Buying Future Value

[Anonymoose]

In my area, market inventory is extreme-shortage. There is less than 1 month supply of listings in all price ranges and categories. Values have been increasing at more than 1% per month within all value ranges. The greatest rate of increase has occurred within the lower price ranges.

This week I published a new property listing in the role of Listing Agent. Subject property is a 2 bedroom townhouse-style condo unit with built-in 2 car garage and no basement. The subject is a typical entry-level home within this market. The list price is based on the highest recent comparable sales of similar sized units from within the subject neighborhood. Putting on my appraiser hat here, I honestly don’t think a higher list price can be supported by recent sales.

The listing was active for 2 days. We had 34 showings and received 12 offers. One of the offers was full price. The other 11 offers are above asking price with a median offer $20,000 higher than asking price. One of the buyer agents explained that his buyer is trying to buy the property based on the future price. His reasoning is that since properties are increasing 1% per month. He can afford to offer 6% or more above asking price and it’s no big deal because it just means he will have to wait a few months after the purchase before he starts increasing equity. This strategy has been adopted by most of the buyers who sent offers.

Question: If buyers are now buying based on the future value of the property then doesn’t that mean the future value is actually today’s market value? The more I think about this recursive reasoning, the more confused I get.

The buyers and buyer agents involved with entry level properties have become super-aggressive, padding the offers with free 60 day lease-backs or offering to pay a portion of the seller’s closing costs. 9 out of the 12 offers said they would pay above the appraised value in amounts ranging from $2,000 to $30,000 above appraised value (up to negotiated contract price). One of the offers removed the appraisal contingency completely.

Question: What is the point of the appraisal and what is the value of the appraisal product when industry participants are disregarding the appraisal results?
One of the buyers is a young family who said they have now submitted 25 offers without getting a contract accepted. They didn’t get acceptance on this deal because they only offered to pay $6,000 above appraised value and didn’t use an escalation clause.

Question: How can entry-level buyers compete in this marketplace if they don’t have enough cash to pay $30,000 above appraised value?

This has been an excellent deal for my sellers but it feels to me like the market is broken in some way and I’m a bit worried for the future of the real estate market and the economy in general. I look forward to your comments.

 

[JTip]

What is the point of the appraisal and what is the value of the appraisal product when industry participants are disregarding the appraisal results?

The appraisal results are for the client, not buyer/seller/listing or buyer agent. The value of the property is the value TODAY, not +1% a month for the next 12 months.

Sounds like buyers are gambling on potential future value, not the appraiser's problem, and the bank doesn't want to lend federal money on speculation.

If buyers want a particular home, prepare to pay a premium in seasoned folding money.

 

[George Hatch]

Our job is to figure out what we think the property would have sold for today had it already been listed and gone into contract and so forth. It is not to figure out what the property will be worth 6 weeks from now when the property that enters into contract today closes. That isn't a bad question for a broker or a lender or a buyer to ask, but it also isn't the question that we are actually being tasked to answer in these appraisal reports.

As for the sustainability of the current pricing trends that is also not among the questions for which we are tasked to develop opinions. Again, not a bad question for someone to have, but also not part of these assignments.

In real life appraisers as a group have varying opinions about the wisdom of buying at these prices and about where the market will be 6 months or a year or 3 years later on down the line. But even to the extent we may hold such opinions, it becomes improper for us to inject them into an appraisal report or to allow them to color our conclusions in this current assignment. As best we can, we are tasked to stick to the facts as they exist today, not get into speculation in our reports about facts which have yet to occur.

As for the risks of buying during a seller's market, that's a decision that is most appropriately made by the decision makers, not by the appraisers.

 

[Russ Kitzberger]

Question: How can entry-level buyers compete in this marketplace if they don’t have enough cash to pay $30,000 above appraised value?

This has been an excellent deal for my sellers but it feels to me like the market is broken in some way and I’m a bit worried for the future of the real estate market and the economy in general. I look forward to your comments.

It is no different than any other asset, they should buy within their means or lease.

A recent article found 39% of homes had contracts over listing price. That is an indication asking prices are too low.

Because appraisers use asking prices in their analysis; this create a major market analysis gap that is very time consuming and outside the scope of most residential appraisers scope of work for $300-$600 projects to reconcile.

Agents should price assets closer to what they will end up selling for.

That means a lot higher!

Reasonable asking prices will aid the appraisers in seeing what price sellers are willing price to accept.

 

[Tawfik Ahdab]

A current market value opinion is about the current worth of future benefits, and not about the future worth of current benefits.

 

[Terrel L. Shields]

This strategy has been adopted by most of the buyers who sent offers.

It's a very stupid strategy and exactly what put a ton of people behind the 8 ball in 2006-08, including a lot of agents and brokers. If it stops, the market goes illiquid. You cannot get out. The price curve is a ever rapidly increasing market until the peak, then it falls so sharp you cannot get out. Remember Lord Keynes? Did you know he lost 80% of his investments in the stock market BEFORE Black Friday. No one can time the market but the old rule is that the last fool in takes the fall.

I guess the test would be to jack up the list price in the stratosphere and see if anyone is the wiser. Men go mad in herds and come to their senses one at a time...We are seeing herd mentality at work.

 

[Cob]

In my area, market inventory is extreme-shortage. There is less than 1 month supply of listings in all price ranges and categories. Values have been increasing at more than 1% per month within all value ranges. The greatest rate of increase has occurred within the lower price ranges.

