You’re wrong if you think this about appraisals

But my house appraised for $________.

Should I get my house appraised before we list it?

I hear this a lot. People seem to think that the appraiser determines the value of a property.

They do not.

Buyers and sellers determine the value.

An appraisal can happen for a lot of reasons. Most of the time they are done for a buyer’s lender. Lenders want to make sure the house is worth at least the purchase price since they will be on the hook should the buyer default. Those types of appraisals are more about justifying the sale price. Market value was already determined when the buyer and seller agreed on a price.

Other reasons a house might get appraised are for refinancing, divorces, bankruptcies, home equity lines of credit, etc. On those types, there is not a purchase involved so the appraisal is really just a professional guess at what the market value might be. An appraiser does not determine market value. The appraiser is not buying the house so they are not looking at it the same way a buyer would. They do not care about the color of the walls, if the kitchen is outdated. They just care about if it is in average condition or not. Ever see a listing that said “Priced below recent appraisal!” That tells you that the market did not agree with the appraisers assessment of value.

Last year I sold a house that I had renovated to rent. I was approached by a realtor with a client who wanted it. I decided to sell. We all agreed on a sale price of $205k. Well, the appraisal come back at $186k. The reason is because it was a split level house. An appraiser can only use a split foyer or split level house for sales comparisons on the appraisal report. Of the 40+ recent sales in that neighborhood, there were 4 that were split foyers or split levels, and all were terrible compared to my house. I get it, the appraiser’s hands were tied. Still though, the comps of similar square footage houses in similarly upgraded condition pointed to a value in the lower $200s, which was what I had a ready, willing and able buyer prepared to pay. Bummer.

A little off the subject, but realtors are really better at determining market value. We do pretty much the same thing appraisers do only we know the market a little better than appraisers. I am not at all trying to discredit appraisers here. It’s just we are the ones that go in houses with buyers and know how they will respond to things like barn doors, farmhouse sinks, 80s wall paper, the neighbor who leaves 4 dogs in a kennel all day, and how much natural light a house gets. We have experience with buyers and sellers leading up to signing a contract……still though, when we are called to list a house, it is still a professional guess at market value. Then the appraiser comes in afterwards more as a system of checks and balances to make sure the lender feels good about lending money on the house.

So, now you know that the appraiser doe not determine market value. Market value is like that old saying “Something is worth what somebody is willing to pay for it.” Realtors and appraisers use data to predict what market value should be but we do not decide what market value will be.

Why I knew this house would come back on the market

I showed a house a couple of weeks ago.  It was a great house in a desirable location.  The price was sort of low for the neighborhood due to it being a bit outdated and having some expensive deferred maintenance items.

I told my people I thought it would need a new roof soon, that the disclosure said the HVAC units were original and we could clearly see the wood rotting on the windows.  I also told them that I didn’t think it was that good of a deal.  By the time you got all that addressed, you would have in it what a better one on the street was worth.  That’s just not worth it unless the property has some unique feature such as a fantastic lot or the perfect floor plan.

I gave all this feedback to the listing agent to help him out.  Within an hour or so, I saw that the house had sold.

I remember thinking to myself “I bet it will come back on the market after the home inspection.”  Sure enough, it came back on the market.

It is easy for most buyers to fall in love with a house only to be heartbroken by the end of the home inspection.   Most buyers don’t know how long a roof lasts, how long HVAC units usually last, how much windows will cost.  A lot of realtors out there don’t think about this either.

I can see the buyer for this house walking in for the home inspection, excited to again see what they were expecting to be their new home.  They have a big smile on their face.  The inspector begins reviewing the report.  The big smile is now a grin.  The inspector keeps going.  The grin turns into a blank expression.  The inspector gets to the end of the report and the buyers now have a frown.

Then the buyer has their agent write a huge repair list that the seller refuses to do.

It all ends with the buyer looking for a much better house and the seller hoping to find another buyer.

I try to prevent this outcome for my clients.  It wastes time, money and even more so, is emotionally draining for the buyer.

I sell houses just like I drive

I drove up to Pittsburg this past week with a couple of friends to go to a track event. My first time. It was a lot of fun. Only hit 110 MPH on the straights since it was raining during our track sessions. We took mostly state highways up and due to rain, mostly interstate back.

As soon as I got back, I put a house on the market for some great people who used me to buy the house several years ago.

Having just spent 5-6 hours on the road, selling their house made me think about what it is like driving through traffic. Not that it was at all frustrating or any of the negatives you typically associate with traffic. I mean the whole watching all the cars around you, seeing when you can get around somebody, knowing which lane is moving better…..that type of thing.

Real estate is a lot like that these days where you can expect multiple offers. You’ve got all these moving parts around you and you have to make quick decisions and take advantage of every opportunity. It is always changing, just like all the cars around you on the road as every other driver is doing the same thing.

We put the house on the market for TOP dollar. Neither the sellers nor I really expected to get half a million dollars for the house, but like moving through traffic, we took advantage of the openings we had to get where we wanted to be.

We immediately got 3 showings. One agent never gave feedback and didn’t say his buyer’s had any interest. Lots of times getting no feedback is the feedback. They were the stopped car on the shoulder of the road. They were out.

We had another agent who had an out of town buyer. This agent called me and said her people wanted to write an offer sight unseen. Now, I really had no intention of negotiating this offer unless it was going to be the only one we got. A buyer making an offer sight unseen is like passing a semi truck right before a blind turn. Too much could go wrong. My goal was just to get it and use it to motivate other buyer’s to act quick and bid high.

