David's Blog

Migration & Real Estate

David Hintz - AZAppraiser (Accurate Appraisals & Consulting of AZ) — Wed, 06 Feb 2008 20:51:44 -0600

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, AZ 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 it 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.

Historical Properties

David Hintz - AZAppraiser (Accurate Appraisals & Consulting of AZ) — Mon, 14 Jan 2008 17:43:05 -0600

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.

Lost Another Client

David Hintz - AZAppraiser (Accurate Appraisals & Consulting of AZ) — Sun, 23 Dec 2007 14:52:30 -0600

I did an appraisal recently on a new build in a new subdivision. The buyers (one R/E Agent and one L.O.) that I have received business from (sporaticly) over the past 2 years, had the LO's company order an appraisal on the house they were buying. Rush order, needed to close before Xmas.

My research found 5 good comps in the market area less than 1 mile from the subject within the past two months. Also found 3 active and 1 pending good comps in the same area. Delivered my report with the value I determined, everyone was happy!

The next day I get the email the from lender and calls from borrowers! They need (lender words) a minor detail change. It seems the buyers will need to come up with an additional 5% down. Why? Because the box for declining market was checked instead of stable. Needs to be changed and all graphs included in the report removed.

My reply - Can't do that. My research data (documented in my work file - data, spreadsheets, graphs) and analysis of the market conditions of the subject's market area and surrounding area (for the past 12 months each), and city (for the past 7 years) all indicate and support a declining market conclusion. Doing so would result in a misleading report and a violation of regulations.

Lender says they can't use the report. One borrower crying, screeming, and cussing me out over the phone for ruining their Christmas - the other borrower claiming they recently closed two deals where the appraisals showed a stable market, by two other appraisers, and if I won't change the report, they will get one of the other appraisers "who will do it right" and not do business with me in the future!

With all the dramatic changes in the Real Estate Market during 2007, it is still common practice for the appraiser to be blamed by everyone when a deal falls thru. Either by loosing clients and business, being black listed or added to a "Do Not Use List", having complaints filed against them, or threated with lawsuits by everyone and their brother, it is quite clear that others in the real estate industry still do not understand the role of the appraiser. While there are many unethical appraisers, who disregard regulations and requirements, providing service to others in the industry that seek them out as "team players", it is the Ethical Appraisers who are being deminished. So I am providing this information (without going into too much depth) to enlighten those of what is required and expected of a real estate appraiser.

Appraisers have regulations that they are suppose to abide by to retain their license. Lenders have some also.
In addition to USPAP - Uniform Standards or Professional Appraisal Practice (which has changes going into effect Jan 1, 2008), appraisers are expected to follow and meet FannieMae requirements and FreddieMac requirements also, which is to the benefit of Lenders when selling the mortgage loans.

FannieMae issued amended guidelines, earlier this year, for Lenders and Appraisers regarding Collateral Valuation Practices and Declining Markets. I'm sure everyone is or should be aware of. Here is part of it.

Reiteration of Appraisal Guidelines
As stated in Part XI of the Selling Guide, lenders are ultimately responsible for the accuracy of both the appraisal and its assessment of the marketability of the property. In addition, both the lender and the appraiser have certain responsibilities related to the valuation, as reiterated below.

Lender Responsibilities
The lender has the sole responsibility for managing the appraiser relationship and general activities of the appraiser it selects. As such, the lender should verify that the appraiser provides an accurate, independent, and adequately supported opinion of the value and property description, and has considered available public and non-public information concerning local trends in home prices.
At a minimum, the lender is expected to:
· Review the appraisal report to ensure consistency with our appraisal standards, analyze the property based on the appraisal, and evaluate the property's acceptability as security for the requested mortgage loan in view of its market value and marketability.

· Ensure that the appraiser analyzes listings and contract sales, if available, along with the most recent closed or settled sales. If the lender determines that the appraisal does not accurately reflect the current market conditions, the lender is expected to request additional clarification or justification from the appraiser, as necessary, to make an informed decision about the property value.

· Have appropriate business controls in place to ensure that no actions are taken by its employees, agents, or third-party originators that may compromise the accuracy of the appraisal report. Such controls may include separating the appraisal ordering process, if possible, from those who have a financial interest, both internal and external, in the transaction. It is unacceptable for a lender's employee, agent, or third-party originator to apply pressure or unduly influence the appraiser to reflect certain results in his/her analysis or reporting. Any identified instances of appraiser pressure will cause the mortgage loan to be subject to immediate repurchase by the lender. (I have to interject here - This can also occur when an appraiser does not get paid for the service provided.)

