Residential Real Estate Appraisals: What Are They and What Do They Do?

If you purchase a house with a loan, the lender requires an appraiser to assess the property and make sure that the market value is there.  In other words, if you’re buying a house for $500,000 the bank wants to make sure the house isn’t worth only $200,000 and that they’re lending you $300,000 of extra money.  Sounds legitimate.

The problem arises when the discussion of market value comes into play.  Buyer writes an offer.  Seller counters.  Buyer agrees.  Buyer and Seller have to come to an agreement about what the house is worth.  To many people, that is the definition of value: “what someone is willing to pay”.  The trouble is that that isn’t necessarily market value.  If the same floor plan just sold 3 weeks ago as the property-in-question for $300,000, and today Buyer and Seller agree to purchase the same floor plan for $310,000 in a declining market, the market value may come in less than $300,000, depending on a variety of factors (interior upgrades, lot size, etc).  Market value isn’t an exact science and appraisers are licensed in using a bunch of determining factors to calculate value (i.e. a larger house that’s a little bit older than the property-in-question and has a pool sold 0.25 miles away 3 weeks ago.  How does that affect the market value of the property-in-question?).  Appraisers use a variety of tools in order to determine how each item affects the value as well as take into account trends within the local and national market.  The main thing to remember is that the appraiser works for the bank.  The appraiser’s job is to protect the bank’s interest and make sure there isn’t any loan fraud or other potentially illegal activity going on.

The lending pendulum has swung from the liberal times of the mid 2000’s (when people making $10/hour could afford $500,000 houses) to the very conservative.  Appraisals have come along with that.  Used to be that lenders and appraisers had relationships and Dave the Lender could call up Tony the Appraiser and have him appraise the property.  Of course, Tony appreciated the business from Dave and therefore was more inclined to make things work and have the property appraise at value.  Now, appraisals go into a hat and a random appraiser is selected.  Seems better but the problem sometimes is that you get an appraiser who potentially isn’t familiar with the specific neighborhood.

The second biggest problem with appraisals is that the appraiser is given the contract.  From the sense of putting deals together it makes sense but for determining market value it doesn’t make sense.  I’ll tell you a quick story regarding a recent house I sold at 3120 Skyline Drive in Oceanside.  The buyer wrote an offer at $800,000 and the seller countered at $825,000.  The buyer agreed.  We went into escrow at $825,000.  However, the appraiser received the contracts from the lender (remember, the appraiser works for the lender) but only got the offer at $800,000 without the counter.  He appraised the property at $800,000 (surprise, surprise).  He thought he was making the property appraise at value.  Actually we were undervalued.  My client (the seller) brought up a valid argument.  If the appraiser is only going off the contract, what’s the point?!  It’s a valid argument.  The appraiser’s job is to determine the market value of the property.  At the same time, he doesn’t want to be the one to screw up everyone’s deal (FYI — appraisers get about $250-$300 take home per appraisal.  Lender fees are about 1% of the purchase price.  Realtor fees are about 3% of the purchase price per side.  Etc, etc).  You can see the dilemma.

Appraisers have one of the toughest jobs within real estate.  Often there are qualified buyers who are agreeing with motivated sellers to buy a house at a specific price and the property falls through because it doesn’t appraise.  At the same time, difficult properties to appraise (i.e. property different than surrounding properties) draw increased scrutiny from the appraiser’s boss (aka The Underwriter).

If you run into trouble with appraisals, there are ways to combat them.  Give me a call or drop me an email if you run into trouble and need some help.

Auctions: What Are They and How Do I Get One?

There is constant discussion about auctions in real estate.  Basically, there are two main types to be aware of:

1.  Notice of Trustee’s Sale Auction: this is the type of auction when a short sale becomes a foreclosure.  After receiving a Notice of Default (after 3 months on non-payment) the owner has 6 months to cure the default.  If the default isn’t cured within time specified, the property goes to auction where it is sold on the courthouse steps.  If no one buys the house at a price the bank deems reasonable, the bank will take the house back and put it on the market as a foreclosure.  Notice of Trustee (NOT) auctions are common these days because of the high volume of short sales.  I’ve been to several in San Diego and the houses are auctioned literally on the courthouse steps with auctioneer going quickly through each house.  A representative for the bank is in attendance and it’s his/her job to ensure that the house is being bought above the bank’s bottom dollar.  The challenge with these types of sales is that they are usually cash only purchases and are done in “As Is” fashion.

