All Forum Posts by: Brad S.

I'd be wary of anyone who states that prices will definitely go down, because interest rates are going up. Rates are a significant part of the equation, but not the entirety. Historically, we have had times where prices continued to rise, at the same time rates were rising. So, when people focus solely on rates, they are seeing with tunnel vision. 

Rates are important, insofar as they affect affordability. Affordability is a function of payment, prices, and financing availability (salary, personal wealth, financing availability, etc). Then there is inventory, and "wildcards," like government policy, intervention, pandemics, etc. 

Personally, I don't anticipate a crash, but a correction, or slowing of upward trends, which sometimes feels like a downturn. Kinda like when an airplane starts slowing down and puts up the flaps on the descent toward landing - it sometimes feels like the plane is stopping in mid-air waiting to fall out of the sky, when it is just slowing to a reasonable speed heading for a safe landing.

Some things leading me to this are: we have historically low inventory of available homes for sale, shortage of homes in general, some of the most secure loans since the 07-08 crash - stringent lending policies, many Homeowner with the lowest fixed rate loans in history, generally higher net worth and wealth/equity ...

Quote from @Lisa Winklepleck:

Looking for advice: Do any other property owners buy the construction materials for the contractor/handyman to save money?  Or is this not worth the hassle? 

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YES, but, it depends on the materials and the project. I don't typically buy the rough materials; plumbing, electrical, or roofing materials, etc. Like, I'm typically not going to supply the pipe, electrical wire, breakers, etc, but I may point the specific trades to supply houses that I know have better pricing. Example, a few years ago, I found an electrical supply house that had recessed LED lights for around $12 (including housing), and my electrician was paying around twice that. So, I directed him to go to that supply house and he lowered his fee, while still making his profit.

I also bought some materials online, but again, it depends on the materials and scope of the project. I even bought materials at auctions. I got an amazing deal on a bunch or wood (flooring, trim pieces, etc) from a local lumbar yard closing auction. I was able to sell a good amount of it on craigslist, to where the left over I used, ended up effectively being free.

And definitely for the finish materials. If I am doing RTA cabinets, I typically direct my installers of where to go  (usually I buy them and have them pick it up) or check out the places they typically go. Same with countertops. Many times, I introduce them to less expensive suppliers, that they continue to use after my job is completed. Example: on past rehab projects, an installer used to get their granite counters at Home Depot, paying per sf, until I introduced them to a supplier where I would get basic prefab 8-9ft pieces for $65/each. This was the basic granite many years ago, things are different now.

If I'm doing relatively small projects or repairs, then typically, no, I don't spend the time to source materials for that, but if it is a bigger rehab project, then I will do my best to efficiently shop for material deals. It is not the contractor's job to find the best deals and they typically don't have the time. But, I can often save thousands of dollars on a project, if I source them.

Quote from @Nathan Williams:

  Im getting an investment loan where the appraised rent amount must met or exceed the mortgage payment.  Long story short the first appraiser the lender used was horrible and gave a horrible appraisal amount of 30% lower than anything you can possibly get in literally anywhere in California (1 star yelp reviews across the board on how bad this guy is).  So now we are ordering up a second appraisal.  This time we want to take no chances and communicate with the appraiser before they come or when they arrive to do the appraisal.  

Any advice on how we should go about this?  We were thinking we have our agent relay some comps to the selling agent to give to the appraiser when he arrives or should we be a little more direct?

thanks 

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Ok, in order to better help, I would need to know what exactly made the appraisal "horrible,"  besides the value?  Did they use very different comps, in different market areas, much larger or smaller, in very different condition, etc, and did they ignore better more comparable recent sales in the neighborhood?

Typically, a "horrible" appraisal is due to a difference in opinion and not facts. Usually, it's because the Subject property is not typical or there is a lack of data, and the Appraiser approached the assignment in a way they thought was appropriate, even though the Borrower doesn't agree. But, there are times where they just totally "missed the ball" and overlooked better sales or did not have good support for their adjustments or opinions. But, again, without knowing specifics of the appraisal or why you think your property was "under-valued," it's a shot in the dark to try and help.

But, I'll give you some general advice. First, I should point out, I am a 25yr+ experienced Appraiser, so I have a little experience. Then, let me clear up some misconceptions. There is nothing to preclude ANYONE from speaking to the appraiser. There are NO regulations stating the mortgage broker (or anyone else) cannot have contact with the Appraiser. Generally, what the new regulations state is that anyone originating the loan, or being compensated directly by loan closing, etc, can't pick the Appraiser and no one can influence them. 

