Urban Condos and Appraisal

Urban condos have some unique qualities that can make one identical unit in the same building have a broad range of price discrepancy. Now differences in similar units are certainly not exclusive to urban condos; homes on corner lots, homes with a view, backing to open space, etc can all add or detract for the market value. But urban condos add additional dynamic and not all appraisers are in the "know". Simple concepts like interior facing units versus exterior facing units might seem simple enough, but does the appraiser know that one is exterior and the other is interior. Maybe, maybe not. Appraisers do not go inside the comps they use, rather relying on data from the local MLS and tax records.

It is important that Realtors® make these differences clear when listing a unit with favorable conditions. There are other items that carry some weight in suburban housing but much more importance in an urban setting. Walk scores are used by a variety of websites to determine how well a property fares when the resident is walking rather than driving. In suburbia this is not as pressing as most suburbanites expect to do a fair bit of driving to get things done. But in an urban condo people often choose to either not own a car of share a car between them. Walkable scores and easy access to public transit are critical. Realtors® should not assume that appraisers get these dynamics. Putting that info in the remarks, which most appraisers WILL read can help that appraiser understand why a buyer offered X for a unit that "seems" similar to another that sold for Y.

Different buildings may be very close to one another yet have dramatically different prices and quality levels. In suburban developments neighborhoods vary wildly in quality and desirability. In urban areas the "neighborhood" can be as small as a single block. In a secure urban building you can have units selling for seven figures because the building has super high end facilities and the units are up high with great views and a building literally right next door has similar sized units for 1/3 the price. It's all good in the neighborhood 'downtown'.

Locally Vancouver USA is rising up with a lot of mid-rise and high rise development going in downtown and along the new waterfront. It's a very exciting time, but we Realtors® still have to stay sharp and frosty and be sure to help both the buying public and appraisers understand the intrinsic value proposition of their listed units ;)

Why Price per Square Foot Rarely Matters in Residential Real Estate.

So often I hear clients talking about the price per square foot on a residential listing. I even hear real estate agents talking that up. Why is this house $200/sf and this other one is 180/sf? Sometimes people are adamant about not paying more than "x" per square foot. My friends, in residential real estate, the price per square foot rarely matters as a comparative value. There are way too many other variables that affect the value of a residential property. Any property actually, but in residential there is a broad range of variables. The only time that price per square foot can really be comparative is if all other variables are identical or near identical.

For example to use the cliché of apples and oranges why is this Apple priced at 1.48 per lb and this Orange is .99 per lb? Why is a Red Delicious $2.99 per lb. and a Granny Smith is $1.99 per lb. Apparently Red Delicious Apples are in higher demand!

Well friends the only time this price per foot stat really matters is when you have two houses in the same neighborhood, same floor plan, same condition, same upgrades, hell, right next to each other in fact. Then if one is priced at a higher amount, you have to ask, why?

I think price per square foot is the most abused statistic in residential real estate. Ranch homes are always going to have a higher price per square foot. Small homes in expensive gated communities will have a higher P/SF than a large spacious home in a run down neighborhood. A brand new home will cost more per foot than an old house. Homes on acreage will often cost more because the land value is higher.

One simply cannot make any prudent decision based on price per square foot unless all these other variables match. Since that almost never happens, then we have to look at those other variables. In the end what really matters for a person buying a home that they intend to live in, is this: Do you like the house? Does it do what you need it to do? Can you afford it? If you answer yes to these, then you're done, pull the trigger and write it up!

Don't get caught up in price per square foot. I sold a 720 sf house last year for $255k all cash. It was nicely remodeled but nothing over the top. That is $354/sf. I sold a 4200 sf mansion with a breathtaking view of the Columbia River for 750k around the same time. That was only $179/sf and the house was decked to the nines with top grade trim, marble, soaring ceilings, the whole bit. Why such a dramatic difference. Simple, lots of variables. There is a massive demand for smaller affordable homes. Far more buyers than sellers. In the high end the opposite is true. Furthermore, there is a bit of the economy of scale when building a large house. Neighborhood plays a role as well but when comparing a very large house to a very small house you cross one of the rare times that location is not the number one variable. Demand is the number one variable here. When comparing similar homes across neighborhoods, location resumes its role as the primary variable driving values.

