Appraiser Comments

Disclosures

2008-02-01T23:26:00.000-07:00

Disclosures May Hurt a Deal – Non-Disclosures Will Get You Sued!

Lsst year I was contacted by an Underwriter about a comment I made on an appraisal report that I prepared. It's unusual for an Underwriter to contact an appraiser directly, but, hey I don't mind. What I am referring to is a comment about an Environmental Concern within the subject property's market area. More specifically, a southwestern phenomenon known as Earth Fissures.

Fissures are cracks in the ground that develop when groundwater is pumped out faster than it can be replenished. A rapid drop in the water table dries out surrounding land, causing tension cracks that rise to the surface. If a fissure occurs in the open desert and there's no one living on or near it, it's not a problem. It's when growth and development starts building roads, homes, businesses, electrical lines and pipelines near them when you have the risk of them opening up after a rainstorm and causing damage to the infrastructure. The county requires all structures to be built at least 50 feet away from fissures. Fissures can be filled in but will never go away.

The additional comment I included in the report did not specify any fissures on or near the subject property, but did specify the subject's market area was known to have fissures present. Although no adjustments were made for the final value (since no fissures or evidence of fissures were noted at the time of inspection of the subject property and no disclosures were made by the seller or realtor in the sales contract) it still was a shock to the Underwriter that I would include a comment about earth fissures. Also, my research of the comparables in the market area that were used in the report, did not reveal any information or disclosures about fissures on or near them, which I found quite disturbing. The deal did go through and closed.

Buyers, Sellers, and Realtors repesenting buyers or sellers, should be aware and disclose any information about fissures. The seller is required by Arizona law to disclose such information. If the seller is unaware of any fissure problems, do your research and check the Arizona Geological Survey maps or hire a geotechnical engineer to survey the land before buying or selling. There have been several news articles over the past few of years of homeowners sueing sellers and realtors for non-disclosure of information in Arizona. I'm pretty sure it happens in other parts of the Country, but perhaps not for the same reasons. Just another reason why AACAZ and other appraisers need a complete copy of the sales contract for the appraisal report, and why realtors need to include and disclose necessary information in their listings.

The Arizona Geological Survey is undertaking a task to map all known fissures and fissure areas in the State of Arizona (Chochise, Maricopa, Pima, and Pinal Counties). According to Mike Conway, Ph.D., Section Chief, Arizona Geological Survey in Tucson, it will take about 3 to 5 years to complete the mapping. At that time the data is handed off at 1:24,000 scale to Arizona State Lands Dept., which they in turn have 90 days to make the data available to the public. Their web site is www.azgs.az.gov . They currently have preliminary fissure maps for Maricopa and Pinal Counties showing fissures in the areas of: North Valley (Phoenix & Scottsdale), West Valley (Goodyear & Litchfield Park), East and SouthEast Valley (Apache Junction, Queen Creek, Chandler Heights, Santan Heights), North/NorthEast Pinal County (Queen Creek, Santan & Chandler Heights). Fissures are found mostly in the central and southern part of Arizona (Maricopa, Pinal, Pima Counties). Pinal County, one of the nation's fastest growing counties in 2005 and 2006, is also home to three-fourths of the state's known fissures.

Lenders, Brokers, and Loan Officers should be concerned that the appraisal reports they order are being done completely, with research and information necessary and required, to arrive at an accurate value of the subject property and are providing a clear understanding of why and how the final value, is what it is. Perhaps fissures don't seem to be much of a concern to many, but I have lived in Arizona all my life and I know with the growth increase in population, development and city sprawl, the demand for water (especially ground water) is always on the increase. This demand will definitely have an impact and increase the presence of fissures and environmental concerns which will effect real estate values in certain areas.

