Paul's Appraisal Blog

    In a previous post, I talked about the first basic part of a real estate appraisal- the verification of the property attributes. In this post, I will talk about the determination of value.

    In any real estate appraisal, there are three approaches to value that can be used:

    One approach is the income approach, which determines the value of a property based on the amount of income it has brought in and is expected to bring in. This is usually used for income-producing properties such as multi-unit residential and commercial properties. It has very little application in primarily owner-occupied properties because there is no income.

    The next approach is the cost approach, which calculates the cost of constructing the building coupled with the value of the land. If the property is relatively new, this can be a fairly accurate way to find value. However, if the building or "improvements" (as we like to say in the business) are older, then the the calculations become less reliable. There is also the problem of determining a valid value of the site if there are no recent comparable land sales to use for the value. (By the way, on my home page there is a link to building cost.net which is a free service that will calculate the cost of building a home in your area - give it a try!!) 

    In residential appraisals of single family residences, (SFR's or Condos), the most commonly used method for determining value is the sales comparison approach. The concept is quite simple: Three or more recent comparable sales are found that are near the subject. The assumption is that if these comparable sales sold for $X, then the appraised property should also sell for $X.  The problem is that sometimes the "comparable sales" are not as comparable as one would like. They may be bigger, smaller, older, newer, in better or worse condition, have a better or worse location, etc.  When this is the case, then the appraiser has to make an adjustment to compensate for this difference. How do we know how much to adjust it for?  What we have to do is find two or more comparable sales that are only different by that one attribute that we want to adjust, and then see what the difference in price is. This is called a paired sales analysis and can be very eye opening.

    What many people don't understand is that we make an adjustment based on how the real estate market reacts to the improvement, not to how much it cost to put in.  For example, someone might pay $20,000 to put in a pool, but a paired sales analysis indicates that home buyer will typically only pay an additional $10,000 for a pool.  Someone might pay $10,000 to put in a new deck, while a paired sales analysis shows that home buyers really don't react at all to this feature- in other words, it really doesn't add much value. These are only examples and every area is different.  Pools in Oceanside near the ocean aren't worth as much as pools in, say, Palm Springs- for obvious reasons.

    So, I hope this helps people understand a little bit about the appraisal process. You can actually get a pretty good idea of what your home is worth by paying attention to the recent sales in your immediate area (in this market they shouldn't be more than 3-4months old with the same living area and within a half mile).  

    If you have any questions, feel free to give me a call or email. I'll try my best to answer them. Thanks for visiting my site!!

    Many people think that when they order an appraisal, they are getting the product of a scientific or mathematical algorithm which, when applied properly, renders an exact number which represents the value of a piece of property on a specific date.

    Although an appraisal is the product of detailed analysis and computation, it is anything but exact. That is to say, an appraisal done by two different appraisers on the same piece of property on the same day could easily render two different values. This is because an appraisal is an opinion of value, not a scientific fact. The opinion must be supported by facts and analysis, but the conclusion is the product of human opinion.

    That being said, if the appraisals are done in a conscientious manner with proper analysis, the value conclusions should be very close. The problem arises when the client or borrower has a different opinion than the appraiser. In my experience, it is very common for a client to believe that their home is worth more than it is. They often point to comparable sales that are over 6 months old, or are much bigger or in superior condition. In this market, many people are still unaware that home values have been plummeting for the last few years and that home values today haven't been seen in 5 to 8 years, depending on the location.

    Although everyone is entitled to their opinion, it really doesn't mean much if it isn't supported by fact and detailed analysis. That's why we strive to keep abreast of the current trends in the real estate market and continually update our education on the latest data analysis techniques. In this market, one cannot haphazardly spit out appraisals (as some appraisers did in the past) without making a detailed analysis of the market and other factors contributing to value.

    If you have a question or would like more information about real estate appraisals, give me a call 760-525-2742 or shoot me an email at paulmcewen@cox.net. Thanks for visiting my site!!

    Someone contacted me stating that he was a first-time home buyer and asked what the process was. Here is my response. Not that I'm an expert, but I have purchased a few properties, so I am familiar with the process. I thought it would make a good blog post for those of you considering buying a home for the first time.

    The first thing I recommend you do is get pre-approved with a lender to find out how much house you can buy. (They don't have to be local- you can get your loan from New York if you want, if they have the best deal. The thing is, most lenders have about the same rate, so one that is somewhat local makes it a bit easier at signing time.)  Many people will not even look at an offer if you do not have a letter stating you are approved for a loan of a certain amount. Make sure it is a letter of pre-approval and not pre-qualification. You can always change lenders later if you decide to, the letter just states that you are good for the loan. If one pre-approves you on the low side, try another. That happened to me when I bought my first house- the first broker approved me at $170,000. Then I went to another that approved me for $210,000. Big difference!!  (That was a long time ago......)

   

   

    I was talking with a new client the other day, and we were talking about the bank-owned purchase transaction that he was brokering. Of course, the conversation turned to "wow-look how much values have gone down...", when he asked, " How much further do you think they will go down?"

    Obviously, I don't have a crystal ball and can't predict the future. However, I can see patterns and am aware of historic trends that lead me to believe that we are very close to the bottom.

    First: I have observed that when this "crisis" started toward the end of 2006, comparable sale prices were all over the map. That is to say, when I would look up comparable sales for a property that I was appraising, the values had a very large range, often over $100,000.  Now, towards the end of 2008, the comparable sales values have a much tighter range- much closer to what it was like before the "crisis". To me, this is a sign that we are near the bottom. Banks are not willing to discount any more, and properties are being bought up in under 3 months.

    Second: Historically, home values tend to rise slightly higher than the rate of inflation. In most areas, this is around 7% per year. Here in Southern California, we have a very strong, diverse economy and desirable climate. This should sustain this modest gain in the long run.  If we go back to slightly before the big run-up in prices, and apply the 7% per year, then we see that the "discounted" prices we're seeing now are right about where they should be. For example, if a house was bought in 1998 for $200,000, then applying 7% per year until 2008 would be 70% or $340,000. Actually, though, the percentage is compounded yearly, so the actual value would be more like $393,430. 

    Third:  When I bought my house, the "rule of thumb" was that you could afford a house that was 3 to 4 times your yearly income. Again, we see that these "discounted" prices are about in line with this rule. If a family has an income of between $70,000 - $150,000 (Senator Obama stated that a family making $150,000 a year is middle class...), then the current prices are right in line.

    Another thing to consider is: Why did so many people buy in these hot areas to start with?  The answer is because people want to live there!!!  Southern California is still a great place to live and property will always be in demand. As they say, they aren't making any more So Cal real estate!!

    Well, I hope my case makes sense. I may be completely wrong, but I don't think so. I'm starting to see more sales and feel that we are coming close to the end.  If you would like more info or would just like to talk about the market or any specific areas, go ahead and give me a call. As I said, I love to talk shop and hear from my readers.