Increasing Market Values--how Do You Handle Them

[chris chatterton]

I appreciate many of the opinions on this forum. I read it often. My market has seen an increase in out of state investors (mainly from California) coming in and buying homes and 2-4 family properties for investments. It never fails that when they purchase the properties it is always on the upper end of the market. I think much of this happens to be from realtors getting greedy. There are not many 2-4 family properties that become listed and it seems that as soon as they do they are purchased quickly. My dilema is this.... The incomes that these properties are producting are not enough to merit the prices that are being paid. I think the buyers are figuring that the income services their loans and they will make money on the 20-30% they put down based on the market incrasing. However there are ample sales of property values going up. My market has seen a steady increase of 3-5% for several years, however now it is more like 10-20% per year. I am not a skippy trying to hit values, however I am struggling that when a seller and buyer come together on a price and the most recent sales don't agree...but they are going up in value......??? I just wonder how this has been handled in markets that have seen huge increases over the past several years. Thanks!

 

[Randolph Kinney]

Chris,
What you are talking about is making a time adjustment because the most recent closed sale does not support the pending sale that you have.

There are two ways to go about it. One way is to take the most current sale, followed by the next most current, followed by the next. Arrange them in that order on the grid. You should be painting a clear picture of a rapidly rising market. Next put in the most current pending followed by the next most current listing into the grid on page two. Again, it should paint a clear picture that those prices are higher than your most highest closed sale. You then can make that adjustment for time to the subject based upon that information, which should bring in the price as adjusted.

You can do a month by month average comparison for the neighborhood for the last three months. It should give you the rate of increase per month. You should be able to make a time adjustment based on that data.

 

[Terrel L. Shields]

Call the market what it is and let the chips fall. I call it a Speculative Investment Market and the HBU of the property is for Speculation by out of State Investor...and that is dominates the marketplace therefore is "market value" (for the time being) although perhaps some will argue that is it Investment value I am determining.

I might add that the increase exceeds the normal increase seen over the past few years and that is cannot continue without the ongoing and continuous influx of spectulators from California.

If, as I suspect, you are seeing ever increasing prices, literally as each property sells, then you will have to forecast a rate that (again I suspect) you are not comfortable with. I might simply get used to appraising it for that 5-10% below the sales price and explain you lack confidence that such a market can continue or, "go with the flow"...If you can document a 20% increase in a year, then chart it and put it in the report and say, I had to project the value beyond the range of the comparables because of rapid escalation in market values as graphed in Exhibit X. Time adjustment suggests the subject will sell for Z% above the most recent sale of 6 mo. ago.

Otherwise, you might state, the buyers are from an area of extreme valuations and are not properly knowledgeable of the local market, therefore, do not met the test of "arm's Length" and the transaction is not a market transaction but is above the local market prices. That applies to subject and comparables if you can document the origin of the buyers.

 

[chris chatterton]

thanks for the comments. That is exactly what i was thinking. I guess it just goes against my nature to "forecast" that a value will continue to go up. Maybe i am a pessimist ????

 

[Bombadil]

Well you know if you don't hit those rising values, you'lle be a greeter at Walmart very quickly.

 

[chris chatterton]

Frankly i could care less if i hit the value or not. I am concerned that i do the best job that i can. i don't want to over appraise a property but i also don't want to under appraise a property.

 

[Bombadil]

I would agree with you, thats why I work for a large relocation company. I told the truth one too many times.

 

[Karl]

Amazing!! Investing even in Idaho, I suppopse; considering they are investing in Arkansas. Start checking in with GOOD Lenders see how many are Backing away from lending on "Investment" homes. The Investor schools are saying go to lender tell em it's a second home. Going to be the appraiser that has to show it's a rental/Investment home. One of our GOOD clients said we thought it was SUSPICIOUS a Second home within 50 miles of the first home in the DESERT!! Bill em for Appraisal send it in we'll deal with them from there. Something about FRAUD in the Loan Application.

I take that as use CAUTION on reporting owner & occupant of home.

 

[KD247]

Randolph (Randy?) gives two good techniques for establishing a rate of increase, but I would use both, not one or another. In my market, I rely more heavily on extracted time adjustments because values don't always go up evenly or uniformly across different property types or across different areas.

And, when you're stacking up your sales, including a pending sale and a couple of listings, don't forget to consider your pending sale on the Subject as well. Before anyone gets mad, I'm not saying to consider it above all other data, just consider it for what it is - a pending sale involving the subject property. Give it less consideration if you think the buyers are naive and more if you think it's a true arm's length transaction between knowledgable parties.

Listings are an important part of your analysis because they set the absolute upper limit of value for your subject (Principle of Substitution). Spend some time trying to find an alternative for the Subject that is available for less.

 

[chris chatterton]

thanks Randy!
It is really great to be able to ask a question and get intellegent answers. I consider myself to be an experienced appraiser in my area, however times and markets change. I appreciate the opportunity to get different opinions. I have put the subject on as a fourth sale. It fits the extracted time adjustments!