I am also not allowed to discuss my opinions or other "assignment results" with anyone other than my client, (unless given specific permission) and in a loan transaction, my client is the Lender. But, I can discuss facts. Facts being square footage of the Subject, sales comp data, general trends, etc. 

So, you don't want to come across as influencing them in any way, you just want to inform them on the "facts." You can provide them with reasonable comps and let them know why you think they are reasonable. If there are close sales that appear to be similar but aren't, you want to educate them on that. This may require you to call the agent/s involved in that transaction and get more info. Example: a similar house sold in the neighborhood for below market value and you find out from the agent, that the Seller recently transferred jobs to another state and was motivated to sell quickly, or that the house was in need of extensive repairs, etc. 

So, what "facts" about the appraisal made it "horrible?"  Why do you think your house is worth more? What factual evidence (comps which sold for more, etc) do you have to show, that back that up? That's where you want to start. But, in the end, it may be that you have a different opinion than the Appraisers. 

Hopefully, this isn't in CA, since the property tax laws just changed on inherited properties. If it is in CA, the tax basis will adjust to today, unless you live in the "homeplace". That would be a negative, if it is in CA. But, in other states you shouldn't have that concern.

Once you have the "homeplace" as a rental, you can later sell and 1031 exchange into something else, or get a DSCR loan. You may also be able to get a DSCR loan now, on the current rental. Maybe there would be enough money there to do what you want. Good luck!

Ok, we have multiple techniques to utilize when comps are scarce. Some of this gets technical - but you asked!  :P

Unfortunately, It would take to much time to go through the specific details, and also, this is why we (appraisers) exist, but here is a taste of valuation techniques we can use and maybe you also.

* Go back in time - find comps in the market area no matter how long ago they sold and analyze and assess an estimate of market condition adjustments. So, if you find a similar sale 3 years ago, determine an appreciation amount and apply that to the sale. Example - comp sold 3 years ago for $100k, you determine the local appreciation rate was 10% since that time, therefore comp gets adjusted to $110k

* Go outside the neighborhood - find comps in other neighborhoods and determine any location appeal differences and adjust accordingly. Example - you find a similar property 10 miles away, which sold recently for $100k. Your analysis shows that neighborhood has an approximate 10% greater appeal (i.e. buyers pay 10% more for houses in that neighborhood), therefore that comp would indicate a value of $90k for the Subject property.

* Depreciated cost - You estimate the cost to build the Subject and estimate the depreciation of the improvements and add those to an estimate of land value. Example - You use costing tables to estimate the Subject has a $100k replacement cost, then you estimate it has depreciated 50% (half it's useful lifespan), and therefore, has a current value of $50k for the improvements. Then you determine the lot is worth $25k and add that to the depreciated cost of the improvements ($75k) and you get $75k estimated value.

* Adjust for differences in recent sales (different type) in the neighborhood - You find recent sales (of a different type of property) in the neighborhood and adjust for their differences. Example - you find a duplex which recently sold in the neighborhood, but your Subject is an sfr. You do an analysis to estimate the value of the second unit, and subtract that from the duplex sale price. Example - Neighborhood duplex recently sells for $125k, and you determine the 2nd unit adds a $25k premium to the property. Therefore, the Subject's estimate is $125k-$25k = $100k

And the easiest ways are:
* Hire an appraiser
* Ask a Realtor familiar with the local market
* List it for sale and see what the offers are

Question: How did you estimate the value when you purchased the property?

I just realized you have a duplex and my examples were for sfr's, but the same theories apply.

Quote from @Joe Villeneuve:

So what.  Your offer shouldn't be based on the AP anyway.  Your offer should be based on the maximum offer your analysis allows within the PV that is determined from your market analysis.  If that's too low for the seller, then the property isn't a deal for you, and you should walk away to the next property.

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You only need to know a Seller's situation, insofar as to attempt to create an offer or situation which will better meet their needs (i.e. creative real estate). But, even so, you should do your underwriting/analysis to determine an offer that works for YOU and YOUR plans. When a seller receives multiple lowball offers, that may be because those offers represent the current value and the seller may have unrealistic expectations (referring to them as "lowball"). But, you don't have to take on their unrealistic expectations, unless you run a charity.

One of the most successful RE investors I know, would figure out his highest offer price and stick to it, without wavering. He developed a reputation for always throwing out his highest, and when he would buy through the same agents, they knew not to counter and became his advocates to the seller.

