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Appraisal Truths

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | August 22nd, 2014

When it comes to real estate, the appraisal is the linchpin around which all else revolves. Both buyers and sellers are in a holding pattern until the appraiser arrives at the property, looks it over and comes back with a figure on what he thinks the place is worth.

Such is the case whether the property in question is a single-family house in the suburbs or a $200 million office tower in the city.

"Nothing happens in real estate until the appraisal report is signed and an opinion of the property's value is provided," says Brian Coester, an appraiser who presides over his own appraisal management company.

With that in mind, here are some things you should know:

-- There is a major disconnect within the lending business. Some lenders -- and real estate agents -- think the appraiser's job is to get the deal done, whereas appraisers generally think of lenders as money-hungry outfits who don't understand their profession.

According to Coester, CEO of Coester VMS in Rockville, Maryland, the appraiser's job is to be unbiased and completely independent of the transaction, while at the same time being realistic and practical.

-- The appraiser's valuation is her opinion -- repeat, opinion -- of what the property is worth. It doesn't matter what the buyer is willing to pay or what the seller is willing to accept.

"Two appraisers could do an appraisal on the same day, on the same house, come up with two different values and have them both be right," says Coester. "The reality is that value is really the appraiser's opinion, not an average, not a range, but a number the appraiser picks by looking at the data, understanding the market and all factors considered."

If the appraisal comes in too low for the lender to accept the buyer's application for a mortgage, the seller will either have to lower his price or the buyer will have to come up with more cash to make the deal work.

Yet the appraiser's valuation does not have to be the final word. Most appraisal companies offer a step-by-step procedure to follow if anyone involved in the deal thinks the valuation is off-base.

-- The information available determines much of the results. Appraisers are only as good as the data available to them.

Most, but not all, markets have a multiple listing service from which the appraiser gleans much of her information. But issues tend to arise when the appraisal is on new construction or houses in rural areas. Then, the appraiser must often deal with incomplete, inaccurate and outdated data.

Sellers should write up an inventory of all the improvements made to the house within the previous five years, complete with receipts if possible, to present to the appraiser as he enters the house. That way, the appraiser can spend his time verifying the information, which is more likely to reflect favorably upon the overall appraisal.

Remember, though, routine maintenance does not count.

-- You are only as good as your neighborhood. Like it or not, for better or worse, your neighbors and your neighborhood have an overall effect on your home's value. In a $200,000 neighborhood, spending $100,000 on improvements is not likely to add $100,000 in value.

-- At the end of the day, all adjustments to the valuation must be backed by real data that support the appraiser's opinion and would stand up in court.

For example, a $5,000 adjustment for garage space isn't just pulled out of thin air. It is backed by market research and data indicating that garages are worth $5,000 per space. It might be that homes with two-car garages sold for $5,000 more than those with one-car garages, or a variety of other market data.

-- Lenders' guidelines are unclear at best. While all lenders try to adhere to the rules set down by Fannie Mae and Freddie Mac -- the two secondary market companies that purchase loans from primary lenders -- or those from the Veterans Administration and Federal Housing Administration, the variety of requirements and requests lenders ask for can be amazing, according to Coester.

Moreover, most underwriters haven't been properly trained on appraisals, and as result, appraisers are sometimes stuck with requests and requirements that contextually don't make sense in the realities of the market or the appraiser's scope of work.

The Uniform Standards of Professional Appraisal Practice (USPAP) is the one true requirement. USPAP discusses how appraisers go about their business, and is the only thing appraisers are bound to. "Everything else is considered guidelines or suggestions, and varies from client to client," Coester says.

-- Appraising is a full-time profession. The typical appraiser does one or two appraisals a day.

"They are trained to be very careful when it comes to what they will and won't do when it comes to value, property condition and selecting comparables," according to Coester.

-- Appraisers are supposed to be licensed and be familiar with the area in which the subject property is located.

Licenses are hard to come by. According to Coester, "it takes two years, 300-plus tested education hours and 3,000 field hours to obtain an appraiser certification."

You have the right to ask to see the appraiser's credentials and make sure she hasn't traveled from outside the subject market. And if you aren't satisfied, you can ask the lender to send another appraiser.

-- An appraisal is not a home inspection. The two are totally different. The inspector's job is to make sure all the mechanical and subsystems are working and that there are no structural issues. The appraiser's is to observe the house in its current state, compare that with similar homes in the area and come up with a valuation.

