All Forum Posts by: Brad S.

I created a couple of charts/matrices to illustrate the affect that rapid rise in interest rates had on monthly payments, which in turn affects affordability. I'm guessing many BP visitors don't raalize the real differences, but they are sobering when you see actual #'s Mortgage rate data from FRED Economic Data (St Louis Fed).

As of Jan 6, 2022, the average 30yr fixed mtg rate = 3.22%, and rose to 6.48%, as of jan 6, 2022, 1 year later.

Rounding the rates to 3.25% and 6.5%, respectively, and using $100k loan amount, calculates to a payment of:

$435.21 as of Jan 6, 2022
vs
$632.07 as of Jan 5, 2023

That's a 45% increase in payment or a 31% decrease in borrowing power ($100k loan amt payment @ 3.25% = $68,854 loan amt pmt @ 6.5%)
Note: the above #'s are not reflected in my charts, since the charts start at 3%.

One assumption I have is that some of the price rise in the past couple of years, is due to unsupported demand fueled by the unusually low past rates. And that those prices did not reflect a true value of many properties, in a normalized market. And the market will take some time to stabilize to within typical affordability bounds. Not necessarily a crash, but a slowdown of increases and probably price declines in some markets. There are other factors involved of course.

Thoughts?

Yes, he was talking about "real" prices, inflation-adjusted. 

I agree that I don't think we are looking at a "crash" necessarily and we definitely don't have the same issues as we did in 2008, but I do think that many people on here don't fully realize the affordability that rising rates have. I put that chart up since I don't think most people understand the drastic affect the rapid interest rate rise has had on the monthly payments and affordability. Of course, I am sure that also contributed to general inflation with many borrowers being able to cashout, while still lowering the previous rate. It was cheap money for them to spend.

And affordability is the main driver for prices. Affordability puts a cap on prices in a specific market and some mitigating factors which assist to dictate the speed of price changes are inventory, jobs, and income. I agree that supply is and probably will remain somewhat muted, due to many unwilling to get out of their extraordinary low rate mtg. But, unemployment changes could affect things and the Fed's actions are usually a step or so behind and may take some time to have an affect.

I have used these forms for transactions in the past. They are California based. I believe they are free now, although they used to charge.

https://journal.firsttuesday.u...

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That is similar to one of the first things I was taught when I started my appraiser training, many years ago. Basically, "let the market tell you what the value is, not the other way around." An analogy being, people might assume a 4 bed house is worth more than a 3 bed house the same size, but they didn't bother looking at the data which reflects that buyers want larger bedrooms, or houses with pools, when buyers have infants and don't want the liability of a pool, etc.

Where are you getting your rental data that you are plugging into your software?

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Well, I think I have a different angle than all the previous replies.

My first reaction is ...if you aren't relatively confident in your estimated value (ARV-After Repaired Value) and what your plans are with the property, then I would question your choice to take on the risk of this deal. But, I see that you are new to real estate, so I understand the concerns. And, I don't mean any of that as a negative in any way.

Bottomline is NO, I wouldn't bother with an appraisal. If you are unsure of value, then I do like the other suggestions of getting an Agent/Broker BPO/CMA instead. I would find 1 or more "good," very active Realtors in the area to help you with that. They are the ones that know more of the nuts and bolts of what is happening in the local market, at "street level". They are more in tune with the trends and pre-trends of markets. Not all of them, but the ones that are active in a particular market, that's why I stated find "active" Realtors. Also, if they are in a larger office, they typically have access to more market data and they hear the other Agents experiences in the market, thereby leveraging on their company affiliations.

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A few more thoughts ....brain dribbles.

As a Certified Licensed Appraiser for decades, I do take it for granted that I am very comfortable with valuing and looking at data. But, I originally started with that pursuit because I thought that was one of, if not the most important part of the process. Afterall, if you are far off on your value assessment than your good deal, becomes marginal or a struggle to stay in the positive. I do think that valuation is often somewhat overlooked by the beginning to intermediate investor. A good, active investor in a specific market will tell me what is happening in a market, probably more than I could tell them.