A 2000 sf home on a 10k lot next to a railroad yard might fetch $150/sf and the exact same house a few miles away in a nice neighborhood with a view might fetch $225/sf. Do not let the price per foot trap keep you from getting the right house. Understand that smaller one level homes will almost always have high per foot costs and larger homes on a small lot will have lower per foot costs. Here is a simplified example of why this is the case. Let's take a lot in a neighborhood that is 8,000 sf and fully ready to build. The city says the builder can put any house between 1200-2400 square feet, one or two levels. The following is an oversimplified hypothetical scenario:

The lot is 100k and the development costs (underground infrastructure, city required appurtenances, fees, permits, etc) are 35k. The builder is into this deal 135k before the first nail is hammered. The physical structure cost will vary depending on size and design dynamics. The landscaping and other costs will be more or less the same regardless, lets say 10k. So the hard costs fixed are 145k. Lets say the 1200 foot ranch costs 100k to build. That puts the net cost before marketing and other post build expenses at $245k Let's say the builder budgets 15% for marketing and other costs of sale (real estate commissions, taxes, staff, ads, etc). That makes the total cost of goods about $282k. Let's say builder makes a 10% profit. That makes the 1200 foot ranch home $309k. Now the same scenario with a larger and slightly more expensive 2400 sf two story trimmed out the same might cost 165k to build. Now the builder has a total cost of goods at 360k and a sales price at $395k. The cost per square foot on the ranch is $258/sf where as the equally built and trimmed 2400 foot home is only $165/sf.

There are many costs that are more or less fixed regardless of what type of house is put on the lot so the larger house is less expensive to build on a per/foot basis. The builder however makes only $28k profit on the little house where as he makes $36k on the larger house. The builder has a finite amount of land with which to build so he wants to maximize profit and thus larger homes become more profitable despite having a lower cost per square foot. The lack of new small homes puts even more pressure on the resale market for small homes and that is why you might find a 1940s 720 sf house at $354/sf. 

Swimming Pools in the Northwest?

The Pacific Northwest is known for its amazing scenery, spectacular greenery and long sunny summers... er, that last one is a stretch. So we may have the best summers on the planet, but they are also quite possibly the shortest summers on the planet. Outdoor swimming pools have a fairly brief season here in the great Northwest.

So why is it that I list a excellent home with a fantastic little built-in pool and the offers are coming in from all directions? Well my friends, a small neighborhood home with an in-ground pool is very rare in these parts. Well rare stuff usually fetches lots of money right? Well maybe... pools are rare around here due to the brevity of the season and the relatively high cost of installation and maintenance. Very high end homes in our area often have pools but they are also quite likely enclosed for year round use.

A traditional in-ground outdoor pool here in Clark County, Washington can attract a fair number of buyers, but the problem will come when the appraiser arrives. Appraisers are all over the board on swimming pools in our area and so seller's should avoid adding a bunch of anticipatory value in it. Even if the offers come in the appraisal may not.

For sellers the best time to list your home with an in-ground pool is June, the buyers have little trouble imagining the next few months of pool parties and fun in the sun. The best time to buy a house with a pool is November, no-one is too excited about the ice rink you have out back ;) It is kind of like buying a boat, buy in November sell in June!

I love me a nice pool. There is something just resort like about hanging out in the yard BBQ fired up and lounging by the pool. Even if it is chilly outside, the pool still adds that aura of being on vacation. So all you Californians, pay big bucks for the house with the pool, we get great deals.


 

Seller's Need to Relax

This recent upswing to a seller's market has left many seller's with a serious attitude problem and the market is starting to make an unfavorable adjustment. Seller's are finding that buyer's are leaving the market and this has reduced pressure on inventory. It is still very much a seller's advantage, but the craziness of last spring has softened into a more healthy condition.

The problem is that seller's continue to exert pressure on buyer's as if they had ten offers in line when in fact they have just one. Buyer's are leaving the market in frustration. This market has shifted back into a more traditional situation that still favors the seller in the lower portion of the price range up to about 10% above median. But sellers need to actually "sell" their house and being rude, making it difficult to show the home, demanding unreasonable closing periods, etc. are going to lead to disappointment for them. They are leaving cash on the table by pushing away potential buyers with a bad attitude.

Regarding timelines, there are many things delaying closing times right now, the most prevalent is the ridiculous appraisal situation. Appraisers are quoting 4-6 weeks for an appraisal and then extorting cash to get it faster. Right now we have a racket being run by appraisal companies that are basically selling appraisals to the highest bidder. There is no accountability at all and as usual the federal government has screwed the system up. I have heard of appraisals being bid up over $2000. This is a practice so egregious that it would make the Godfather blush.

Locally the cost of appraisals has more than doubled int he last 12 months. It is time for "El Federale" to crack down on these appraisers or better yet mandate that the banks pay all appraisal fees. After all it is the banks that demand appraisals, right? Believe me, if the banks were paying they would kick the appraisers teeth in before succumbing to this latest round of extortion.

Once again the government under the guise of protecting consumer rights has gone off and created a situation where pure unadulterated greed reigns supreme and the ultimate victim of this unregulated catastrophe is of course, the consumer. Classic. I find it interesting that appraisers were offended that they were targeted after the collapse of the market in late 2008. There were some appraisers on the take back then, puffing up prices for dirty loan officers to get cash out refinances pushed through. I have no doubt that these dirty scoundrel appraisers were a minority representation of the industry. But they certainly have not helped buff out the tarnished reputation with this current trend of plundering the public like an 18th century pirate. Ahoy matey, raise the black flag, there be treasure to plunder in thar appraisals...

