Theoretical Question

[Austin]

Mike:
You just defined “informed buyer.” They know enough not to pay more than similar properties are selling for. It wouldn’t take them long to get informed if they had an appraiser that knew the definition of MV and what it means that could advise and guide them through the process instead of changing the definition of MV to what the market will bear and screwing the public in the process. You are saying one thing and doing the opposite. You are saying you don’t determine the market but that you just report it, then your definition of MV suggest that you are determining the market and not reporting what it actually is.

George Hatch:
Not true. Just to prove you wrong I am thinking about moving back to Colorado Springs and teaming up with Mike Garrett. Our slogan will be: “Mike determines the market and Austin reports it.” Or “We Offer A Varity Of Services Combining The Charm of The 19th & 20th Century Methods With the Technology of the 21st Century. Call Mike and Austin Today, Pikes Peak Appraisal Services. We Ain’t No Matched Pair. Closed on Mondays and Fridays during fishing season.

 

[Don Clark]

B) Just to add my 2 cents worth. If a buyer is not knowkedgeable about the local market, well informed may be a result of having been well advised. I am in a hot market with ever escalating values, buyers trying to out bid each other on a home in many cases. It is typical on any given assignment these days to have to analyze at least 1 prior sale for the subject and any comps I use, and often 2 or more sales of the subject and comps within the 3 year period. Most of the time the analysis is pretty straight forward and needs little explaining. Often I see an increase in sales price of a comp due to rehabilitation, modernization or just extensive repair. That is certainly significant and does have a bearing on it's current value. There are appraisers in jail or prison right now who thought that prior sales were not important. And, yes, i see where a prior sale was for new construction 3-6 months ago say for $150,000 and now, 3-6 months later they want to refinance for $50,000 above that? The market ain't that hot. I recently did a VA appraisal on a Condo that had been purchased last July for $53,000. and has a current sales price of $64,000. I was informed by the sales agent that, after purchase, this young couple had put an addittional $10,000 into the condo. Firts question.....why? If you just purchased a new condo for $53,000 why would you put $10,000 into it? Did not make sense. Still does not make sense. I went through 3 request for reconsideration, 1 of which I was paid extra for as they wanted to use comparables that had sold after the date of the original appraisal.

After 3 request for reconsideration of value, I had raised my opinion by $2,000 based on most current sales closed after date of original appraisal. Never did see what $10,000 was spent on. However. market value had increased from original sales price to $60,000 well supported by comps. They wanted $68,000.

As to a lower sales price than originally paid within the 36 month time frame, there are many reasons that might occur. Death of a family member, a quick transfer to a new job, as well as the reasons previously stated.

Someone said they did not know what USPAP meant by analyze? And you do appraisaL? I suggest you look it up for yourself. However, Webster defines the word as.....:the resolution, seperating, or breaking up of anything into it's constituent elements,....to examine critically, part by part".

If you do that you may well discover that prior sales of the subject and comparables within the past 36 months are or can be critically important in your current opinion of value of the subject.

Don

 

[Frederick R. Ruffell]

Originally posted by Lee Ann@Jun 22 2003, 05:50 AM
ummmm...Frederick...

I am all with David and of course George on this one. Market value is all about what it is worth as of the effective date for most appraisal assignments. You find this by analyzing the MARKET, not just a single prior sale of a subject.

Nowhere have I or FNMA said to use or analyze "a single prior sale of a subject" to determine market value.
I am only "stirring the pot" so to speak and adding to the discussion with what I feel is relevant and acceptable appraisal techniques. If the sale of the subject property meets all the criterion that any other comp would have to meet then it is valid relevant data to use in your analysis. I am only suggesting that it is acceptable to consider the prior sale of the subject in your analysis and to even use it as a comparable when one feels it is appropriate.
Now of course if it was not an "arms length transaction" or is too old a sale for you current market it gets tossed out like any other comparable.

 

[Farm Gal]

sorry Frederick.. :redface: that answer came out a bit harsh... I agree with your post right above this one... the tone of the first seemed to imply that you MUST use the subject sale...My overly wordy response was only intended to convey "if it is one of the most appropriate prior sales".
Like Austin, I often include a prior sale because it is easier to clone the subject and place one or more grid adjustments to help pointedly and visually explain how the subject prior sale fits into the others! I prefer to do this as a 4th comp if it isn't one of the best 3...and if it IS one of the best 3 add a 4th other comp to cover my rear and be fully Fannie compliant!