Then about an hour later I got a call from another agent who asked if we had any offers. I was more than happy to tell her that another agent had just told me she was going to make an offer. That put this agent in high gear as she wanted to zoom around the other buyer and get the house for her clients. Normally when there are two offers, the default is to get in the fast lane with at least a full price offer.

We sold it for full price. I never got the other offer. That buyer ended up being like that car in your rear view mirror that slowly fades away in the distance never to be seen again. Without that buyer though, I doubt we would have gotten such a great offer…..so thank you to that agent who cruised with us for a little bit.

What’s that gonna do to my property value?

It’s a questions I get asked often, so I thought I would share some examples about what affects property value and what doesn’t….most of these have been asked by friends and clients, for which I am thankful they deemed me to be enough of an expert to ask!

“The golf course behind my house went bankrupt and I’m worried about it getting developed”

I got this one a lot since I lived in such a neighborhood where this happened. People that lived on the course were worried that their values would drop if there wasn’t a golf course behind them. If the land got developed to be single family homes that were priced about the same as the rest of the neighborhood, it would not impact value. Sure, if it was your house you would know the view you used to have, but to the person buying your house, all they know is that there are houses behind your house just like most of the rest of the neighborhood. (BTW, when this happened in my former neighborhood, there was no value difference for the lot. Houses of similar size and similar condition were selling for the same regardless of whether the house sat on the course or backed to other houses in the neighborhood.)

“The city is taking part of my lot for storm sewer runoff.”

This friend of mine lives in a historic neighborhood where all the houses on his street have large, deep lots. He showed me where the city was going to install underground drains and described what it would look like. It wasn’t going to be ugly. Fortunately his lot was big enough that his backyard was still huge by today’s standards. I said it wouldn’t impact value at all since there was still plenty enough backyard for future buyers to have room for kids to play, a pool, etc. It was functionally the same before and after.

“My neighborhood got redistricted to another school”

This one happens a lot. If the school you are losing performs equal to the new one you are getting, then it won’t impact value. If you are going from one of the highest performing schools to a lower performing school, well, that isn’t so good. If you are going from a poorly performing school to a better one, your values could go up!

“They are going to build apartments in my neighborhood.”

This seems to be happening a lot. Density in Lexington is only going to get worse as we attempt to fill every square foot inside the urban service area before entertaining the idea of expanding it. People in Lexington are used to this. While the increase in traffic in your neighborhood will be annoying compared to what it used to be, future buyers won’t know how good you used to have it. Plus, people in Lexington are used to traffic. Unless your house backs up directly to the new apartments or you are on the road that everybody living in the apartments will use, it won’t impact value.

I think when it is YOUR house, it is easy to think any change will be negative. You will remember backing to the golf course, when you used to have a bigger backyard, the school your kids went to and what that vacant field looked like before it became apartments. The thing to remember is that when you go to sell your house, the buyer has no idea how things were. They only know how things are now. A prime example of this in my own house is noise. When I moved here, there was a lot of undeveloped land around me. It was very quiet. With all the new development around me came things like hearing fire trucks or ambulances, dogs barking in the distance, the sound of kids playing. I miss the peace and quiet but you know what? All the changes are things most people see as being normal in any neighborhood, so it doesn’t hurt my value one bit.

Worried about the real estate market crashing? This will help

We are living in the first tough economy since the Great Recession. Naturally there are people that worry about the real estate market crashing again. The memory of half the houses on any street being for sale and owing more on your house than it is worth is all too fresh.

While I don’t see any need to be concerned about that happening again, I got to thinking about what that would look like if it were to happen.

Let’s look at a huge difference between 2005 and today. Both are times when the real estate market was on fire.

Back in 2005, the interest rates I was seeing were around 5.5%. The market was good. Values were high. Then when the 2006 season kicked off, it wasn’t as good. The following years until 2012 got worse and worse. Fewer buyers. More sellers. More foreclosures. Unlike stocks, real estate values usually rise gradually and fall even more gradually. Short of a landfill being built behind your house, you are not going to wake up one day and find your house is worth 20% less than it was the day prior. Remember this because I will bring it up later.

That person who paid $300k for a house in 2005. Let’s say they did a 30 year mortgage at 5.5%. One year into their mortgage, they owed about $296k still. After five years, they still owed about $277,500. This is why many of them had to BRING money to a closing when they needed to move in 2010. Back then, one of the first things you would ask a potential seller was “How much do you owe on it?” Many were upside down on their houses, which is why many chose to walk away and let the house get foreclosed.

Today, a buyer can get a 2.875% interest rate for the same $300k house. That is just over half what it was 15 years ago. After one year, they owe about $293,500. After five years, they owe around $266k.

Okay, now it’s time to remember I said real estate values, when they drop, don’t drop fast. It took about 5 years for values in the Lexington area to drop about 15% from the 2005 peak values. Some houses didn’t even loose that much. Picking a good house with a good floor plan, on a good lot, in a desirable neighborhood for the price range and with average or better performing schools is the best way to protect yourself from a bad market. If you look at the math on today’s buyer getting a super low interest rate, you will see that in five years, they have paid off about 12% of their balance. If they get a couple years of appreciation before a decline, the numbers are even better!

I know I got a little nerdy there with the math. Sorry. In the end, my point is that should the market crash again, today’s buyer is going to be in much much much better shape due to low interest rates. If the value of your house drops at the same rate that you are paying down your mortgage, then the worst thing that can happen is you just aren’t building equity in the house. It’s effectively like you’ve been renting where you pay to live there and walk away with nothing when you sell…..and this is the worst case scenario. The best case scenario is that the market stays good and you build a ton of equity. I just don’t see much risk in buying a house right now thanks to low rates.