Migration & Real Estate

2008-01-27T15:51:00.000-07:00

For decades, Arizona has been one of several destination goals of illegal immigrants filtering their way into the United States by way of Mexico. The lure of jobs, as a means to earn money to bring other family members across the boarder, coupled with the benefit and assistance programs funded by the taxes of legal citizens, that only illegal immigrants seem to qualify for, have created a steady stream of boarder crossings.

During the recent housing boom, a greater number have made Maricopa County their final destination, and recent news have estimated 12 million illegal immigrants live and work in the United States. The increase of illegals in the local population also helped fuel the housing boom, and now seems to be adding to the real estate and mortgage crisis.

There are no statistics, that I am aware of, on the direct impact or the numbers of illegals effecting the current real estate market. However, in 2007, Arizona foreclosures were up 566% from 2006 with an estimate of 10,000 or more vacant homes on the market, and a prediction of more to come in 2008. With the passing into law of the Employers Sanctions, which took effect January 1, 2008, more companies are laying off undocumented workers to avoid having their licenses suspended or permanently revoked.

These workers who bought homes are no longer able to pay their mortgage which adds to the number of foreclosures and abandoned homes. In addition, many who took advantage of assistance programs to purchase homes, did not have jobs or income to make their payments, and relied on refinancing, in some cases several times, to draw out the increase in equity during the boom.

Recently is has also been reported that several towns along the U.S./Mexico boarder have been gearing up for what they call a “Reverse Wave of Migration”. With Arizona now being labeled as one of the toughest places for illegal immigrants, increases in deportations, and the employer sanctions, many illegals are expected to return south of the boarder. But migrant shelters and human smugglers are telling the illegal immigrants they need to go farther north into the United States for better wages and fewer Border Patrol agents.

Smuggles in Tijuana that normally charged $2,000 for crossing into California or Arizona, are now charging $3,000 to $5,000 to avoid boarder states for more desirable locations such as Oregon, Illinois, Virginia, Maryland, and Washington D.C..

Any way you look at it, where ever they go, many who are leaving Arizona on their own or by deportation, are definitely contributing to the number of foreclosures and the oversupply of housing in the local market.

"Cost To Cure" Adjustment

2008-01-23T19:16:00.000-07:00

Cost To Cure is an adjustment to the value, of the subject property, for the dollar amount it would cost to restore the property to its original construction state. Such in the case of a property referred to as a “Fixer-Upper” or a property with room "Additions".

In the market areas that AACAZ provides appraisal service for, there are many older homes, and it has been common over the years, for a property owners to construct an addition to the basic home. Such as an extra room on the back, or converting a garage/carport into an additional bedroom/den/family room/etc.

It has also been common for the property owner not to obtain a building permit for some types of additions.

When a permit is issued, the addition is inspected for building code compliance. The additional square footage is included in County Records for property tax purposes. And no adjustment in the grid is necessary. However, if no permit was issued, the square foot measurement of the addition should not be included in the GLA (Gross Livable Area) in the Appraisal Report.

By including the added square footage of the addition in the GLA, the appraiser is certifying the addition complies with and meets all local building codes, and is structurally safe and sound. By doing so, the appraiser can be held liable if anything should occur to indicate otherwise.

It is not uncommon for an Agent or a Homeowner to include the additional square footage when marketing the property. The added space or room provides an additional marketing feature used to entice potential buyers. Example: An original 3 bedroom, 2,000 square foot home, with a 156 square foot room addition (12 x 13 bedroom), can and usually is marketed as a 4 bedroom 2,150 square foot home. It is also a technique used to justify a higher listing price by comparing the 3 bedroom (now a 4 bedroom) to other 4 bedroom homes.

When appraising a property with additions, a comment should be made noting the type and quality of construction of the addition, and pictures of the inside and outside should be included in the report. This is when a "Cost to Cure" adjustment may be necessary.

If the addition does not involve original structure changes, such as roof, outside walls, weight bearing supports, etc., an adjustment could be made for the estimated cost to remove the addition by a common person. I would only make an adjustment up to $1,000.