Bottom line - If you're trying to get a "deal," you need to decide at what price it is a "deal" to you, present it to the seller, and move on. There are too many potential deals to spend time on one, which is most likely not going anywhere.

Quote from @Nicholas Coulter:

@Bruce Woodruff Could be. From what I see here there is potential to see the market correct but rents will support the cash flow until the properties are back to where they need to be for a positive sell. I like buy and hold for the math. Over 40 years which included 08 crash California has seen over 3% annual in those years :) I wouldnt suggest anyone get into a short term hold right now but buy and holds are still working!

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I assume you are talking about average annual appreciation over that 40 yr time period. And while that may be true, that works for a 40 yr goal plan, but might not work for a shorter plan or unforeseen circumstances. It's kinda like what I tell some of my Seller clients - their house may be worth what they want it to be, but it just might take a little longer than they hope. In other words, their house value is partially a function of time and if they want to sell it soon, they should pay more attention to current sales prices, and adjust accordingly, but if they need to get a higher amount, it may take a while, even many years, so they can change their game plan or their goals.

I personally have been in 2 major real estate downturns in my area, over the past 30+ yrs. I lost money in 1 of them and purposefully outran the other one. The first one, I bought at the precipice of the market, and was forced into a position having to sell, 7 years later, for a loss (28%+ value drop in that time frame). It took me years to get whole again after that. 

I have also owned houses where both the rents and values did not rise to any significant levels over the 17 years I owned them. I sold those for a loss, after paying for repair costs to get them in condition to sell. These were my first ltr's I bought and now, I know I should've done more research prior to purchasing them. My point is, the real estate market cycles and it would be wise to adjust your underwriting to your goals and the current part of the cycle.

That said, the OP's cashflow #'s do appear to be ok, but it's not clear if they account for vacancy/collections and maintenance/repairs. I personally, would also account for property management, even if I was managing the property. It is still a cost of business and someone has to do it. I may put less emphasis on my own property management expense, but I'd still want to see it in my spreadsheet. Those #'s start looking pretty skinny after that, especially taking into account the riskiness of the current place in the market cycle. For me, the risk/reward analysis doesn't seem worth it, at least for my goals. But, you'd also assess the potential "bonuses," like the ADU potential (cost to build/convert vs rental value).

Generally, in CA, we are now at an affordability bottom (or below), meaning, there will be pressure on normalizing the affordability equation, which is a function of price vs interest rate vs income. As the rate goes up, so does downward pressure on prices, which is also influenced by income. As rates go up-If income stays steady = downward price pressure, if income drops = additional downward pressure on prices. And, incomes are not likely to rise in the near future. Even Meta just warned of a hiring freeze and possible upcoming layoffs. So, I would adjust any buying underwriting more conservatively.

Depends:

Is it an sfr with a guest house or a duplex? This typically depends on zoning and what is legally allowable on the property and if it was constructed/converted legally. 

I'm not sure what you're referring to when you say "There are no similar comps for this specific property type?" Are you saying there are no similar properties with detached converted garages or there are no duplexes, or no sfr's with guest houses, etc. Again, first thing is to determine "what" the property is (duplex, sfr + garage), and this depends on the zoning or what is legally allowed on the property. Then, the legal status of the structures may play a role. So, if the garage conversion is legally allowed, as a guest house, but was not permitted, it may or may not be given value in the appraisal. There are multiple scenarios that come into play, but it's hard to address them, without knowing the specific zoning, permitting, etc.

If it is an sfr with a guest house, then the appraiser will do their best to find similar properties (sfr + guest house). If it is a duplex, then they will look for similar sold duplexes in the area. If they don't find similar comps, then they should go to neighboring areas/neighborhoods and find comps and analyze and possibly adjust for location differences, as well as go back in time to find older comp sales and analyze and possibly adjust for differences in market conditions (appreciation, etc). They may also choose to use a depreciated cost adjustment, in the absence of comps. There are multiple ways to approach this, but again, it starts with determining what the property legally is.

Quote from @Ginger Spurlin:

@Brad S. this write up is amazing!  This is exactly what I was wondering.  Thank you for all of the insight!  I hope this post will also help others in similar situations.  Thank you very much for your time and effort to answer this post!