2.  Auction-Style Regular Sale: this is a relatively rare type of auction for normal housing.  It’s a creative way to try and sell a house quickly and create a lot of buzz about the property within a short time period.  They usually don’t limit based on financing or length of escrow, but will take those factors into consideration before moving forward with the buyer.  Also, usually everyone is aware of what the highest bid is.  I’ve seen them done via phone and they ask you if you want to proceed to the next level of bidding.  If not, they thank you for your time and you are disconnected from the call.

In my opinion, it’s a gimmick that doesn’t do the best thing for the seller.  Perhaps you’ve seen the recent raffle for houses.  People can buy a $50 ticket and the house is given to the lucky winner.  The hope is that if the house is worth $500,000 the agent sells more than 10,000 tickets and makes the seller a decent profit.  On the other side, the buyer’s hope is to get into a house for a significant discount (say, $250 for 5 tickets).  The problem is that it’s a game of chance.  The agent hopes that they sell enough tickets to justify the sale.  The buyer hopes they are lucky enough to beat the 1 in 3,000 odds.

To me, auctions are a great opportunity for a buyer but another gimmick that hurts the seller.  Here’s why:

– usually there is a weekend where the buyers must attend a viewing of the house before being eligible for the auction.  This is usually a specific time on a weekend (Saturday and Sunday).  The problem is that that doesn’t always make sense for every buyer.  A four hour time slot (let’s say 2 hours each day) is typical and to make that window limits getting all qualified buyers in the door to be eligible to bid.  This limits the potential auctioneers.  It also means that people who think their bid won’t be enough may or may not go.  My advice: if you’re within $100,000 of what the house is worth, go.  You’ve got nothing to lose.  Another bit of advice: take your Realtor.  Get good advice about the value of the house and let him/her read through the obligations of the auction contract (i.e. is it being purchased “As Is”?  Is there an escape clause for the seller if they don’t get enough?  Will there still be a contingency period to get inspections done? etc).

-opening bids are usually about 50% of value in order to get everyone interested.  That means a $600,000 house might have an opening bid of $300,000.  That’s nice at the beginning but for most buyers not doing their homework on the auction and the true value of the house, they are set up with unrealistic expectations.  The thought is that someone who can afford more but only wants to pay $550,000 gets caught up in the “game” of the auction and outbids someone else for $585,000 and the house gets sold in a weekend.  My advice to buyers is to pick a number before seeing the house and stick to it.  Many times in traditional negotiations I’ll recommend to the buyer that we go take another look in between Counter Offer #1 and #2.  I do this because I want them to make sure they like the place and are excited about moving forward.  Looking at houses is fun; buying a house is a whole different animal.  With an auction you won’t have the luxury of going back to view the house again after the last bid.  It’s easy to say “just one more bid” over and over again until you end up $35,000 above where you wanted.  Consult a Realtor, find a number, stick with it.

Buying or Selling Out of State? I Can Help!

Many people are aware that I can help them buy and sell residential real estate within San Diego County, Riverside County, and Orange County (actually I am California licensed so I could help sell someone’s house personally anywhere in the state).  What people sometime don’t know is that because I’m part of a network of Realtors within my company and because of relationships that I have with some very large lending institutions, I can put people in contact with a local Realtor who has a proven track record of success anywhere in the world.

For instance, let’s say your grandmother wants to move from Chicago to the beaches of Florida.  I can help.  I can put her in contact with a quality agent in both areas (selling and buying agent) that is a veteran, quality agent.  Maybe she already has a relationship with someone she trusts (and I always recommend using those first) but if she doesn’t, it’s a way she can at least start with someone who is qualified.  Plus, as an added benefit, then I can keep tabs on that agent and keep him/her accountable and make sure that he/she is working hard in order to get that home sold or help her buy a beautiful place to live.  When I recommend someone I realize that the quality of work (or lack thereof) is a reflection of me, and so I take all of that business very seriously.