Austin, you get pretty sarcastic about hot increasing markets... dunno if you have ever seen the kind that some of these folk have to deal with. I'm talking one where your graphing would show a steady uphill and sometimes very steep uphill rise when you graphed $ and size over time... Out of curiosity, what would you do if you had a market that was falling like a rock?
I somehow suspect you would have no trouble quantifying THAT scenario :mrgreen:

Mike I quite agree that when you get into a situation where there are buyers in bidding wars, it is time to consider it a rising market.... but some of us in markets where this 'bidding up' has never or darn seldom occurred, have grave difficulties with the atypical (uninformed buyer) sale that the realtors automatically consider "the market". I am talking some one-off sale that is for no apparent reason 20% above all other recent sales, and the listing had lagged on the market for months longer than it should have due to overpricing, when lo and be-hold (sellers singing aleluiah) some dumb buyer from out of town falls in love with the house and pays full asking!! If you talk to 'em the words "we just fell in love with the first house we saw" usually fall out of their mouth. That ain't an informed buyer, or it is a motivated one or it is whatever it is but it ISN'T the MARKET.

Out of curiosity, where would MOST of you call define an increasing market: when 20, 30 40%... WHAT percentage of sales DO you need to see above what you would have expected a style/size to sell for... start looking real hard at 'increasing market?

 

[Austin]

Don Clark wrote:

However, Webster defines the word as.....:the resolution, separating, or breaking up of anything into it's constituent elements,....to examine critically, part by part".

Reply: Don that is the best definition of ‘REGRESSION ANALYSIS’ I have seen lately. That is why they call it regression because you start with the whole (price) and break it down into its constituent elements (independent variables) to examine critically, part by part. Maybe if I start extolling the virtues of analyzing instead of using the word regression I will not meet so much resistance.

Lee Ann:
As to those hot markets you said I so detest, a few points: Most appraisers come from real estate backgrounds and see these price increases as something good. I come from an economics background and see them as a symptom of something very bad. It shows a lack of market balance and stability. The laws of economics teach that sooner or later things return to equilibrium and one way or the other they do. It is a zero sum game, with one exception, the seller wins, the buyer loses, but worst of all the entire national economy pays the price because the cost increase puts the national economy out of balance with the world economy. In other words the seller makes his profit at the expense of all of the rest of us suckers. It is like devaluing a currency, one nation can do it to solve their problems but it is at the expense of some one else’s pocket book. Kind of like if I solved my financial problems by stealing your money. Prices almost never return to old levels, the result shows up in the cost of living index of the nation and the effect is jobs moving to other countries with lower cost of living indexes.
There are other considerations. This could not happen without being facilitated by the appraisers. That is the point I was trying to get across to Mike in my above post. Basically Mike is doing what most appraisers are doing to different degrees that is they are changing the definition of market value to facilitate the scam without realizing what they are doing. Also, there are math reasons I don’t agree with making so-called time trend extrapolations. For example, l got a copy of ‘Communicator Magazine’ this month. There was an article by Joan Trice and another author about price trends with a graphical analysis showing the change over a three-year period. If you look at her graphs, there is no way you could make adjustments for time for a number of reasons. First: The slope of the trend line changes every 4 months so if you made an adjustment based on the lasts 4 month trend line's slope you would over or under adjust every time. 2. Each market segment has its own trend line so the data with which to support these adjustments does not even exists until so far into the future that they could only be used in a retro-appraisal long after the comps would have expired. 3. Time adjustments are a self-fulfilling enterprise. If you make a time adjustment by extrapolating any trend number then the next cycle will reflect the trend line number the appraiser inserted into the process. In effect by making time adjustments the appraiser is determining the market and not reporting it. I hope you read this Mike.

 

[Farm Gal]

Austin:

I can agree with you wholeheartedly on the point that rampantly overheated markets are 'false' in one sense, because some one eventually 'pays' for the deal and it in all likelihood wil be thee and meee in the long run. IF that barrel of cash won't buy the kids bread and milk, there is troubled times upon us. )Oh yeah history does tend to repeat it self) National stability aside, as I read your response, it almost seems that you dodged the question: Would you adjust if you saw a downward trend in YOUR local market ?

I disagree that appraisers are 'at fault' and 'make the market'... when performed properly the back view inclusive of reasonable adjustments for time/market change tends to provide a better indication of value than straightlining... The fact that people in America are damn stupid about their money is a side issue. What's it worth on an open market buyer and seller well-informed and acting in thier own best interest?!?!?

I mean come ON: 'false apprecaition' or not the 25 year appreciation on my parents' 22K home investment in the SF Bay area is 'real' as alll get out as long as they sell before the (possibly) inevitable crash that would make their $600,000 home a 'something less than that level of appreciation'.

