All Forum Posts by: Brad S.

All the things Troy mentions and I'll add a little to that. The contract price can be one of the best indicators of market value for the Subject property (assuming typical terms and no major concessions). It is literally a direct reflection of market demand for that property, especially, when you have multiple offers on that property. The first part of the Definition of Market Value we use for lending purposes, is "The most probable price which a property should bring in a competitive market." Many times an actual contract price perfectly fits that part of the definition. But, as Troy says, as long as the comps reasonably support it.

I'll start with a few of my favorite quotes.

"Whether you think you can, or you think you can't ...you're right." Henry Ford

"If you argue for your limitations, they're yours" ..don't remember where I got that one.

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I am not reading any responses from anyone saying that it is "easy." But, I have read a bunch of your responses stating words like can't, don't, not, no, etc. Which seems like you discount any possiblillities before learning about them or giving them a chance, even when experienced people are offering you examples. Some better words to focus on would be "how can I."

A few more thoughts.
It sounds like you are equating money with "value." As a professional "valuator," I see that a lot. Your best opportunity to do the things you seem to want to do, is to figure out a way to bring value to others. And since you seem to be saying you don't have the money, you would do better raising your "value." This typically happens by learning more about the business and how others have already done the things you want to do, like buying a property with no money down, subject-to, at a steep discount, or ?. Basically, if you feel you don't have the resources, go find them, and I am not just talking about the money. Resources, go far beyond money, like education, information, creativity, relationships, etc. But, if you keep discounting any options so easily, then you will prove yourself correct, and all of us who HAVE done what you say can't be done, will continue to do those deals.

And as you gather more info, you may decide to approach things in a different way or in a different order. You may decide that doing a flip deal first works best, in order for you to gather more money, or finding money partners and splitting profits or cashflow. There are many reasons why people would want to do that. There are professionals that are too busy or lack the knowledge of how to best invest their money in RE that would gladly put up their money in a secure investment for a higher than market return. And there are also many reasons people sell there property at a steep discount. 

I, like many others, understand that it is not typically easy or straight forward to do what you seemingly want to do, but if it was, it would probably carry less value. I think one major problem is, that in the most recent past, it was it was too easy to make this business successful and people didn't put in the work to understand how it typically works. In other words, they added little "value." And now that we are in and going toward a different cycle some don't know how to navigate the market with their limited toolbox.

But, bottomline is if your not willing to put in the work, this business may not be for you. No need for you to be "wasting time" (your words) if it doesn't fit your ideals. Maybe you need to work through your frustration first and then decide which route/s to pursue.

I have done both. I recently did a DofD appraisal as a "drive-by" due to the house selling since the death. But we still generally use a form report with all the same exhibits (maps, photos, sketch, etc). It is done on a different form, not a report form used for lending purposes. 

So, generally, yes, it is very similar to a lending report, but it is really up to your attorney and/or CPA to decide, The report needs to hold up to IRS standards, in case of an audit. So, that is why we treat it as a typical conventional report and not a truncated one.

Hope this answers your question.

Sorry for your loss. :(

@James Hamling 

I would put a lot of weight into what James says. He has the experience and knowledge to back it up. He proposes a general, very balanced smart approach of mitigating risk while maximizing potential, with reasonable exposure. I have read many other posts talk about # of units desired, monthly $ goals, high return %'s, etc., but few consider the other "costs" associated with some strategies. Some of those costs are intangible, like time and stress of managing multiple rentals. Example: 10 rentals netting $100/mth each vs 2 rentals netting $500/mth each. And there are other real considerations. Like, If your 10 rentals appreciate moderately ($10k/each) and you decide to sell 5 of them to exchange into 1 better rental - you have to line up the timing of selling all 5 in order to exchange into 1. It's a lot easier to sell 1 well appreciated property and exchange into 1, or more, well positioned rentals. Or....those 5 properties in relatively stable markets will most likely appreciate less (if at all) then those 1-2 rentals in a growing market. Ok, I am a little off the main topic, which is Sell or No

I was in a very similar position (minus the tax exclusion potential) prior to the '08 downturn, and I chose to exchange 1 very well appreciated rental into multiple rentals in TX to preseve my gains and hopefully increase them at a reasonable pace. I am very happy I did that, especially when the local (SoCal) rental I sold, resold for ~22% less than I sold it for, about 3 years later, and my TX rentals continued to increase moderately.

And I diversified my TX purchases, between a few market areas and a couple different property types and classes. I purchased a couple in better cashflow areas, and others in better growth areas (appreciation potential). Of course looking back multiple years later, I would've rather had all of them in better growth areas. But, in either case, I was happy I tfr'd out of my SoCal rental when I did.

I did an analysis of my actual SoCal rental vs TX purchases a few months ago, and my synopsis of that analysis is: After 16 years, the TX properties I bought are worth 31% more than the SoCal rental I sold and current rents are about 33% higher (in aggregate) with the TX rentals than the SoCal rental. And that includes one bad apple in my TX portfolio.