If you or someone you know needs to buy or sell outside of Southern California, please feel free to contact me and I can help.  It’s just another way that I look to provide service that truly is “a foot above the rest…”

Writing an Offer: How Much of a Discount Should I Write the Initial Offer at?

Watterson had it correct in this Calvin and Hobbes cartoon, and dealing with the compromise and negotiations of an offer can be difficult.  The question in the title is a common one I get from buyers.  The house is listed at “such-and-such” price.  What should we write the initial offer at?  10% off the asking price?  More?

The thought is that there is some kind of formula which will allow you to get the best deal.  However, the most important thing to note is that the offer you should write is based off the market value of the home, not the price it’s listed at.  In other words, if a house is worth $400,000 and it’s listed at $500,000 a 10% discount off the asking price would still be over paying for the house.  On the same token, if the same house is listed at $375,000 there is no need to go in at a discount because it’s listed at a discount.  Learning market value is key and discerning the features that may add or subtract value is extremely important.  Now, just because a house is worth $400,000 (market value) doesn’t mean it’s worth that to you.  Maybe you aren’t totally in love with it but at the right price it would make sense and the best price for you is $375,000 no matter what.

In writing the initial offer I generally work under two strategies, each with their own advantages and disadvantages I’ll discuss:

1) Write an offer that’s strong enough that it doesn’t piss the seller off where they don’t respond, but low enough that you create some room to negotiate.  Let’s say the house is worth $400,000 and it’s obvious (i.e. it’s a tract home with a model match of similar upgrades that sold two weeks ago at $400,000 with no difference in view, lots size, location, etc etc).  The first strategy is have your Realtor do some background work.  Why is the seller selling?  What’s their motivation?  Did they get a job transfer and he’s leaving in two weeks or are they just testing the market?  What kind of activity have they had on the house?  Any previous offers?  Any offer now?  Anything we should know about the property before writing the offer (i.e. seller wants to take all the appliances or that the seller will credit for a carpet allowance)?  Identifying these things will help with the initial offer.  With that information I make my recommendations as to what the initial offer should be.  If the seller has a job relocation and needs to sell it, maybe we start at $370,000 and hope we split the difference around the mid $380,000’s and can feel like we’re walking into equity.   Sometimes this happens where the buyer writes the offer at $370,000 and we end up splitting it right down the middle and go into escrow at $385,000.  The common complaint is, “Had I known we were going to split it 50/50 I would’ve started lower.”  Makes sense but remember it’s based off market value not the initial offer written.  If that was the case then we should’ve written the initial offer at $1 and the seller would’ve split the difference and we’d be in escrow at $200,000 right?  Wrong.  Thus, the biggest challenge of this style of offer writing: writing the initial offer too low.  Same scenario but the buyer writes the offer at $350,000 and the seller rejects the offer outright as an insult or ridiculous.  Now, as a buyer you’ve put yourself in a tough spot because you need to go back to the seller and increase your offer.  Now it looks like you really want the house and you’re begging for it.  Not exactly the way you want to start out with negotiations.

2.  The second style of offer writing is the “highest-and-best” tactic.  For the scenario above, this would be like writing the offer at $385,000 and holding firm on it.  You go in relatively strong and back it up with data and explain that this is the best you will do.  The biggest part of this is that you have to stand firm.  The seller will probably test you and may even become frustrated with you because it’s such a power play.  Usually when I write these kinds of offers with clients the seller doesn’t agree to it because of the lack of negotiations and 4-6 weeks later I check in with the listing agent and say that the offer still stands (if we haven’t found something else) and we’ll go into escrow.  Psychologically it’s tough on a seller to deal with this kind of offer because everybody wants the game.  I’ll give up this if you give up that.  The biggest challenge I find is two-fold for these kinds of offers: 1) is the challenge that a seller may pass on a legitimate, good offer because of the lack of negotiations and 2) is the susceptibility of the buyer to not stand firm on their offer.  If you go in and say that $385,000 is your highest-and-best, “take it or leave it”, and the seller counters at $387,500 what do you do?  It’s a difference of $2,500.  Are you willing to let the deal fall apart over $2,500?  But are you willing to enter a more challenging escrow from the beginning because what you originally said was highest and best really isn’t?