If the addition involves structure changes (like the ones mentioned), I would not make an adjustment at all in the report. I would however, provide pictures and comments for the addition, plus an explanation of the reason no adjustment was made.

If the client, underwriter or reviewer requests an adjustment, or questions the report, then I would have the client hire a licensed contractor (since I am not a home inspector or building inspector) to provide a repair cost estimate to them. Then, when I receive a copy of the estimate from the client, I would include an adjustment for the amount of the estimate in the report.

Absorption Rate and Appraisals

2008-01-22T20:06:00.000-07:00

There are numerous sources about the use and formula(s) associated with Absorption Rate, but nothing addressing this topic, specifically, for its use by Appraisers. Here, I am providing a simple explaination of its use in appraisals for the benefit of non-appraisers.

Definition: Absorption Rate is the mathematical representation of the relationship between supply and demand. In the Real Estate Industry, it is the calculation of how long it will take the inventory available, to be absorbed by the current market.

Realtors/Agents use Absorption Rate for their listings, and with their Buyer/Seller clients to help determine a selling/purchase price, and get an idea of how long it will take for the property to sell, at a specific price. Appraisers can benefit by using and including the Absorption Rate in their reports. And the Absorption Rate Analysis can increase the accuracy and creditability of the report.

Absorption Rate is also a good indication and useful tool for appraisers to determine market conditions, performance, and trends. It is especially helpful in accurately determining the Housing Trends or Market Trends on the URAR (Uniform Residential Appraisal Report), or GPAR (General Purpose Appraisal Report), to correctly determine which boxes to check regarding -- Property Values (Increasing, Stable, Declining) -- Demand/Supply (Shortage, In Balance, Over Supply). While most appraisers will conduct the necessary research of comparables sold, active/pending competative listings, and Days on Market (DOM), they will not take the extra step to calculate the absorption rate with the information at hand, and include supporting comments explaining their analysis and its effect on value. Others are doing it without realizing it, but don't include comments, regarding the absorption rate, in the "canned" comments already included in their report.

The Formula: The basic formula for calculating the rate is simple, and can be used for any type of property being appraised (Single Family, Multi Family, Condo/Townhouse, Manufactured, Small Income Producing, Commercial, Land, etc). AACAZ uses this formula and other data sources for a complete accurate analysis of the Housing Trends and Market Trends in each type of assignment. For simplicity, we will assume the properties are all detached single family residences (your basic house).

FIRST - Divide the total number of homes sold in one year by 12 (to determine the average number of homes sold in one month). SECOND - Divide the total number of current listings, by the number sold in one month. This gives you the Absorption Rate, or, the number of months it will take for the current market supply to be absorbed.

Example: Sold in 1 year - 39 comparables (page 2 URAR)
39 / 12 = 3.25 (sold in one month)
Comparables currently offered - 9 (page 2 URAR)
9 / 3.25 = 2.77 (Absorption Rate)

There are different variations of the formula, depending on who is calculating it and for what purpose. The example above is market area/neighborhood specific, since the sold and listings numbers from page 2 of the URAR, are for comparables, or more similar to, the subject property. For an accurate overall condition of the market, you would include ALL types of properties sold and ALL types of current listings - including listings not showing in the local MLS, such as FSBO, Foreclosures, REOs, and New Construction. The most common use by appraisers would be for, Market Area / Property Specific - similar to the subject property, as in the example above, Market Area / All - all residential properties within the subject’s market area, and Zip Code Area – City Level – Metropolitan Level – County Level – State Level.

Realtors/Agents would use, similar price or price range, as another search parameter. With different variations in the search criteria, the rate can be calculated for any time period (1 week, 1 month, 1 quarter, 1 year, etc) and for any specific area (neighborhood/subdivision, market area, zip code, area/grid, County, City/Town, State) or any combinations thereof.