Generally, we (CA) are at historically low affordability. This is typically when the affordability is poised to start reversing course. Affordability is a fxn of price, payment,and income, and in today's environment, it is likely prices will soften, since income is not likely to keep pace and rates don't appear to be significantly decreasing anytime soon. We don't have the same situation as 2007-08, but it is still unsustainable in the short-medium run. Not to mention the 100k's of people exiting the state! There are still areas that are growing and will have good growth potential that you can benefit from (outside of CA). And also, Moreno Valley took huge hits in the last downturn - I viewed many potential foreclosure buys there. Again, we don't have the same circumstance as the '08 downturn, but, if your value goes down 5% ($23k) or 10% ($46k) or ?, that could've been helpful in acquiring rentals somewhere else, in a better positioned market. And also, you have the fortune of tax free gains now, so you can have the advantage of not having to rush into a new deal, to preserve an exchange.

So, I think you need to look at the time horizon for your goals to help dictate the direction and moves you make today. The longer the time horizon, the more growth potential you may want. There are other factors to consider, like your income, expenses, etc. But there's too much info to pack in here. Feel free to contact me if you want to hear more about my experience.

Quote from @Eric Noble:

@Brad S. - In assessing a property's value, is it reasonable to combine value of the 'comps' and improvements ? My basis for believing this house is worth more than the next door neighbor's is founded on the swimming pool and guest house. I understand that the property is only worth what the market is willing to pay and that if I price it unreasonably, then it will sit forever. It's a diamond in the rough and I'd prefer to sell the diamond.

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I'm not exactly clear on what you mean by "combine." I'm, thinking you are asking, how are your houses' additional amenities of a pool and guest house valued, if the comps in the area do not have those same amenities?
So, I'll throw out a couple of thoughts here to hopefully shed some light on that.
The best way to value a property is to look for examples of similar recent sales (comps) with similar amenities, characteristics, and features. So, first would be to search for houses in the neighborhood (market area) that are similar in gla (gross living area - size), lot size, location, year built, bed/bath counts, # of stories, amenities (pool, guest house, etc), quality and condition, etc. Many times you can find semi-similar comps, but missing some of the amenities the Subject (your house) has, like the pool and guest house. The proper way to approach this issue is to approach it from multiple angles, some of which are:
1) Go further back in time - look for older sales of properties with similar amenities. So, an Appraiser should look at "old" sales which have similar amenities (pool, guest house, etc) and then adjust for any difference in market conditions. Simplified Example: a property sold 18 months ago for $100k with a similar pool and guest house as the Subject, and the Appraiser determines the market appreciated 10%. Then that comp would be adjusted to $110k to account for the market difference.
2) Go to other neighborhoods to find similar comps - look for sales with similar amenities in other neighborhoods (hopefully competing neighborhoods). Then, the appraiser would determine any market differences between the neighborhoods and adjust accordingly. Example: comp with pool and guest house sold in adjacent neighborhood for $100k, and appraiser determines properties in the comp neighborhood typically sell for around 10% below the Subject's neighborhood. Then the comp would be adjusted to $110k, to account for the inferior location. And if the comp sold 18 months ago, the appraiser would again, determine if a market adjustment is also necessary (see #1 above)
3) Depreciated Cost - Estimate the cost to build and then apply an estimated depreciation amount. The appraiser would use a data source to estimate the cost to build the pool or guest house and then they would estimate the depreciation of that item. The depreciation part is the tricky part. That may be based on age, condition, function, etc. Example: Appraiser uses cost estimation source to calculates the cost to build the guest house new at $100k and they further estimate the depreciation of the guest house at 30k, therefore, their final estimate would be $70k value for the guest house.

A couple of more thoughts
* The best way to estimate value of something is always "what someone is willing to pay for it."  And the best evidence of that, is a similar house with same amenities located next door that sold yesterday. But, that does not typically happen.
* If a property has atypical amenities, that may mean those amenities may not be as desirable or marginally valuable to the market or potential buyers in that area. Basically, if all the houses in the neighborhood do not have pools and the Subject property does have a pool, that may suggest the Subject pool is an over-improvement and may either be less desirable for that market, or in some cases, this can actually decrease the value of a house (not typically though). Same with a guest house, the value of the guest house may be less than the value of the main house gla. Example: main gla may have an incremental value of $100/sf and the market may value the guest house gla at $50/sf.
Note sure if that helps at all, but I am happy to attempt to answer anything else, if you like.

Quote from @Eric Noble:

@Bruce Woodruff

It would be interesting to speak with an appraiser. Several years back, while considering the value of adding a carport, I consulted an appraiser forum.

Thanks for your feedback.

 @Eric Noble

Longtime Appraiser/Broker/Investor here. What would you like to know?

I personally would revisit your strategy of buying a negative cash flow property in SoCal, right now. Unless you are buying at a significant discount, or are hacking it, or have some other value added strategy or plan. Many areas have experienced a moderate slowdown last year, and are temporarily (my opinion) stable, and seem poised to soften from the high prices we have seen in the past couple of years. We are currently at a low affordability rate, which is typically a leading indicator of slowdown and price trend change. CA, in total continues to lose 100k's of population and continues to add onerous legislation, including the state rent cap they passed a few years ago (doesn't apply to sfr's though).

