with also happened to need $50,000 in work to bring it up to where it is now.  And his adjustment for that house might have only been $10,000…

The result is that we see neighborhoods with homes that sold for $100,000 last year, with homes that could (and do) sell for $175,000 this year.  Seems like a HUGE increase in value, but the reality is that the $100,000 house needed a tremendous amount of work to get it up to where the current houses are.  Coupled with the reduced inventory and increasing prices… the current price is NOT out of line with reality.

But then…

The appraisal hit.  And it hits HARD.

The buyer either freaks out and thinks that he wants a MASSIVE price cut because of the low appraisal, or starts freaking out that there is no way they can buy the house.

The seller either freaks out because he has to take that much more of a loss, or becomes despondent because he doesn’t think he’ll ever be able to sell his house.

Nobody wants to return anybody’s call…

Solutions…

AP of Large Residence under construction for u...

AP of Large Residence under construction for use in an appraisal article (Photo credit: Wikipedia)

Actually, there are some things that can be done…

  • Buyers – You have to realize that the appraisal is an opinion of value, often based on out of date information.  It is NOT the Appraiser’s fault that it is low… the Appraiser HAS to work within very specific guidelines.
  • Sellers – Same thing.
  • Both – Don’t yell at your agent.  We aren’t picking the appraisers.  Neither is your Mortgage person.  But, we WILL try to help.
  • Sellers – One of the best ways to start is to buy (yes, spending money) an appraisal PRIOR to listing your home for sale.  Forewarned is forearmed.  It is better to know well in advance that there could be a problem than to get slapped by a shocker appraisal just when you think you are on Easy St.
  • Agents – Do your homework.  Is the CMA for the Seller (or the Buyer) “real” or is it manufactured just to tell them what they wanted to hear?  If it is based in reality, give the Appraiser the comps you used.  You can NOT tell them what to value the house at, but you can help them get to where you are.
  • Sellers & Seller’s Agent – If you get a pre-listing appraisal, talk with the Appraiser about helping to fight the low one.  They speak the same language and might have an easier time working everything out.

There is one other tidbit.  If the appraisal is done for an FHA loan, it sticks with the house for 90 days… that mean ANY subsequent FHA loan from another buyer for the next 3 months will use the same appraisal.  And if you think it is out of whack now, think how out of whack it will be in 3 months…

 

The bottom line is…

Don’t freak out.  Work with the professionals that you hired and see if they can get everything worked out.

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Wayback Wednesday… How Were My Prognostications?

Last year I wrote one of those “wonderful” annual prognostication posts with my guesses on what we would be looking at during the same time next year… and that would be now.

Gwinnett County, Georgia

Image by dougtone via Flickr

Here is a link to the old post.  I’ll have the quick version below, but if you want to see the context, knock yourself out…

  • I predict that next year there will STILL be people talking about the coming giant wave of Shadow Inventory.  Well, I have to say that I hit that one.  Inventories are dropping, but the general buzz in the biz is that there is a huge wave of “Shadow Inventory” just around the bend.  Of course, it has been there (just around the corner) for a few years now…
  • Interest Rates ARE going to rise.  They did… a little… but they are down.  I was wrong.
  • there will be another wave of government intervention…  I hoped I would be wrong on this one, and I was.
  • The entry level market (under $200k) is well on the way to recovery… and that will continue.  I hit that one right.  The entry level market is pretty much rocking in Gwinnett County.
  • And I don’t think we will see a meaningful recovery in prices for the Luxury Market (above $600k).  Talk about a hurting market segment…  Unfortunately, I hit that one on the head.
  • The “Near Luxury” segment (from $200k-$600k) will be mixed.  That one is pretty close.  There are some markets that we are seeing a meaningful recovery for this price level… and other, not so much.  A few are just waffling.
  • I don’t see Unemployment going under 9% during 2011.  How do I rate this one?  Officially, I am wrong.  However, most of the improvement hasn’t been from job creation, but rather from people giving up.  The December numbers are supposed to be released later today…

I went 4 for 7… maybe 5 for 7, depending on how you want to score the last one.

 

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Wayback Wednesday… Mortgage Thoughts from Ken

You don’t need a weather man Beeches obey the ...

Image via Wikipedia

One of my Mortgage Guys, Ken Cook (not the Weather man), write a LOT about mortgages and the best ways to get the best deal and best chances of closing your loan on time and without drama…  a LOT!  He knows his stuff.  And he has NEVER delayed a closing with me because of issues with an approval (ok, there was a time when we had to go get lunch and we closed it after lunch…)

A couple of years ago I grabbed a few quotes from Ken and linked them back to posts he had about those subjects.  Here is a link back to the original post

The subjects I included were…

  • Should you be “pre-approved”?
  • What do the different steps mean (pre-approved, conditional, cleared, etc.)?
  • How to make the whole process go smoother.

Ken knows his stuff.  I trust his opinion…

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