With the use of spreadsheets (such as Excel) a template can be created for future use, and a Graph or Chart can be created for a more visual supporting explanation, to be included in the appraisal report. A short version of this blog can be read on AACAZ website along with other information.

Update to Historical Properties

2008-01-21T15:18:00.001-07:00

This is an update to the previous post of Historical Properties .

A comment made by Anonymous was received, which included a link to a related article. The link does not take the reader to the article mentioned, so I have included a working link in this post. http://www.azcentral.com/community/swvalley/articles/0121raneyhouse0121.html .

LP/SP RATIO

2008-01-20T00:19:00.001-07:00

We all know appraisals are being scrutinized more these days than in the past by lenders, underwriters and reviewers. We also know the main reason(s) for this, if we keep up with the news and happenings within the Real Estate Industry. With the declining market so wide spread, there is a reinforcing of expectations on the part of underwriters and reviewers and is being carried over to appraisal standards.

One of the main areas of an appraisal, that AACAZ has noticed, being looked at closely (in a declining market) is the support for the value conclusion. An Appraisers responsibility is to certify that they have performed an objective and complete analysis of quantifiable data supporting their conclusion, with a strong emphasis these days on: property value trends and market trends – supply and demand – concessions – sale dates and proximity of comparables - marketing time and exposure time – days on market.

There have been numerous Blogs, Posts, Comments, recently and in the past about concessions, disclosures, absorption rate, matched pair sales, cost to cure, all of which should be addressed in the reports ( NOTE: I will be adding new posts on these topics in the future). But there is one thing that is probably over-looked, neglected, or unknown that needs to be included. That is: List-To-Sale Price Ratio.

Realtors can, and some do, use this as a marketing tool for clients by telling sellers their sale price ratio is higher than others, which means a higher return at closing, or getting the property sold at or closer to the listing price. But that ratio is calculated on the performance of the individual Realtor and not the market.List-To-Sale Price Ratio, sometimes referred to as Sale Price Ratio or LPSP%, is a simple calculation to determine the ratio percentage between the list price and the sale price. Formula: Sale Price divided by List Price equals Ratio (%).

What this indicates, and what it is being looked at for, is seller’s of previously sold comps, willingness to negotiate and by how much. It is also an indicator of the market trend – increasing, stable, or declining. Adjusting the listings by the LPSP% calculated on the sales, a supporting indication of value is presented because of the Principle of Substitution, applied to the listings. By adjusting the listings and arranging all comps and listings from oldest to newest, will show higher or lower values as you move forward in time, proving a positive or negative time adjustment that can be calculated as a monthly percentage. The analysis results are an upper limit of value and a market trend direction.

Appraisers should have in their work files documented research supporting the market conditions reported (LP/SP ratio, concessions, active/pending listings, absorption rate, etc) along with comments in the report to comply with Standard Rule 1-1 for Credibility and the Competency Rule of USPAP. AACAZ is USPAP compliant.

Appraiser Representation

2008-01-18T10:28:00.000-07:00

Yesterday I attended one of the monthly meetings of the Arizona Board of Appraisal which was open to the public. The mission of the board is to promote quality real estate appraisal in Arizona that protects the health, safety and welfare of the public. It also acts as a disciplinary body to ensure conformity with the statutes, rules and regulations governing the board.

While the meeting itself may appear somewhat mundane to members of the public, the procedures and agenda topics (cases, item numbers) do provide an insight to the state of the appraisal profession. Although the meetings are open to the public, the Board may go into Executive Session at which time the public may not attend.

Most items on the agenda were carried over from previous meetings and covered the usual monthly items: applications accepted/declined, continuing education classes approved/disapproved, motions (for investigation, informal hearing, formal hearing), informal complaint hearings, and complaint reviews. The complaint hearings and reviews are the “meat items” to find out what is happening in the world of Real Estate Appraisals.