I am not sure why anyone would want to jump in the deep shark infested waters right before feeding time, unless you have a clear proven strategy, or a very long time horizon. I don't mean to be negative and obviously, you are going to do what you want to do, but to put it in perspective, I bought one of my 1st properties in 1990 (at a peak), and sold at a significant loss in 1997, due to specific circumstances. I would've rather have waited a year or 3, to buy something at a steep discount and I would've seen appreciation a short time later. I don't anticipate things to be that bad this time, but the value dropped over 25% back then and we are unsustainable at the point of the affordability cycle we are at now.

You basically will be buying a monthly debt, speculating the value of the property is eventually going to go higher than you bought it for. Now, of course, you also get some principial paydown, but that may pale in comparison to an equity loss, if things do soften. I personally would look to a growing market and then exchange the money back to CA later, when things soften up. Like SW Florida, TX, TN  Some cities in those states are not necessarily the best cash flow positive, but they offer good appreciation potential. Those states are tax and landlord friendly, but not as cash flow friendly as they once were, although, you may be able to find pockets that work. 

In general, usually markets with good appreciation potential don't cash flow well and markets with good cash flow don't always appreciate as much or as fast. Simple explanation is: more people generally want to live in certain areas and are willing to pay more to live there, which increases demand. And if demand increases faster than supply in those areas, prices appreciate. And they usually don't go down as much in downturns either, because as the prices soften in those "desirable" areas, people start flocking back to buy properties in those desirable areas, as they become more affordable, which props up the demand again.

So, in thinking about your goals with real estate investing, I would take into account where you want to end up 5, 10, 15+ years from now. Envision yourself at a time in the future and your looking over your investments - Where do you want to see your investments? Do you want to look at your properties on the spreadsheet and see $100k's of appreciation or $1k's of monthly net cash flow or some combination of both, etc. And all the things that come with either. Like, if you have a lot of appreciation, you can then "play" with the money, by pulling out equity and buy more rentals or sell and 1031 exchange into different area/s or property types, or sell some properties and pay off others to increase your net cash flow, etc. Or you can look at your cash flow and decide to stop working your regular job, etc. Then you back up into today and evaluated which strategy/ies give you the best chance of getting where you want to be tomorrow.

I have invested in both cash flow and appreciation markets and if I were to start over again, I would more heavily be in the appreciation markets. That would've got me to where I wanted to be much faster and greater. And that's done by first researching areas (states, cities, etc) where population is growing, then you can delve into other metrics. 

Food for thought
Example, my 1st 2 properties cost very little to get and cash flowed, only for me to lose money one 1 and break even on the other 17 years after I purchased them. So, contrary to what many people say, real estate does not always go up over time, unless you have an unlimited time horizon.

An ADU is an accessory, it says so in the actual title (ADU - Accessory Dwelling Unit). It is not part of the gla of the main dwelling on a property and should not be included as such. Therefore, if the appraisal was done on a FNMA 1004 form for a typical financing transaction, the form will reflect the 1,900sf as the main gla of the primary dwelling unit. But, this doesn't mean the 400sf ADU was not accounted for, it is just not listed as the gla of the primary unit, since it isn't.

That said, the Appraiser should've still considered the ADU and compared the Subject property to similar recent sales with a similar ADU. I am not going to go into the details and options of what they can/should've done if no similar comps were available. I have done that in previous posts and that is off topic. So, look at the Appraisal and read the addendum comments to see how they approached the ADU valuation. In other words, the ADU should still have value in the market and the Appraiser should've addressed how they estimated it's value and where it is accounted for.

Don't get caught up in the price/sf myth. In residential valuation, that is good for general market evaluation with enough datapoints or a highly homogeneous neighborhood and market area. There are typically too many variables which directly affect specific properties and market areas. Example, the same house located beachfront has a much higher $/sf than if it were located across the street from the beach. In my market, it would literally be millions of dollars difference in total. Other variables affecting market appeal and value may be: lot size, useable lot area, available views, amenities, quality, condition, floorplan, location - busy street, culdesac, etc, and blah, blah, blah, many other variables having nothing to do with gla size.

If an appraiser is basing his valuation off mainly $/sf, I would seriously question their knowledge and skill. $/sf can be used as a very general check and balance AFTER all other variables are accounted for, but not before. And for the record, I am a longtime Appraiser/Investor/Broker

It is a common practice in my market to list the bedrooms/bathrooms/gla together, but then specify in the comments which buildings contain what. But, that doesn't change what the property is legally. For lending purposes, if the building interiors are not contiguous, then It will be appraised as a 1/1 sfr with a 1/1 adu. And a 1 bedroom home is likely rare in your area, which may cause a challenge for some lenders and appraisers, especially if the house is under a certain gla size. Many lenders won't loan on a house under 600sf, but that may be a lender specific guideline. And appraisers will have a tough time finding a similar 1 bed house to bracket the Subject for the Appraisal and lender guidelines.