Archive for the 'Appraisal' Category
Can’t sue me, I’m no expert!
My final ‘required’ course was taught by a CPA who is also a residential appraiser (Utah divides appraisers into residential and commercial). He got right to business, by handing out his business card to the class. I have already shared my opinion of appraisers in other lessons, so I have become rather skeptical when it comes to appraisers. That said, I was willing to give the guy a chance as most CPAs I have known have been pretty smart people.
He explained that he felt the best way to teach an appraisal class would be to share a sample appraisal which he has done. He began by sharing every appraiser’s secret weapon. Tax records. My ears perked up when I heard him explaining online records: “As Bart Simpson would say, ‘It’s on the computers now.’” Being an avid Simpsons fan, I must confess I have never seen that episode.
Sadly, things quickly became boring as he continued explaining property taxes and answered a barrage of rather silly questions from the class. I’d list them, but sadly none of them were dumb enough to be amusing. They were just silly questions.
I was surprised to hear him claim that corner homes are on average worth less than other lots. It had always been my impression that the opposite was true. He supported his claim by stating that the double traffic from bordering two roads will bring down the value in areas with any degree of traffic.
He mentioned that you can check to see if your home is in a flood zone by checking with FEMA. This can have an obvious affect on a properties value, particularly if the home cannot be insured. There are few areas in Utah Valley that are flood zones, places such as the riverbottoms are surprisingly not a flood zone, although homes very close to Utah lake are.
He explained that he will not actually evaluate a foundation or home structure. He claimed that he only looks at it and makes a guess. While I realize the instructor is not an engineer, it is troubling that an appraiser could give a high appraisal to a home with a faulty foundation. He claimed that he had never been sued, and was happy to proclaim that he wasn’t an expert on home structure, danger, or appearance - that he just gives a guess of what he thinks the property is worth. He continued on by telling us that he looks at very few of the home’s actual features, and that at times can do a ‘drive-by’ appraisal without actually having to go inside the home.
Perhaps that attitude is one of the reasons why there is little to no consistency in the appraisal industry. He did admit that he can pad an appraisal to come out to basically whatever he wants it to by changing the neighborhood he draws his comps from. Appraisals (and CMAs) rarely draw all of their comparables from similar neighborhoods, so if I wanted my home to appraise for double I could do so by comparing it to homes in the best part of town…or I could get it appraised for half it’s value by comparing it to places on the other side of the tracks.
It was interesting to learn that many appraisers use Marshall & Swift to determine the cost of building an equivalent home. Something I didn’t know, but that makes sense, is that new homes are actually more expensive than other ones. There is a premium paid for a new home, and as such it may actually depreciate in value initially (depending on the market).
He continued explaining the appraisal line by line and did so clearly, until he went off on a rant about 0% down loans and all the evil which they have brought about. I disagreed with a lot of what he said, but I’ll go into that some other time.
He stated that most appraisers are willing to give some leeway on their appraisals, and will often increase by 5% if you ask them to. I guess that says it all. If you want to have any influence on what the property appraises at, make sure that you talk to the appraiser.
Appraisal is an Exact Science
Today we gathered about to learn about the topic I’ve already mentioned as being one of my favorites, Appraising!
Our instructor began by stating that any property bought through financing will require an appraisal, which range in price from $250 to $500 for residential properties, to much more for larger properties.
According to our instructor, appraisers are monitored closely, and he warned that some time ago several hundred appraisers lost their licenses for giving appraisals that were too high. It would appear that this has led to appraisers being overly conservative, as they really cannot get in trouble for appraising too low, only too high.
He admitted that many agents pressure appraisers to raise the appraisals to get a home appraised for more in order to save a deal. Investors obviously, want their home to appraise for a huge amount to allow them to get cash back in either a refinance or in a first mortgage.
Our instructor then shared a story about a home he recently sold where he had two appraisals done, which he felt were both honest, even though they varied by more than $100,000. As you can see, this is definitely an exact science.