Appraiser Responsibilities
The appraiser's role is to provide the lender with an accurate and adequately supported opinion of value and an accurate description of the property. We expect the appraiser to accurately report on the primary indicators of market conditions in a given neighborhood whether increasing, stable, or declining.
At a minimum, the appraiser is expected to:

· Use the most recent and similar comparable sales available as part of the sales comparison approach. Because excessive sales concessions can artificially inflate the sales price of a property, particular attention should be given to unusual sales or financing concessions in markets experiencing:

              o Declining property values,
              o An over-supply of properties, or
              o Marketing times in excess of six months.

· Provide an objective assessment of the primary indicators of market conditions in a given neighborhood whether they are increasing, stable, or declining. For example, when indicators such as price changes, supply and demand, and market activity reflect a decline in property values, an over-supply of homes, and/or marketing times in excess of six months, Fannie Mae expects that the appraiser has considered these factors as part of his or her analysis, and accurately reflects this information in the appraisal report.

· Describe the reasons for these trends and indicate what, if any, impacts these trends have on the opinion of the market value for the subject property. It is unacceptable for the appraiser to ignore these issues and not report the factual property value trends and market conditions.

• Research and/or review available information regarding the home price trends of the market in question.

FreddieMac issured a bullitin in November 2007 - Here is part of it.

DECLINING MARKETS

Lending Practices in Declining Markets

Many areas of the country are experiencing significant and on-going property value depreciation. While the decline in average home prices is widespread, the amount of the decline varies and may be significantly worse than the national average in some areas. In light of these market conditions, we are reinforcing our appraisal standards and underwriting expectations related to maximum financing in declining markets.

Appraiser responsibilities when performing an appraisal

The purpose of an appraisal is to provide the Seller with an accurate and adequately supported opinion of value, based on our definition of market value. Appraisers must determine whether the property they are appraising is located in an increasing, stable or declining market. In reporting the property-value trends, appraisers certify that they have performed an objective and complete analysis of quantifiable data supporting their conclusion. Appraisers must support their conclusions by providing relevant information relating to the property-value trends, demand/supply and marketing time.

Appraisers must also provide a description of the prevalence and impact of financing assistance, e.g. concessions, gifts, or down payment assistance, paid on behalf of a Borrower as well as the assistance generally available in the market. They must also research and comment on the days-on-market, including expired listings of the subject and comparables, as well as list-to-sale price ratios, and the availability of financing. The opinions of value must reflect the value and marketability of the property without concession.

Seller responsibilities for appraisals

While it is an appraiser's responsibility to indicate the property-value trends in the market in which subject properties are located, Freddie Mac expects Sellers to be aware of market trends in their lending areas. We hold the Seller accountable for the quality, integrity and accuracy of the appraisal.

Among other things, Sellers are responsible for:

� Selection of an appraiser qualified to perform an appraisal of the subject property, without attempting to influence the appraiser's results;

� Providing the appraiser with the sales contract and other information available about the subject property and transaction, including any funds paid on behalf of the Borrower, whether or not the funds are considered an interested-party contribution subject to contribution limits

� Properly underwriting the appraisal to ensure that the appraiser's opinion of value meets the definition of ‘market value', and that the appraisal is accurate and fully supported

Sellers are reminded that appraisals must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), applicable Advisory Opinions, laws and regulations, and Freddie Mac requirements.

Cost To Cure Adjustment

David Hintz - AZAppraiser (Accurate Appraisals & Consulting of AZ) — Wed, 21 Nov 2007 12:17:51 -0600

In my service area, where there are older homes, it has been common for a property owners to construct an addition to the basic home. Such as a room addition on the back, or converting a garage/carport into an additional bedroom/den/family room/etc. It's also common for some previous or current property owners not to obtain a building permit for some additions.

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

Realtors/Agents will include these types of additions in their listings as a selling point, or amenity of the property, to entice buyers. Some will also include the square footage of the addition(s) with the recorded (original) square footage amount in their listings. By doing this, any search of comparables can be inaccurate due to the incorrect square footage stated in the active, pending, or sold listing.

By including the square footage of the addition in the GLA, the appraiser is certifing the addition coplies with and meets local building codes and is structurall safe and sound, and can be held liable if anything should occur to indicate or prove otherwise (such as a fire, roof problems, foundation problems, etc).