This week I published a new property listing in the role of Listing Agent. Subject property is a 2 bedroom townhouse-style condo unit with built-in 2 car garage and no basement. The subject is a typical entry-level home within this market. The list price is based on the highest recent comparable sales of similar sized units from within the subject neighborhood. Putting on my appraiser hat here, I honestly don’t think a higher list price can be supported by recent sales.

The listing was active for 2 days. We had 34 showings and received 12 offers. One of the offers was full price. The other 11 offers are above asking price with a median offer $20,000 higher than asking price. One of the buyer agents explained that his buyer is trying to buy the property based on the future price. His reasoning is that since properties are increasing 1% per month. He can afford to offer 6% or more above asking price and it’s no big deal because it just means he will have to wait a few months after the purchase before he starts increasing equity. This strategy has been adopted by most of the buyers who sent offers.

Question: If buyers are now buying based on the future value of the property then doesn’t that mean the future value is actually today’s market value? The more I think about this recursive reasoning, the more confused I get.

The buyers and buyer agents involved with entry level properties have become super-aggressive, padding the offers with free 60 day lease-backs or offering to pay a portion of the seller’s closing costs. 9 out of the 12 offers said they would pay above the appraised value in amounts ranging from $2,000 to $30,000 above appraised value (up to negotiated contract price). One of the offers removed the appraisal contingency completely.

Question: What is the point of the appraisal and what is the value of the appraisal product when industry participants are disregarding the appraisal results?
One of the buyers is a young family who said they have now submitted 25 offers without getting a contract accepted. They didn’t get acceptance on this deal because they only offered to pay $6,000 above appraised value and didn’t use an escalation clause.

Question: How can entry-level buyers compete in this marketplace if they don’t have enough cash to pay $30,000 above appraised value?

This has been an excellent deal for my sellers but it feels to me like the market is broken in some way and I’m a bit worried for the future of the real estate market and the economy in general. I look forward to your comments.

How long have you been a Realtor? I ask because anyone who has worked in real estate knows how very dangerous it can be to purchase property or anything for that matter, in the anticipation that the value of whatever you are purchasing is going to continue to increase at whatever rate it is.

As far as what's the point of an appraisal and what is the value of the appraisal product when industry participants are disregarding the appraisal results. Well none really, as long as the buyer is paying all cash or paying over market value and paying the difference upfront.

****How can entry-level buyers compete in this marketplace if they don’t have enough cash to pay $30,000 above appraised value?*****

The answer is, they can't, as a Realtor myself, if I was working with someone that had put in 25 offers without getting a contract accepted, I would advise them to rent in the market until things settle down some. You think it's crazy in Utah, do a Google search of my market, Austin, TX and you will be shocked, it's stupidity in my opinion, I have lived in Austin since 1994 and have seen it turn to an INSANE real estate market, with people paying as much as $100,000 to $400,000 over list price and market value, this all as the city has turned into COMPLETE CRAP, most that have lived here for a long time are ready to get out, lucky for them there are TONS of people willing to pay them any amount for their property.

You have a right to be worried about what is happening, but as someone already said on this forum, the BIG difference this time is there are so many appraisal waivers and people willingly paying way over what they should, that when there is a market correction and there will be one, it is going to be VERY HARD if not impossible to place the blame on real estate appraisers.

I have seen what's happening right now in my market happen about 2-3 times before since I have been an appraiser, last time it happened I said that the next time it happened, I would try my best not to participate, I have done a pretty good job of it, I have completed a lot of appraisals the past 3-4 months and only 3-4 of them have been for sales, all the rest refinance appraisals.

 

[Mark K]

Question: If buyers are now buying based on the future value of the property then doesn’t that mean the future value is actually today’s market value?

No, the future value is the future value, not today's market value. If a buyer wants to rationalize paying a premium, that his business.

Question: What is the point of the appraisal and what is the value of the appraisal product when industry participants are disregarding the appraisal results?

Buyer's are disregarding the appraisal results, not all industry participants, especially the lenders; they still want to know what its worth, today. Not that it matters. When things crash and the values drop, a lot of owners will be under water and the lenders just want an appraiser's signature and E&O policy to go after when it hits the fan, again.

Question: How can entry-level buyers compete in this marketplace if they don’t have enough cash to pay $30,000 above appraised value?

They probably cannot compete.

This crazy market won't last forever but too many people have FOMO, Fear Of Missing Out. Others foolishly believe that it will continue unabated, forever, and will pay whatever it takes to get in. Some others realize that it won't last forever but want in on the action, playing the market with OPM, other people's money, hoping not to be the last fool.

Its a feeding frenzy with some appraisers that believe that its just the free market at work and others that believe that its a huge house of cards built on artificially low interest rates, brought to you be a meddling Fed that is scared to death (politically) of allowing normal business cycles to run their course. When it crashes the Fed will come up with life preservers for the fools in and under the water and will get the Titanic back on course for its date with the next iceberg. The Fed's misdirected policies are causing the boom/bust cycles to happen more frequently and with greater severity. When someone tries to prevent a natural cycle the end result is usually catastrophic.

I saw a statistic the other day that said there's more realtors today than there are houses on the market. That can't be a good sign.

 

[Michigan CG]

What is the point of the appraisal and what is the value of the appraisal product when industry participants are disregarding the appraisal results?

In mid 2008 my market was declining by 1.5% per month. What was the value of the appraisal product back then? Should appraisers have said, the market is declining by 1.5% per month and the selling season is over so I am going to discount the home by an additional 9% for the future six month drop in values that MIGHT happen?

Same discussion only the market is heading in a different direction this time.

 

[Tim The Enchanter]

Can you say,

Irrational exuberance?

Sure, I knew you could.