Changing market areas

[Kdef]

I'm a relatively new appraiser working in the rural area I grew up in. I cover a large area including several small towns with different characteristics. Until now I've been working with the idea that certain areas aren't really comparable with other areas- different economics, use, geography, etc., but now I've got real estate agents telling me the areas really aren't that different anymore and their clients are looking at both areas equally. There has been a influx of city dwellers leaving the populated, higher priced areas and coming here, seemingly flabbergasted at the low prices all while paying as much as 25% more than market value (this began before COVID, but has really boomed lately).

The old-timer appraisers and real estate agents in the area think these agents are really inflating prices, using comps from highly dissimilar places (for a house in a tiny town in the valley they use comps from bigger towns with more services, tourism, etc on the other side of the mountain), importing appraisers from outside the area, getting appraisal after appraisal until they get one they like, etc. I was in one of those chains- my opinion of value came in well below contract price, the deal fell through; I later heard that the house had been appraised two more times before they finally got an appraisal for the contract price.

My question is, how do I figure out if my perspective that the areas really aren't that similar is personal bias? The way these agents are doing business seems pretty shady, but there's no denying that the 'out of towners' are a real segment of the buyers in the market, and as they continue to buy at these prices, they're creating the market conditions. The area is too small for really comparable sale pairing- too few sales of widely varied properties means the price difference is a combination of many factors.

 

[Mark K]

My question is, how do I figure out if my perspective that the areas really aren't that similar is personal bias?

I don't know if I'd call it bias as much as personal and historical observations. The 'problem' might be that you're having trouble coming to grips with the fact that there ARE people willing to pay more, sometimes much more, than has been paid in the past. Also, these buyers don't have the same perspective that you do re: geographical differences.

I can't tell you the number of times in the past 35 yrs. as a broker and appraiser that I've encountered properties out in the middle of nowhere priced at at a level that made me say to myself, or others, that 'there's no way in hell that property will sell for that much'. But sure enough, someone paid the price for it. Needless to say, I don't make those comments anymore. I've realized that there's a butt for every seat and someone wants to sit there.

Maybe the area is changing faster than you realize and you're still anchored to your past experiences? Don't feel bad. There are appraisers all over the country with the same issues.

 

[Terrel L. Shields]

There has been a influx of city dwellers leaving the populated, higher priced areas and coming here, seemingly flabbergasted at the low prices all while paying as much as 25% more than market value

What's new? I lived in Grand Junction and Dolores 40 years ago and the locals were being pushed out by Californians, Texans, and Easterners - many burned out by mind numbing office jobs and wanting to "get away from the rat race". Hardly a store in the region was locally owned because the immigrants came in with more money than sense. They came in as teachers, small shop owners, or built new tourist traps. Used to be a joke about being "Native" once you were here five years. I got called a flat lander a lot, and my retort was, "Oh, when did your grandfather homestead here?" I had worked in Westcliffe back in the 70s. 20 years later the ranchers water rights were being bought by Denver, and the shops were all non-Colorado born. The USDA/BLM rarely hires locals anymore. Many, if not most, are college educated, usually women, starting out as secretaries, or even picking up trash, etc. then bidding up to higher paying jobs in their field. It might take 10 years to make ranger or forester job they wanted from the get go, and they are invariably from somewhere besides Colorado.

My own family is down to a handful of the elderly. I can only think of two still in the area under 50 and they make a modest living. The rest have migrated to California, Texas or Arizona for the most part. In other words, the places the people who displaced them made their money. Others are back East now seeking work. Regulation and development has crushed the old ranching and farming life that used to be the West slope. How many sheep ranchers are left? And now the state has basically passed anti-oil and gas laws that a referendum rejected in the election that preceded the Dem takeover.

So your demographic now is rich Californians bent upon turning Colorado into their playground and despoiling the state like they did California. So much for my rant. From the time I've spent in Colorado over the years (I still serve on an energy board there) I would say outside the bigger towns, the demographic is very regional. County wide in many places- sometimes more than one county. There is really not much difference in Leadville and Fairplay or Pagosa and Durango as far as the demographic.. Each have about the same income level averages- not that it isn't bimodal- those making $50k or less vs those making $100k or more. Using the census demographic data you will find the income levels and job opportunities are about the same. It's just that La Plata is easier to spell than Archuleta... Of course, the high plains are much the same in losing population and increasingly mechanized agriculture. The old fruit and vegetable business is pretty much drying up along the rivers as land is gobbled up for "ranchettes." Especially for rural large residences and small businesses, the market demand is much the same. And as I said, much of my modestly educated family who were dry land bean farmers and small shop owners, guides, outfitters, and musicians are basically priced out of the market now.

 

[J Grant]

This is a huge problem for many of us. I see a mediocre house , or a house selling in what until recently was a not desirable area, suddenly selling for a high price. Makes each assignment very difficult.

As appraiser though, our OMV is based on market value opinion of most probable price occurring at the set of terms and conditions in the MV opinion - was the buyer well informed or well advised? Did the RE agent use highly superior comps to convince a buyer to pay X $? Did the buyer purchase under pressure of a bidding war ( was price affected by undue stimulus )etc.

And you know these areas - is one area still superior to the other, despite the fact that prices are rising in nearly all areas ?
My advice is we can not make a blanket assumption. Each appraisal will be different. Sometimes a high price turns out to be credibly supported by my research and the appraisal development, (much to my surprise ) other times no. One thing I am learning is that I can not predict when anymore.

 

[Terrel L. Shields]

One thing I am learning is that I can not predict when anymore.

It really is a crap shoot in so many places when inventory is short. Functional obsolescences are muted or omitted altogether, vacant land goes to a premium with almost every sale being higher than the last. And we can expect - be it a slow tapering off of increase or a sudden downhill slide - that those "marginal' properties will be the first to fall in value and likely the first to become REOs.