A comment should be made in the appraisal report noting the type and quality of construction of the addition, and pictures of the inside and outside should also be included in the report. This is when a "Cost to Cure" adjustment may be necessary.

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 "Fixer Upper" or a property with "Additions".

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, up to $1,000. If the addition involves structure changes, I would not make an adjustment in the report. If the client or underwriter/reviewer requests or questions it, then I would have the client hire a licensed contractor (since I am not an expert in this field) to provide an estimate of cost to them, and when I receive the estimate from them I would revise the report to include an adjustment.

Don’t Forget List-To-Sale Price Ratio !

David Hintz - AZAppraiser (Accurate Appraisals & Consulting of AZ) — Thu, 15 Nov 2007 21:50:56 -0600

We all know appraisals are being scrutinized more these days than in the past by 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 is 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 - supply and demand - concessions - sale dates and proximity of comparables - marketing 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. 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.

List-To-Sale Price Ratio, sometimes referred to as Sale Price Ratio, 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 past willingness to negotiate and by how much.

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, by getting the property sold at or closer to the listing price. For appraisals, I calculate the average in the subject's market area and include the results in my comments.

Appraisals and Absorption Rate

David Hintz - AZAppraiser (Accurate Appraisals & Consulting of AZ) — Wed, 14 Nov 2007 10:32:56 -0600

There have been numerous Blogs, Posts, Comments for Realtors, Agents, and others about the use and formula(s) associated with Absorption Rate, but nothing addressing this topic specifically for its use by Appraisers. I am not an active blogger, but decided to contribute my views on the topic.

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 (sold) by the market.

Realtors and Agents are probably the ones that use Absorption Rate the most 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.

The Absorption Rate is the best indication (for appraisers) of market conditions and performance. Which is especially helpful in accurately determining the Housing Trends on the URAR (Uniform Residential Appraisal Report) or GPAR (General Purpose Appraisal Report) and which boxes to check for -- Property Values (Increasing, Stable, Declining) -- Demand/Supply (Shortage, In Balance, Over Supply) -- Marketing Time (Under 3 months, 3-6 months, Over 6 months), also the Exposure/Marketing Time on the FUA - FIRREA/USPAP Addendum. While most will use DOM (Days On Market), Active and Sold Comparables (for the past 12 months) in the subject neighborhood, which is required to included in the appraisal report, they will not take the extra step to calculate the absorption rate with the information at hand and include comments. 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, Commercial, Land, etc). FIRST - Divide the number of homes sold in one year by 12 (to determine the number of homes sold in one month). SECOND - Divide the 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 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. 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 and possible Foreclosures, REOs, and New Construction. The most common use would be for Property Specific - similar to the subject property, as searching for comparables. 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 combination thereof. With the use of spreadsheets (such as Excel) a Graph or Chart can be created for a more visual explanation.

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

David Hintz - AZAppraiser (Accurate Appraisals & Consulting of AZ) — Sun, 10 Jun 2007 17:00:40 -0500

Recently I was contacted by an Underwriter about a comment made on a report I did. 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 a subject property's market area. More specifically, a southwestern phenomenon known as Fissures. They can start as a small little ripple in the desert crust and with a little bit of rain can trigger an earth fissure to tear open a crack large enough to swallow a car or part of a house, and can damage foundations, driveways, and other structures.

Fissures are cracks in the ground that develop when groundwater is pumped 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 desert and there's no one living on it, it's not a problem. It's when you build roads, homes, electrical lines and pipelines near them where you have the risk of them opening to 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.

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, is also home to three-fourths of the state's known fissures.

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 fissures. Also, my research of the comparables 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.

Just another reason why appraisers need a copy of the complete sales contract for the report and why realtors need to include necessary information in their listings.

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 also, but perhaps not for the same reasons.

The Arizona Geological Survey is undertaking a task to map all known fissures and fissure areas in the State of Arizona. According to Michael Conway, Ph.D., Section Chief, Arizona Geological Survey, Tucson, mapping of 22 priority areas throughout Cochise, Maricopa, Pima, and Pinal Counties in Arizona will take about 3 to 5 years. 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).

Mortgage Brokers, Lenders, 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 is 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, but I have lived in Arizona all my life (over 50 years) 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. Another recent article about the building of a "World Class Water Theme Park" in the central/east valley, which will require a tremendous amout of water, will definitely have an impact on the ground water, and increase the presence of fissures and environmental concerns which will effect real estate values.