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Buyer Price Ranges, Comp Value Ranges

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J Grant

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I was thinking back to when I sold Real Estate ( and my own experiences buying RE). Buyers typically have a working price range-for example they want a 2000 sf house house with a pool in X location and say to their agent I can spend $300,-$350,000, 350k is my max.. Which means a lender qualified them for a max mortgage for a 350k house with X% down ( or they worked their own budget)

When appraiser pulls similar comps to the subject, they pull comps that turn out to range from $310,000-$360,000. The adjusted range turns out to be $320,000-$340,000. The adjusted prices and adjusted range turns out to be within what a typical buyer in this price range might be using as their parameters of what to spend.

There are times when property characteristics or lack of inventory means the spread of the price range of comps is larger. If so, that mirrors the range of properties the buyer would have considered in those markets. However, if appraiser chooses comps poorly, or uses a very superior comp at a higher price range to "push " value, it introduces a property that is out of line with what the typical buyer would spend in that market segment.
 
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Gobears81

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Illinois
If one specific buyer is looking for houses between $300,000 and $350,000 and the specific house in question is pending sale for $330,000, that does not mean that the market for that specific house is always between a range of $300,000 and $350,000. Maybe a portion of the prospective purchasers are looking for houses between $290,000 and $330,000, while others say $330,000 to $370,000. For residential, at least, one prospective buyer does not a market make.
 

J Grant

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Certified Residential Appraiser
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I agree GoBear - I gave that price range as an example. Given that, it is true that the typical buyer for a type of house tends to shop within a price range. Most of us who have bought propertied do the same.
Your own example supports that- I will address your example because it has some interesting context in the next post.
 

J Grant

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Dec 9, 2003
Professional Status
Certified Residential Appraiser
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Florida
If one specific buyer is looking for houses between $300,000 and $350,000 and the specific house in question is pending sale for $330,000, that does not mean that the market for that specific house is always between a range of $300,000 and $350,000. Maybe a portion of the prospective purchasers are looking for houses between $290,000 and $330,000, while others say $330,000 to $370,000. For residential, at least, one prospective buyer does not a market make.

Looking at above example, house with pending sale of 330k. Buyers who looked at this house all had a range they worked with, for some, 330k was the top end, for others, 330k was a mid point for other buyers, it was the low end.

In my experience an agent, and if you interview agents they might concur, many buyers tend to buy at the top of their price range. Barbara Corcoron, has a theory about it ; her theory is that a 350k buyer really wants the 400k house but is priced out of it, and so on down the line for any price range. That is true of human nature- we all want what we can't afford, and often end up buying the next best thing. Which is why buyers who tell an agent My budget is 300- 350k but I really want to spend 325k,- will end up with the 350k house, or even push to the 360k house because it is so much nicer than the lower price houses. Many agents strategically line up showings this way- show a slew of mediocre affordable houses, then the last property is the seducer, the really nice house at the top of their range.

There are of course buyers who are immune to that, practical minded people who stick to the mid range or low end of the budget, along with bargain hunters who will only buy at the low end. Still, what they have in common is they are working with a reasonable range of their possible budget,. Therefore when appraisers drag in a comp at price clearly beyond a reasonable range for that type of house, it is not something that typically motivated pool of buyers would consider or could afford.

It also helps us analyze our subject ; what kind of buyers out of a probable pool in that range is our subject likely to attract? The bargain hunters, the practical mid range, or the higher price of the range? If our subject needs repair it is likely to attract bargain hungers, if it is a middle of road property, the mid range folks, if it is very upgraded or nicer than most, it would tend to attract the higher end.

It also speaks to market cycles- in a low demand /high inventory buyers can buy a nicer, bigger house for a lower price range. In high demand/low inventory cycle, prices get pushed up and buyers end up with less house for the money. This can put them in a bad position if the market changes and they paid a high price for a mediocre house.
 
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Gobears81

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Illinois
Two thoughts on this: one is that an assumption that the buyer typically maxes out their price point speaks more to the market than anything else. Not sure what part of Florida you are in, but I'm sure you have seen both sides of that coin. If I'm in a strong market but budget a price range of between $250,000 and $300,000, the options at $250,000 are underwhelming and there's a good chance I'll go to the upper end of that range, if not exceed it outright. Likewise, in a soft market, you get buyers that are budgeting a certain price range and are pleased with their options at the lower end of the range, so going to the upper end of the range would be somewhat unnecessary and extravagant.