Put another way, appraisers typically work on the assumption that everything is in good working order, whereas inspectors verify functionality.

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Monthly Reports 'Recreational' at Best

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | August 15th, 2014

It has been said that figures lie and liars figure. But even when the numbers are truthful, they often are nearly meaningless.

Take average home prices. They are widely reported by regional and local media, even though they are generally national in nature. While it's nice to know that housing values throughout the country are up or down -- or holding steady -- the figures often have little meaning when it comes to what's happening on your block or in your neighborhood.

David Rathgeber, a northern Virginia real estate broker, says home price data is "recreational" rather than actionable. He also rightly points out that the figures quoted are usually old news, as much as four months after the fact, even though they are often mistakenly reported as this month's or last month's numbers.

Why such a delay? A two-month delay is "unavoidable," he says, "due to data collection limitation -- the lag between contract and closing -- and another month or two for data assembly, review, comment and publication."

Rathgeber also points out that "taking action" based on two- to four-months-old information "can be a disaster."

Prices rise or fall in two ways -- appreciation or depreciation -- and according to the mix of sold houses.

If the trend has resulted from rising prices, sellers might want to hold firm on their asking price, even if the house is currently overpriced. It may be getting only a few showings, or perhaps none at all. But if prices are, indeed, rising, the seller can hold on until values catch up.

And if prices are falling, sellers will have to cut their inflated asking price by a rate greater than that of the overall market decline if they want to lure a buyer.

Buyers, on the other hand, may be willing to pay something above the asking price when home values are rising because they have a reasonable expectation that, in a few months, they will recoup their "loss." If prices are falling, buyers will have no sense of urgency because they expect greater value for their money in the future.

But beware: The average home price can change even when individual values do not.

That's because of the distribution of the properties covered in the price report. If more lower-cost houses than usual are sold in one particular month, the average price will skew lower. Similarly, if more than the usual number of expensive places change hands, the average will swerve higher.

And one more thing: The true average rarely changes more than 1 percent from one month to the next. So view reports that show values rising or falling by more than that with a high dose of skepticism. In Rathgeber's words, they are "patently meaningless."

Again, what's happening on a national scale usually has little significance to values in your neck of the woods. But even more important to note is that even though averages can be built for any zip code and any month, the sample size is generally not large enough over a short enough time to have any significance.

Generally, to calculate a meaningful average price for a particular area would require years of data, much of which would be so old that it would no longer be relevant. The actionable information today's buyers and sellers need must be fresh: what went down last week and last month, not years ago.

While we are debunking myths about prices, let's take a deeper dive into two popular reports covering mortgage rates: one from Freddie Mac, the other from HSH Associates.

Freddie Mac, the huge secondary mortgage market company, publishes a widely quoted monthly report on the average rates for 30-year and 15-year loans. Its survey is an average of the offerings to "prime" borrowers from 125 primary lenders nationwide, large and small, for purchase loans with 20 percent down.

Even that much information is often more than gets picked up by news organizations. But how many people these days make that large a downpayment? And who is a prime borrower? Freddie Mac doesn't have a definition, but reports that it is "not necessarily" someone who has never missed a payment and is always on time.

HSH, the New Jersey mortgage information firm, says its weekly average results from a survey of 600 "active" lenders who are in the market and able to make loans directly to consumers. Here, the survey asks lenders about their pricing for 80 percent loan-to-value mortgages to someone with a 740 FICO score or better.

This is the "stuff of normal humans," according to the company's Keith Gumbinger. But again, do you fit that bill? If not, you can expect to pay more than what's reported in the media. At the same time, because Freddie Mac's and HSH's numbers are averages, you might be able to find lower rates.

This is not to damn either Freddie's or HSH's surveys -- or any of the pricing surveys, for that matter. Rather, the point is this: Take all that's reported with the proverbial grain of salt. Do your own sleuthing and you just might do better.

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Protect Your House From Wildfire

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | August 8th, 2014

Wildfires like the one last summer that killed 19 elite firefighters in a blaze near Yarnell, Ariz., can't be stopped. But there's plenty homeowners can do to protect their properties.

If you don't think you should take remedial action, think again. One-third of all houses are located in what fire safety officials call wildland urban districts, which are near or among areas prone to wildfires.