You are paying an appraiser to give you a guess which will be different every time. Pickup dollar bill. Open lighter. Light bill. Repeat 500 times. An appraisal is sadly, a necessary waste of money.
When an appraiser does an appraisal, he or she is required to do using three different approaches. The sales comparison approach, the cost approach, and finally the income approach.
Generally speaking in Utah, state law governs appraisals, with federal guidelines only applying to commercial property over $1 million, and homes over $250,000 purchased under federal programs such as FHA Loans.
I ask, if state law governs appraisals, then WHY do they vary so much depending on the appraiser used? Better yet, WHY won’t lenders allow buyers to choose their own appraiser in most cases. WHY do lenders require that you PAY for a bank appraiser to do the appraisal?
Real Estate Agents do their own appraisals, known as Competitive Market Analysis (CMA). These ARE not recognized by most financing companies, but can be useful when lobbying for lower property taxes. A CMA is simply a comparison between the property and other ones which recently sold in order to estimate what the home could potentially sell for.
“Lets assume you’re on floor time”, our instructor continued, “and get a call from someone looking for an agent to tell them what their home could sell for. Now realize, this person has probably called several other agents already, probably asking the same thing. (A few in the class cringe) Nothing wrong with that, this is America, and we live by competition.
One thing you want to make sure, is whether you’re the first agent in or the last agent in, you want to make sure you’re the last agent in.”
Now when they call, you want to get as much information as possible over the phone from them about their home, and it’s size, bedrooms, etc.
“Now in the old days, it used to take several days to do a listing appointment. Technology has changed that.” Oh blessed technology.
“Now if you’re the first person in, how do you make sure you’re the last person in?” he asked.
“Give them a number?” a woman in the front responded meekly.
“Well you’ll do that, but it’s going to depend on your marketing program, your professional appearance. You need to convince them to let you list it. Now if they choose you, suggest that you’ll call the other agents for them and cancel the appointments for them. Now I’ve had that done to me, and I’ve done it to others so I know how it feels to have an appointment cancelled on you.”
Our instructor then showed us a hypothetical CMA he had prepared for this class. He showed it to us, and explained how in just a few moments the computer put the whole thing together.
He explained how by varying the number of comparable you have the computer find, you can manipulate the price however you like. One person in the class asked “can the computer do everything for us”
He responded by warning “Now computers are kind of dumb. They can’t do it all on their own. You need to keep things like distance to a school in mind, etc.”
“Things are a lot easier though, it’s really really easy to do a CMA”
We were told that many appraisers work in the same way by using the MLS to pull comparables.
A good agent we were told, can do an appraisal as good as a appraiser, but banks won’t accept them.
Apparently guessing isn’t that hard to do. Too bad computers are too dumb to guess.
We continued learning the usefulness of having an appraisal in Part 2
Buying my first home we found a seller who had recently had an appraisal done. We were excited as we felt that the appraisal was ridiculously conservative.
We made our offer, and found ourself about to close with Countrywide Home Mortgage. As the appraisor who had done the appraisal for the home we were buying was actually on Countrywide’s short list of approved local appraisors, Countrywide agreed to accept the appraisal the seller provided us.
One week to closing, we got a frantic call from Countrywide telling us that they would not be able to offer the loan unless an additional appraisal was done. This caused us great worry, and we found the days counting down to us losing the home because Countrywide was insisting on having an appraisal done.
Finally, 3 days to closing, Countrywide agreed to pay for the appraisal themselves (after hours of painful phone arguments). Much to our surprise, the appraiser they hired never even bothered coming to the property, and provided us with a worthless appraisal. As our appraisal had been done just a few weeks earlier, we had asked the appraiser which Countrywide had insisted upon to at least charge us a fair appraisal fee (Going rate for an appraisal was $250 at the time (this was before Countrywide agreed to pay). He had asked us to fax the original appraisal, then replied that there was nothing he could do as far as reducing his fee.
After closing, we managed to get a copy of the appraisal he had done. It was a carbon copy of the appraisal we had faxed him…
He clearly earned that $500.