Sometimes, it not about being right or even accurate at times, but it is about properly assessing the risks, or "bonuses, of a specific deal. I have gone into deals where I couldn't confidently estimate an ARV, but I had an idea of where the potential risks (or bonuses) could be. And that helped to mitigate those risks in some deals and assisted in bonuses in others. I have lost money on deals, but those were due to construction issues (stories for another time), not to my risk assessment.

Another thing is that Appraisers are generally looking backwards to give an estimate of today's value. We are looking at yesterday's sales and maybe some actives and pending sales, but generally we are looking at the "proof" of value of those properties that have already closed escrow. You should be more concerned with what the property is going to be worth, at the time of your exit. So, if your "exit" is to cash out refinance after a rehab, than you want to value it as if already rehabbed, and market trends may change also, etc.

Also, as an appraiser, you can't pay me enough to care about assessing your deal, as much as you care. In other words, if you want to be a good investor, learn to be your own "appraiser." 

Also, when you go to refinance later, it is the "luck of the draw" when you get an appraiser assigned to your deal. So, the value you get today, won't have a bearing on the value you get after rehab and at the time you go to refi. In the past, I have had some bad appraisals on my deals and my own house, and being an appraiser, myself, did not help much in those situations. But, understanding the process PRIOR to my acquiring a deal, has helped understand the potential for those issues on a particular deal.

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@V.G Jason  My first response to the OP was going to be the word "Nothing," but then you beat me to it. :P

@David Ogas I think you are smart to realize that there are those liabilities, risks, and potential limits in this business. In my experience, within many of these forums and podcasts/blogs, there is a tendency to understate that portion of the business, or the fact that this is a business, for that matter. Generally though, it's a matter of managing those liabilities (mortgages, etc), in order to utilize reasonable leverage to acquire assets that will, hopefully, propel you toward your goals.

I'll give you the short version. The idea is that the rents will cover the expenses (mortgage, taxes, ins, capx, etc) and either have left over cash flow (net cashflow), or cover all or most of the expenses on a property with good appreciation potential. Some people are focused on cash flow properties, others are focused on appreciation potential, and some with both. If you have multiple properties providing good cash flow, they can help offset other properties with low or negative cash flow, but that may have better appreciation potential. And all the while tenants are paying for your mortgages/debt (including principal paydown), you are getting depreciation benefits to help offset other income, you benefit from leveraged appreciation (hopefully), and have other benefits with real estate investing not available elsewhere (1031 exchanges, lower taxes on passive income, etc).

So, hopefully after some appreciation, your balance sheet is swignificantly more positive, due to some of the houses appreciating. This will hopefully dwarf the mortgage balances and give you options. Like, you can sell some of your better appreciating properties and pay taxes and then pay down some other properties you own, to reduce or eliminate your mortgages.

So, yes, to your point, you do take on liabilities and responsbilities which can get you in trouble, but may also hugely benefit you, if managed properly. You can also choose to some short term "flips" and buy rentals with more or all cash, to reduce your liabilites and risk, but then you don't get the benefit of leverage. In my opinion the risks do seem to be missed or underplayed often.

I would do as @Dan H. says. If San Diego is anything like Los Angeles, then there are a lot of unpermitted structures/conversions, as well as legally nonconforming ones. From what you said, the property is nonconforming (meaning it doesn't conform to the current zoning code), but you should check to see if it is legally nonconforming.  Legally nonconforming would mean it was built or converted legally, at the time, and the zoning originated or was changed after. Therefore, it was legal when it was done, but would not be legal if done now, based on current zoning.

Per your specific question, NO, the fact that SB9 was just enacted, does not automatically "legalize" the property. You would have to apply for permits from the city specifically under SB9, or you could get it legalized as an ADU. There was some type of amnesty when the ADU ordinances were first introduced, but I am not sure how they would handle a nonconforming ADU now. Check with the city, as Dan said.

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I assumed you were talking about residential. Commercial is a different animal although, the appraisal process does parallel residential in many aspects. Like, Lenders will typically not allow someone in the transaction to influence who the appraiser is, although, I don't believe it is specifically against any laws, as it is with federally related transactions.

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Hey Carlos, That wasn't my response. that was from John. 

Basically, you can't "influence" the appraiser and no lender will accept an appraisal ordered from someone involved in the transaction.