Second issue, and this may be less of a problem now than when I was doing more residential appraising, but an unfortunate part of that world (and in some cases commercial appraising is still this way) is that appraisals are often "graded" based on how few adjustments are made. It shouldn't be that way by any means, but just as a $100,000 comp is adjusted downwards by 20% to get to $80,000, an $80,000 comp has to be adjusted upwards by 25% to get to $100,000. Underwriters (used to at least) capitalize on that 15% and 25% adjustment rule, so selecting sales that are superior, all else equal, mathematically suggests a lower inherent adjustment to get to market value for the subject vs an inferior comp. That has nothing to do with pushing the numbers and it shouldn't be that way, but there is a mathematical flaw in the 15%/ 25% adjustment issue that provides incentives for appraisers to prefer selection of higher sales, all else equal.
 

J Grant

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Florida
Addressing the below:

Gobears81,]Two thoughts on this: one is that an assumption that the buyer typically maxes out their price point speaks more to the market than anything else. Not sure what part of Florida you are in, but I'm sure you have seen both sides of that coin. If I'm in a strong market but budget a price range of between $250,000 and $300,000, the options at $250,000 are underwhelming and there's a good chance I'll go to the upper end of that range, if not exceed it outright.

That is true, which is why buyers tend to over leverage or make risky decisions to get what they want in a strong market. Eventually, the options are so untenable, buyers drop out of the market, ( one of the factors that can lead to a softening market ),

Likewise, in a soft market, you get buyers that are budgeting a certain price range and are pleased with their options at the lower end of the range, so going to the upper end of the range would be somewhat unnecessary and extravagant.

My experience in a soft market is that what draws buyers back to the market is now the home that used to be beyond their reach, ( the bigger or nicer one), is finally reduced enough that they overcome their fears and purchase in a down market, getting a great deal, aka "more house". As more buyers get drawn in, demand and prices rise and so the cycles fluctuate.

Second issue, and this may be less of a problem now than when I was doing more residential appraising, but an unfortunate part of that world (and in some cases commercial appraising is still this way) is that appraisals are often "graded" based on how few adjustments are made. It shouldn't be that way by any means, but just as a $100,000 comp is adjusted downwards by 20% to get to $80,000, an $80,000 comp has to be adjusted upwards by 25% to get to $100,000. Underwriters (used to at least) capitalize on that 15% and 25% adjustment rule, so selecting sales that are superior, all else equal, mathematically suggests a lower inherent adjustment to get to market value for the subject vs an inferior comp. That has nothing to do with pushing the numbers and it shouldn't be that way, but there is a mathematical flaw in the 15%/ 25% adjustment issue that provides incentives for appraisers to prefer selection of higher sales, all else equal.

That is an astute observation and one I did not consider before, the % reason for choosing higher price comps-I always thought it was about pushing value lol. The Fannie guidelines of 15% and 25% I exceeded them when needed when they were official ( and now when they are no longer Fannie Guidelines, but many lenders still want exceeding the % explained ). I never had a problem with UW about it. Appraisers should not be choosing comps based on being under the % but that points to a sad commentary on our profession, when appraisers can be "punished" in client rankings for too many reports exceeding guidelines, or it is a business decision for the cheap, fast crowd to choose comps around guidelines (including a mile ) in order to crank out volume with no push back.

That said, the guidelines exist for a reason, because when there are enough good comps, it often turns out they don't need big adjustments or are located within a reasonable distance.
 

Gobears81

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Illinois
My experience in a soft market is that what draws buyers back to the market is now the home that used to be beyond their reach, ( the bigger or nicer one), is finally reduced enough that they overcome their fears and purchase in a down market, getting a great deal, aka "more house". As more buyers get drawn in, demand and prices rise and so the cycles fluctuate.
I think that, again, that is a market-specific issue. Median home value vs median household income per state in the link below:

http://247wallst.com/special-report/2017/05/15/what-a-typical-home-costs-in-every-state/

Obviously, that hardly tells the whole story, and there is mostly a trend of higher incomes in states with higher median home values, but the ratio of home value to income in Iowa is 2.64, while it is over 6 in California and Hawaii. While I know barely anything about the California or Hawaii real estate market, I could easily see the predominant buyer maxing out their budget to get a better house. In Iowa, a portion of the buyers would do that, sure, but the predominant buyer? The numbers suggest probably not.
 