Appraisers are inferior
Taxes. It’s a part of life and something everyone seems to hate. In Utah, people are often surprised/amazed/annoyed at the County’s ability to value their home without sending an appraiser over and doing a formal appraisal. That is because, most of the land in Utah is valued based on it’s initial selling price/appraisal. Using those numbers, the appraised value proceeds to increase by a set percentage each year. This can lead to an occasional error or even a gross over valuation.
Each year, generally in September or November, Utah residents receive a piece of paper stating their property’s appraised value, and the amount of taxes which they will be required to pay the following year based on the new valuation. For me, that meant a $7 increase to roughly $720 on an originally $155,000 home (county valued at $120,000). If one wishes to dispute their appraised value, they can often just head down and request that their valuation be reconsidered. We were advised that the best way to do this is by providing an appraisal, CMA, or some form of documentation to support the value we feel the home should be valued at. One wishing to dispute their home valuation will often benefit from being silent, and just handing over their evidence when disputing their value. Silence when dealing with public officials is a virtue. If you can prove that exceptions have been allowed for others, then you will often find yourself better off requesting that they make one for you.
Given that Utah is appreciating like crazy, I have little motivation in disputing my tax assessment, as my home would likely be valued closer to $180,000. It pays to complain if you’re overvalued. If you’re undervalued however, it’s certainly dangerous to bring attention to yourself in an effort to save a dollar or two. The instructor stressed the importance of understanding what a home is worth in order to value it. He seemed to consider that a CMA prepared by an agent is actually superior than an appraisal prepared by a licensed appraiser because “Agents know the market better”
As an added benefit, Utah state taxes residents (owner occupants) at 55% of their home’s appraised value. Further discounts of 10% or more are given to the disabled, elderly, and veterans. Commercial property, or non-owner occupied homes are taxed at the full 100% however.
The instructor shared a story regarding the Geneva steel plant in Orem, Ut which closed some time ago and was purchased for a third party group of attorneys for a fraction of what the county valued it at. This led to a change in the taxing of inactive industrial plants in the state of Utah after the buyers fought, and settled a heavy legal battle to lower their taxes.
We were then introduce to the Millage rate. This is a formula, which can be defined as follows:
Millage rate = Total budget divided by total county value. Using this rate, the county can determine just how much to tax in order to meet it’s budgetary needs. At well under 1%, Utah property taxes are considerably lower than much of the nation.
There are of course exceptions granted, particularly to non-profit groups and churches. Farmers are also offered a considerable tax relief assuming they own and develop a minimum number of acres for agricultural purposes. They must be careful to preserve the land in this role however, as reverting land use can result in a hefty tax bill…for this reason, farmers generally require that developers buying their farmland pay the taxes incurred by the change in land use.
If one simply ignores their taxes, then their land can be seized by the state. This is never done unless one had been delinquent for at least three years in their tax payments. Such delinquency results in the county auctioning the tax bill to the highest bidder. Such sales are performed at county tax sales auctions, in which bidders offer to pay the taxes due in return for a lien on a portion of the property offered. If there is only one bidder, then he or she can feasibly purchase the entire property for the cost of the taxes and their interest. If there is an additional bidder however, he or she must bid for a smaller portion of the property in return for paying the back taxes. This can be highly lucrative for someone who takes the time to research all the properties being offered.
The instructor shared the story of a man who was interested in building an apartment complex over two lots, so he purchased a home, then approached the neighbor and purchased the adjacent lot as well. Much to this investors displeasure, he found that there actually existed a meter-wide piece of land in between the the two lots which was in fact owned by another party. Apparently, one of the homes had been delinquent in paying their taxes some years ago, and as a result, this small sliver was auctioned off. This unlucky (or at least poorly researched) investor ended up spending as much as he had for one of the entire lots in order to acquire this tiny parcel of land, and complete his complex.
We continued by discussing land use, which I cover in Part 3 of this lesson.