When it really comes down to it I think one of the biggest advantages of having a Realtor is having a qualified person who has been through the process many times to bounce your ideas off.  If you just want an order-taker anyone can be your agent.  If you want someone that can help you get a good deal through the negotiations, give me a call.

Renting vs Buying: The Whole Story

The age old question: is it worth it to buy or should I continue renting?  Well, let’s look at a hypothetical:

Let’s say John currently rents a 2 bedroom place in San Diego for $1,500 per month.  He’s tired of paying someone else’s mortgage and wants to begin putting money into his own equity and is trying to figure out if it’s worth it.  First off, let’s look at the financial side of things.  In order to do that we need to begin with a couple of rules of thumb:

1.  First off, calculating a payment can be complex and I always recommend speaking with a lender, but an easy way to start is to think that for every percentage point of interest rate you have, your monthly payment is equal to $100 times that for every $100,000 you finance.  In other words, let’s say you’re financing $300,000 at 5%.  A basic payment (before HOA dues and property taxes) would be $1,500 per month (5% at $100,000 would be $500.  $500 times 3 is $1,500).  Note that this doesn’t include property taxes, which in San Diego County are about 1.25% of the purchase price or any HOA.  Also, without getting too technical, the monthly payment depends on the type of loan.  If you do a VA loan or an FHA loan your property taxes are built into your monthly payment in an impounds account (i.e. assuming a $300,000 purchase price with a VA loan, property taxes would be $3,750 annually at 1.25%, or an additional $312.50 per month built into the payment within an impounds account).

2.  John’s payment is heavily reliant on his down payment and financing because the qualifications are different.  If he puts 20% down and does a conventional loan a lender only needs to see his last year’s tax statement.  An FHA loan (with 3.5% down) would be the last two years and these days banks want to see an increase in income from oldest to most recent.  Again, everything we’re doing here is “rule-of-thumb” without a calculator and just to give you a basic understanding.  In order to know what you qualify for and what a payment would be, speak with a lender.

Ok, back to John.  John’s trying to figure out if it’s worth it to buy today or one year from today since the market is so wacky.  John’s biggest concern is that if he buys something today and then prices soften more, maybe he should’ve waited.  Maybe.  Think of this: if John is paying $1,500 per month, in order to save money for next year the market needs to drop by $18,000 ($1,500 rent per month times 12 months).  That may not mean much at the $400,000 and $500,000 level but if John likes his payment around $1,500 per month, he’s probably looking in the $250,000 – $300,000 house area.  An $18,000 drop would be a drop of 7.2% drop (at $250,000).

Another major benefit to home ownership is the tax break.  Owning a house and paying a mortgage gives you the opportunity to  write off all your mortgage interest and property taxes.  Consult a CPA to know exactly what you can write off.  With the money saved in taxes, a $1,700 payment really becomes at least a $1,500 payment.

Making the jump to buy a home is a big step.  It means you are making a commitment to pay on a house for (usually) the next 30 years.  It means that you are established enough to feel like this will be home for at least the next couple of years, or that you can rent it out.  It means you are willing to take on the challenges of home ownership (i.e. plumbing breaks, roof leaks, etc) without the help of a management company or a landlord to call.  But here’s the kicker, after all the tax benefits and assuming he can find something he likes in his price range, John can actually save money by buying right now as compared with waiting until next year.

There’s no question our market is in uncertain times.  But if John knows that he will be staying in the house for at least the next 5 years, market signs are very strong that purchasing right now is a smart decision.  Based on the numbers above, if John is looking in the $250,000 house range, the market would need to drop 10% in the next year for him to break even.  Any drop less than that means he’s actually making (or saving) money.

If you have questions about it, please feel free to contact me.

What is a Short Sale?