There are two types of compalints – Board complaints and Out Side complaints. Board complaints usually occur from something revealed during a review or investigation by the Board, and may or may not be related to the initial purpose of the review or investigation. Outside complaints are filed by the public.

In yesterday's meeting, the outside complaints were pretty much the usual: values too low, values too high, used wrong comparables. There were, however, a few different complaints.

They included: appraised the wrong parcel of land, wrong appraisal form used, appraiser signed report using another appraiser's license infor, trainee accepting assignments from own clients, and signing reports with supervising appraiser's electronic signature, without their consent or knowledge, supervising appraiser remained in vehicle on cell phone while trainee performed exterior and interior inspection on own.

Some complaints were dismissed while others were sent to investigation, hearings, and/or disciplinary actions, which ranged from: Letters to Comply, Supervised Probation, Additional Educational Courses relavent to Violation, License Suspension, Order to Hand Over License.

The meeting also had a couple of other agenda items of interest. One was a preliminary report from the Appraisal Subcommittee of the Federal Financial Institutions Examination Council. Another was a discussion concerning the 48th Legislature, 2nd Regular Session and Governor's recommended merger of the Arizona Board of Appraisal into the Arizona Department of Real Estate . Unfortunately, I was unable to attend that portion of the meeting and will have to obtain any information from other sources.

Historical Properties

2008-01-14T10:47:00.000-07:00

When it comes to appraising Historical Properties, more specifically residential historic properties, an appraiser can find themselves in a very interesting and educational situation, or a complete nightmare. Either way, AACAZ does not appraise historic properties.

Most major cities have historic districts (for example – Phoenix has 35 historic districts), however, not all residential properties within a particular historic district are in fact “Historical”. You might ask “What is a historic property?” A historic property is a property that is designated, or has been determined eligible for designation, at the local, state, or federal level. The property, or properties, must either be important for representing broad patterns of history, associated with the life of a historically important person, or for archeological contributions. More simply put – associated with a historical person, place or event.

Generally speaking, a historic property has roughly a 25% higher value than similar non-historic properties.

With that in mind, I came across an article today, in the Daily Real Estate News (their source was The Associated Press), that I found interesting, unusual, and slightly humorous, given the increase in foreclosures and the current real estate market conditions.

Daily Real Estate News January 14, 2008
Woman Sells Pieces of her Foreclosed Home
An Ontario, Calif., woman, who tried to save her home from foreclosure by selling its period flooring, baseboards, and other fixtures on eBay, was evicted and the house was secured by local police.

A Superior Court judge intervened after the city complained that the home was being desecrated. The city had an interest because it gave the 71-year-old Mediterranean Revival home owner a break on property taxes because the property is considered historic.

Owner Kim Shewalter stopped paying her mortgage after payments adjusted to $6,500 a month. "Until the bank takes it away, that's my home," she says.Shewalter says she was only removing and selling items that she installed in the home herself, such as a set of custom-made cabinets and an antique light fixture she inherited from her grandmother.

"I have to give my house back to the bank, and I want to be sure I recoup a little bit of my money," she says.

With the increase of Pre-Foreclosures, Foreclosures, Short Sales, Abandoned Properties, Bank Owned Properties (all of which I do provide appraisal service for) on the market today and many more to come, I would not consider this an isolated event. It is however the first I have heard regarding a Historic Property.

I Do What?

2008-01-09T15:33:00.000-07:00

I provide Real Estate Appraisal Service in Arizona. My coverage area is all of Maricopa and Pinal Counties.

My service is offered to Mortgage Professionals (loan officers, mortgage brokers, mortgage lenders), Real Estate Professionals (realtors, agents, brokers), Investors, Individual Property Owners, and anyone else needing a valuation of real estate.

The types of properties I specialize in are: Single Family Residences, Townhomes, Condos, Manufactured Homes, Rental Properties (Single, DuPlex, TriPlex, QuadPlex), and Residential Acerage/Lots.