Worse, perhaps, wildfires have ravaged houses in three-fourths of the 50 states. And with more and more people choosing to live in rural areas closer to nature, the chances are greater than ever that someone you know -- maybe even you -- will lose a house to a fire.

Indeed, on most days, a wildfire is burning somewhere in America. Over 33,000 fires have burned 1.6 million acres already this year, according to the latest count by the National Interagency Fire Center in Boise, Idaho. And the state with the most fires isn't California, Arizona or another place in the West. It's Georgia.

Fortunately, wildfires are covered by standard homeowner's insurance policies. But the best insurance is prevention. Here, gathered from a number of sources, are some steps you can take to protect your house, improve its fire resistance and shield it from indirect exposure:

-- Choose a firewise location. Canyons may offer a beautiful view, but they tend to act as chimneys, drawing the fire and accelerating the speed at which it spreads. A level site is better than a sloped one. A grass fire moves up a slope four times faster with flames twice as high as fire on level ground, because hot gases rising in front of the fire preheat the up-slope vegetation.

If you're building new, you can avoid this kind of topography. Also, find out about prevailing winds, seasonal weather conditions and the local fire history, so you can plan your landscape design accordingly.

-- Implement landscape safety zones. Work on your surroundings so the landscape will not bring a fire to your door. Do this by creating three safety zones, the combined extent of which will depend on your property lines and your risk level. In high-risk areas, even a zone reaching 200 feet from the house may not be enough.

The first zone should be a well-irrigated area that circles the structure for at least 30 feet on all sides. If your house is on a slope, though, a clearance of between 50 and 100 feet may be necessary, especially on the downhill side of the lot.

Plantings in this area should be limited to carefully spaced indigenous species. Beware of "ladder fuels," or vegetation that serves as a link between the grass and treetops and enables the fire to climb into trees or onto your house.

Trees and shrubs are fine in the first zone, as long as dead or low-hanging branches are removed and the height of ground vegetation is controlled. But the more grass, the better, because a wide lawn can serve as a fuel break just as much as a driveway. Ditto plants with a high moisture content.

Your irrigation system should also reach the second zone, which can contain a limited number of low-growing plants and trees spaced at least 10 feet apart. Dead or dying limbs should be trimmed away, and no live limbs should come within 10 feet of the structure. On trees taller than 18 feet, prune away branches that are less than six feet from the ground.

In zone three, thin selected trees and remove highly flammable vegetation such as dead or dying shrubs and trees.

-- Consider your roof, walls and windows. The landscape zones you construct around your house should keep all but the most ferocious wildfires at bay. But if one does happen to break through this protective zone -- usually from wind-blown embers or firebrands, sometimes more than a mile away -- ignition is most likely to occur on the roof.

Fire officials say eye-catching, untreated wood-shake roofs are the No. 1 cause of home losses in wildland areas because they can catch wind-blown sparks. If local rules allow, a better choice is factory-treated shakes. But consider using such noncombustible or fire-resistant roofing materials as Class A shingles, metal, cement and concrete products, or tile made from slate or terra cotta.

Fire-resistant subroofing also can improve survivability. But don't be fooled into thinking an expensive roof sprinkling system will stop a fire. You need a large volume of water to make a roof safe, yet water pressure is generally at its lowest during a fire. Also, the electricity needed to run the system is likely to fail, and the high winds that usually accompany a wildfire often divert the spray away from the roof.

Walls, too, should be made of fire-resistant materials such as stucco or masonry. Vinyl can soften and melt during a fire, offering little or no protection.

If you're building a new house, minimize the number and size of windows on the downhill side, the side most likely to be exposed to a fire. Smaller windows perform better than larger panes, according to the National Association of Homebuilders Research Center, and double-pane or tempered glass are more effective than single-pane glass. For greater protection, windows, sliding glass doors and skylights should have nonflammable screening shutters.

To prevent sparks from entering your house, screen your chimney with noncombustible wire mesh. Also cover exterior attic and under-floor vents with wire mesh -- plastic or nylon screening will melt -- no larger than an eighth of an inch. Screen under your porch, too, as well as any other areas below the ground line.

Also, locate your under-eave roof vents near the roofline rather than near the wall to prevent heat or flames from becoming trapped inside. For the same reason, the eaves themselves should be boxed or designed with minimal overhang.

Finally, inspect your house occasionally, looking for breaks and spaces between roof tiles, warping wood or cracks and crevices in the structure where fire or sparks could enter.

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