Divy that one out: if you didn't apply some pretty hefty adjsutments over certain time frames and sold according to "Austin's rule" you'd be seriously hurting yourself!

The weather and amenities are nicer than some other areas of the country and apparetnly al ot of other folks think the same way... but it's a standard 60 built ranch home in an aging subdivision. Why don't htey take the $$ and run? They don't WANT to move someplace the weather isn't so nice.

 

[Austin]

Lee Ann:
If you don’t drop your eyeteeth when you see a house going from 22K to 600K then you have lost your sense of realty. That is a sign of an economic disease. Earthquakes are not the only reason I would not want to live in CA. We all will pay the price for their excesses, for example, when we all have to sit every night and listen for hours to the latest murder trial of the killer of children and woman in CA because of their love of ****o. Their freedom is at our expense or so it seems.
How would I handle a hyper-inflated market trend? My doing what I just did in the above post, tell it like I see it to inform people. You do have a point though, that is you either play the game and survive in this business or tell the truth and die because one person can’t buck the trend. It all goes back to what I have said many times, that is that this industry is a leaderless mob. It is like being on a bus headed for a cliff. We are all having so much fun that the driver is under too much peer pressure to slow down or even considering stopping. I guess the answer is that we will all go down together. At least I tried to warn.

 

[jeff samolinski]

I think I have to go with the ole man on this one. We are not here to point out and correct market anomilies that occur when there is an influx of supposed uninformed buters that pay too much. My God how much more responsibility do you all want. We already have to report and analyze so many factors that may be affecting values that to do all of them we would have to charge $500 and interview all parties to the transaction with a lie detector to get at the true market value. It is our job to base our value on the market not a corrected market as we see it. I am not here to save the economy. Now it is different with the few oddball sales that don't seem to make any sense when compared to the overall market. Appraisal is the estimated value at the time of the inspection and does not require us to analyze the future potential busting of the bubble. If your scared about it put some chicken little language in your comments but do not spend time trying to analyze it, its not our job.

 

[Alan Simmons]

1. I think the difficulty with this thread is that some are trying to skip or combine a few steps of the appraisal process.

Does a prior sale of the subject always equal market value? NO! Can it? YES!

Use a past sale of the subject when it is an indicator of “Market Value” (the most probable price…); otherwise just include an analysis of why it sold for less (distress, foreclosure, itchy feet, et al) and move on. Supply the information and let your clients make their own decisions.


2. If a buyer has a real estate agent he is considered, rightly or wrongly, informed. This does not mean that they use the information to make smart decisions.


3. Austin:

What?

“The laws of economics teach that sooner or later things return to equilibrium and one way or the other they do. It is a zero sum game, with one exception, the seller wins, the buyer loses, but worst of all the entire national economy pays the price because the cost increase puts the national economy out of balance with the world economy.”

I think you should be requited to place the above on the cover page of each of your reports. I know this book. Your conclusions were all wrong, Nelson acted foolishly.

 

[Mike Garrett RAA]

Two short points because this thread is making me dizzy....

1. Lee Ann...I do not use that one sale that is 20% above everything else unless forced to. My approach is to research the market, select several sales, eliminate the high and the low and use comps from the middle.

2. Austin...I do not do time adjustments; however, I honestly believe that they should be used especially in rapidly changing markets. That applies to advancing and declining markets.

Somehow I am beginning to think you are a socialist. Your ideas and concepts of stable markets only works in theory not reality. You would be much more at home in Boulder, Colorado rather than Colorado Springs. I don't attempt to make a market or manipulate it...only report it.

Like it or not markets are not static, especially real estate. I guess I like that. The first house I purchased for $16,500 I sold for $45,000. The next one I bought for for $17,500 I sold for $70,000. The third was a small condo that I paid $23,000 cash for and sold for $90,000.

Have some people lost money in real estate? You bet your ahhhhhhhh, you know! The condo I purchased was sold new for $59,900. Someone lost their donkey on that one; however, if they had held on would have made money not lost it. I think the same thing is true with the stock market. I haven't lost a dime over the last four years while many of my friends believed the doom and gloom and got out at the wrong time. They were "informed" by so called ecomomic experts.

Buy gold, hoard food, stash guns.......thus says the John Birch Society. My father-in-law died with a basement full of tins of food and buckets of wheat. His gold dropped to nearly half of what he paid for it. who made the money? Those John Birch guys who convenienced him "the sky is falling, the sky is falling". Still don't know what happened to his guns???? That was over 8 years ago...and the sky still hasn't fallen.