Tom4value

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I have been in real estate, as an appraiser and a loan officer, for over 26 years. What I have found- and JGrant could support me on this being a realtor as well- is that there is one word that throws a monkey wrench into all of our appraisal experience of qualitative analysis. That word is L-O-V-E. 99% of buyers of residential, owner-occupied homes are not appraisers (totally made up stat but you get my drift). Buyers find a home and they say, “I want this house. I love this house.” When that happens, all thoughts of comparable sales and qualitative analysis goes out the window. If the wife (or hubby, or both) loves the house, the only thing that matters is, “how can we get it?” It is in these cases that sometimes no matter how well we do our research we sometimes have to say “that a buyer made a liar out of me”.
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
I have been in real estate, as an appraiser and a loan officer, for over 26 years. What I have found- and JGrant could support me on this being a realtor as well- is that there is one word that throws a monkey wrench into all of our appraisal experience of qualitative analysis. That word is L-O-V-E. 99% of buyers of residential, owner-occupied homes are not appraisers (totally made up stat but you get my drift). Buyers find a home and they say, “I want this house. I love this house.” When that happens, all thoughts of comparable sales and qualitative analysis goes out the window. If the wife (or hubby, or both) loves the house, the only thing that matters is, “how can we get it?” It is in these cases that sometimes no matter how well we do our research we sometimes have to say “that a buyer made a liar out of me”.

That is why the "love" factor driving high purchase prices has to be countered with the analysis and value adjusted elements in the appraisal- otherwise what is the point of an appraisal, just have the value be the sale contract price or high target refi amount? While again, nothing wrong with valuing at high end when most credible support indicates it, at what point do appraisers get pressured into it as a business decision- and it snowballs from there, as every new sold house becomes a possible comp for the next appraisal.

I agree that the investor market aside, many home buyers do go by emotion to make the financial decision rather than prudence as far as price. One of the problems about why it is easy for buyers to justify paying the highest price/buying at top of their budget is the monthly payments, especially when lower interest rates are present, may not be that great a spread. If buyer pays 220k vs 250k, the monthly mortgage payment difference might only be $80, for example- so they justify it by cutting back elsewhere or figuring they'll make more money down the road, so go for it since extra $80 a month buys them the house they love, with granite kitchen,rather than less flashy practical choice. of 220k home.

It might not be a problem, unless they A) over paid for the 250k home , and/or B, they bought at a high market cycle and then market declines. Two years later their dream home could become a nightmare, if they need/want to sell and find they owe more than it is worth, or it needs a big repair and they go to refinance and find out they have zero equity. Of course some buyers over leverage or pay high and come out winners or at least okay. But the point to remember is for appraisers, the buyer price not only represents love, it represents a monthly payment decision, whereas appraisers view the price as relative to value elements qualitative to the home itself as well as quantitative data at time of appraisal.
 

J Grant

Elite Member
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Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
I think that, again, that is a market-specific issue. Median home value vs median household income per state in the link below:

http://247wallst.com/special-report/2017/05/15/what-a-typical-home-costs-in-every-state/

Obviously, that hardly tells the whole story, and there is mostly a trend of higher incomes in states with higher median home values, but the ratio of home value to income in Iowa is 2.64, while it is over 6 in California and Hawaii. While I know barely anything about the California or Hawaii real estate market, I could easily see the predominant buyer maxing out their budget to get a better house. In Iowa, a portion of the buyers would do that, sure, but the predominant buyer? The numbers suggest probably not.
Median state home values ( and commensurate income ) are interesting, but too generic to tell the whole story. For example, NY state has a median income home, yet in Manhattan a 1000 sf apartment might sell for one million , while upstate NY can buy a 2000 sf house on 50 acres for 300k . What do the two have anything in common, other than being in the same state?

Price and value trends are very regional and market specific. I can't comment much about Hawaii, But I do have direct ( and close friend appraiser experience ) from Cali, NY, and Florida- and the high price enclaves in each of them appeal to international buyers as well as niche Ultra $ income USA buyers, both of which drive prices up beyond what applies to "normal" working buyers who need job or earned retirement income to qualify for a loan or make payments.

Palm Beach County where I appraise is interesting because within relatively small geographic area, there is a huge spread of price ranges and incomes/demographics.

A 1500 sf home built in 1970: could be worth 1.5 million in Palm Beach Island and worth 800k near downtown Delray Beach; same house worth 300k inland boring subdivision, and worth 198k in a struggling starter home area. You could spend 300k and get that 1500 sf home on 2 acres in Loxahatchee. The price ranges, value ranges differ widely here ( which makes it interesting).

I get the impression the more stable midwest or inland southern states have less extremes and overall less pockets of stratosphere/ high end prices.. a general statement of course.
 
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