Appraisal Companies Have Ruined The Process

During the run up in real estate from 2000-2008 there were a small percentage of appraisers that engaged in unethical and even illegal behavior. Padding appraisals to get higher values for greedy loan officers that were pushing cash out refinances. This practice contributed to the heavy losses and burden on the taxpayers during the "bailout" in 2009.

It stands to reason that the Congress would take action to limit this bad behavior in the future. And so they did with sweeping regulations and changes to the whole process of borrowing money for real estate. Senator Christopher Dodd and Congressman Barney Frank chaired to effort to create legislation to severely curb these and other bad practises.

Part of the legislation mandated that appraisals all be handled through a regulated appraisal company and that appraisers are to be randomly assigned to files with no interaction between the loan officer and the appraiser. This part makes sense as the shady dealings were often between the loan officer and the appraiser. The solution to one problem has created another problem, which has become multi-faceted.

Appraisers have begun to take on the government employee attitude of "I don't care". There is no accountability, there is no reason to put forth any genuine effort to do any kind of service. Appraisers are slow, they ignore common real estate time lines with impunity. They are now akin to employees in the department of redundancy department ;)

Furthermore the cost of appraisals which is now 100% borne by the buyer, has nearly doubled. I just had a client pay $925 for an appraisal with which has taken more than a month to complete. This was a $250,000 house. The appraisal company had all kinds of extra adds for location (which was not at all very far from town) mobile home, land size, etc. That same appraisal 9 years ago when the market was much busier than it is now would have taken half the time and cost at least 40% less money.

The appraisal is mandated by the bank to protect them from lending too much money on a home relative to its value. The buyer is paying for a report that is specifically for the benefit of the bank and is now being exploited and to put it curtly, extorted. With this new layer of shielding between the bank and the appraiser, I think it is safe to mandate the bank pay for their own appraisals.

Appraisals locally has become an extortion racket the likes of which you might find in a Sopranos episode. The buyer must pay what amounts to extortion and they have NO CHOICE in whom they "hire". There is no free market influence as the appraisers are randomly assigned. The free market is what keeps people in business working hard to provide good service at a fair price.

I believe that if banks were paying these outrageous fees, there would be a holy terror of change, and this cavalier attitude, slow work pace, and puffed up pricing would be under control faster than a downtown parking space is filled.

Dodd-Frank was designed to fix some genuinely gaping holes in the regulation of mortgages and for the most part it has been successful. The appraisal process however has become a Soviet style mess and needs immediate repair.

All of this ranting aside, for buyers and sellers it is important to note that the appraisal needs to be ordered very early in the process. Buyer's agents need to make sure the lender orders it immediately upon mutual acceptance of the purchase and sale agreement. Even with that, closing in 45 days has become a challenge.

I believe that this situation with the appraisals is a genuine consumer protection issue and perhaps our state and federal representatives should get a mailbox load of complaints from 'we the people'.    

Do You Really Know What Your Home is Worth?

In this day and age of Internet information many people feel like they have a solid handle on the value of their home. After all, sites like Zillow offer an instant value with a single click of just about any house in America. But how accurate is Zillow? They use a variety of data but mostly public records. Unfortunately companies such as Zillow are not intimately aware of the important details about any individual house. All of their posturing in the market really boils down to public data on a spreadsheet.

I think the coolest thing Zillow ever did was the old heat map but that is gone. But Zillow is a great tool for looking at trends across a broad market area. Are prices going up? Are they flat? Are they trending down? I am a professional Realtor® with a variety of tools at my disposal and I still enjoy playing around on sites like Zillow and Trulia because they offer an easy interface and provide a quick way to analyse broad markets and compare relative housing costs in different areas. How does Vancouver, WA compare broadly against Denver, CO?

Looking at an individual house however on Zillow is a fool's errand. They simply do not have enough information about the comps they used relative to to home they are evaluating nor do they know anything about the condition, upgrades, etc to the house they are applying a Zestimate to. They disclose all this in the fine print so they are doing it right, legally.

The last 18 months have been good to real estate values in the residential market locally and for the most part across the nation. Any homeowner thinking about value on their home would be wise to ask their trusted real estate pro to do a comparative market analysis. They should be willing to do that for free. Of course the alternative is to hire an actual appraiser but a local agent can give a solid evaluation providing they can see the home.

It is never a bad idea to be aware of your home value. Whether or not selling is in the near future or not, knowing where you stand against the market and any loans on the property is solid info to keep on hand. Talk to a Realtor® about the value of your home and go ahead and have some fun on those internet real estate sites, just keep a health pinch of the proverbial salt handy before jumping to any conclusions based on broad based internet data.