In certain qualified cases, where a homeowner owes more on their home than what it is worth today, a lender may allow the homeowner to sell the property for less than the mortgage balance and accept a short sale.  A short sale allows the homeowner to sell their home to a buyer thereby avoiding a lengthy foreclosure process that can be damaging to credit and future ability to purchase real estate.  To qualify for a short sale as a homeowner you must meet three simple requirements: 1) you must have a financial hardship or a verifiable reason why you’re unable to pay your mortgage payment 2) you must insolvency, or in the eyes of the bank you must not have the cash or assets to pay off your mortgage balance and 3) you must have a monthly shortfall or verifiable financials that show that each month you can’t afford all of your monthly payment obligations including your mortgage.  If you meet these three requirements it is very possible that with the right Realtor you will be able to negotiate a short sale.

I often get questions about the timelines of short sales.  From start to finish how long does the process take?  That’s unfortunately hard to say.  It depends on many different factors.  Let’s take a hypothetical example to help illustrate this:

Let’s say John buys a house in 2005 for $500,000.  When he buys it in 2005, he does an interest only loan with a 1st trust deed (loan) with Wells Fargo for $400,000 and a 2nd trust deed with Chase for $100,000.  He does this because by staying under the $417,000 loan limits at the time he buys he allows himself to get the best interest rate at the time.

Then, the market tanks.

Today, John’s house is worth $200,000 and he just lost his job with the recession.  John needs to short sale his house.  In a normal transaction, if John were to sell his house at $200,000 today he would owe $200,000 to Wells Fargo (1st Trust Deed) and $100,000 to Chase (2nd Trust Deed).  NOTE: Obviously, John has been making payments since 2005 in this example so those numbers will be slightly less depending on the type of loans he got in 2005, how much he pays monthly and if he pays over his mortgage payment towards prinipal, etc etc, but for ease of numbers let’s leave those numbers as they are.  In a short sale, John needs to prove a hardship and prove that something bad happened (i.e. his job loss) which makes it impossible to continue making the payment.  A market change isn’t an acceptable answer.  Now, he calls up his favorite Realtor (read: steveploetzhomes.com) and begins the process of short selling his house.

A few important things to know:

1) The short sale process doesn’t begin until there is a qualified, ready-willing-and-able buyer who has submitted an offer.  Only then will the bank begin the process.  From there, they will start by going getting a “short sale package” from the listing agent complete with John’s financials, job history, etc in order to prove that there is a hardship and that he isn’t able to afford the payment.

2) Because the process doesn’t start until there is an offer, many listing agents will under price the house in order to get it going.  For example, John’s Realtor may list the house for $170,000 in order to get offers submitted.  Once these offers are submitted the property is held in “Contingent” status.  Short sales from start to finish can take anywhere from 3-12 months and therefore most Realtors don’t count on the original buyer to stick around.  (Usually after several months, that buyer finds another house and buys it)  But, the Realtor doesn’t let the bank know the buyer is gone.  The bank looks at the offer and counters the buyer (3-12 months later) with an offer of $205,000.  Now, the buyer is gone but the listing agent puts the house back on the market (from “Contingent” back to “Active”) and increases the price to $205,000 in the MLS with “APPROVED Short Sale” in the remarks.

3) Short sales are similar to bank owned foreclosures (or REOs) in that usually the bank will not pay for repairs (including any and all termite damage repairs) and sell it “As Is”.  The advantage is that you can get property at a discount (sometimes), the disadvantage is that you can go in blind sometimes.

Short sales are complex and there are many moving parts.  I recommend you contact me with any questions and I can help you through the buying and selling side.

WELCOME!

Hello, and welcome to StevePloetzHomes.com.  This is a site dedicated to the education and improvement of your understanding of the local San Diego real estate market.  Every day I will blog about some different segment of the real estate world as we know it from finding the best deal in new construction to learning the difference between short sale properties and bank owned REOs, to selling your home for top dollar.  I want you to view this website as a source of information and I want you to always feel free to ask questions or provide me with specific topics you’d like to see my professional opinion on.  Please enjoy it and always feel free to contact me directly.