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 Happy to help! Feel free to ask me anything further, and I'll help if I can.  :)

I reread some of my post and wanted to add something: One main reason to make sure to get permits "finaled," is some building departments may make you bring the work up to current code, when you try to get a final inspection. This happens sometimes, when someone did some work on a house and had everything done but a final inspection. They might've thought they were done and "good." But, when they go to sell or pull additional permits years later, this may come up and they may have to redo some of the previous work, to meet current codes. This can cost a substantial amount of unexpected expense.

Typical appraisal practice does not include verifying permits. In my 25+yrs of appraising, I maybe pulled permits for an appraisal assignment once or twice, but I don't remember the specific circumstances, and I used a service that gets copies of them, and I would charge the client. I have read in appraisal message boards, that in some areas, it may be more common to look for permits, but that is a rarity. I have had many homeowners provide me permits, for work that was done. So, if you want to assure that I will count everything I observe during my inspection, it is up to you, (the homeowner) to provide me with permits.

This usually is an issue, when public records (Assessor records) don't match with the actual improvements. Like in your situation, on record it is a 3/2, but in actuality it is a 4/3. This can happen due to the Assessor not updating the records when additions are done, or when an unpermitted (illegal) addition/alteration is done. 

Although, I believe my experience is typical, I am speaking from my personal experience and knowledge in my market areas. All my areas require permits for most alterations, my understanding is that some areas may not require permits. 

Also from my experience/areas, just because public records (Assessor) does not have the correct property data, does not mean that it is not legal. The Assessor is separate from Building/Planning department and they may not fully communicate with one another. I was a deputy assessor at the beginning of my career, so I know how this works firsthand. We would only get a small portion of permit information, and it may be the part the states some interior remodeling was done or something that didn't require an onsite inspection to update our files. So, there might've been more info unseen, which related to an addition, or some other significant alteration to the improvements. Therefore, the Assessor records would not get updated and would not accurately reflect the current state of some properties. This also happened a lot in new tracts, where we would just walk down the street and note which lots had which models, but we might miss certain options on a model, like a 4th bedroom option upstairs or a 3rd bathroom or powder room, or something at the rear of the property we can see from the street, etc. 

But, the reverse is true also. At the Assessor, I was taught to measure and record the property as I see it, during an inspection. Meaning, I would measure the house at 3,000sf, and note it has 4 bedrooms/3 bathrooms, even if it was a legally permitted 2,000sf 3/2. But, that 1,000sf, 1/1 addition may not be legal, but I may not check, if I am just updating the Assessor role. Then, it was up to the homeowner to go to the Assessor and dispute any potential value increase, due to illegal additions.

So bottom line is ALWAYS VERIFY permit info on any property you buy, especially, if you find any discrepancies.

As an Appraiser, if I am unsure if an addition or another part of an improvement (conversion, etc) is permitted (legal), then I may not give it value and explain, leaving it up to the homeowner to prove it is legal, or I may include it and explain, by using an "extraordinary assumption (EA)." By doing that I am basically saying, I assuming something is true, but if it isn't true, then my conclusions could change. In other words, I assume everything is legally permitted, but if I find out it isn't, my final value estimate may change. Then, the Lender (my client), may request permits or something else from the homeowner (borrower). But, what the EA does is covers me.

Now, just because an area does not have permits, doesn't mean it lacks value. But, that said, typically, it would have less value to a buyer than if it was legally permitted. And, as an Appraiser, it is practically impossible for me to accurately discern the market value of an unpermitted addition, which is why I would most likely use an EA and assume it is legal.

So, after all that, I could've just answered your question with: "YES, either verify there are permits for the additional addition/bedroom/baths, etc, or get permits for those areas that need them." But, keep in mind make sure to get the permits FINALED! Just because you pull a permit, doesn't mean those areas are "permitted." They need to be inspected and APPROVED (signed off)! I have had multiple appraisals where certain work was never signed off and therefore, it was still not fully permitted. And make sure to get a C of O (Certificate of Occupancy) if required in your jurisdiction.

SIDE NOTE:
The Lender's Appraiser can talk to you all they want, what they can't do is discuss their opinions, but they discuss facts. So, they can tell you what the final measurements of the house was, etc, but they can't discuss their value conclusions or how they got there. Unless the client (the Lender) expressly gives permission to speak with the appraiser - which doesn't happen. 

AND the Lender can speak with the appraiser directly, they just can't influence them and if they are an originator of the loan, etc, they can't pick the appraiser, etc. Basically, if they will benefit from the loan closing, they can't influence the appraiser or discuss opinions.

....ok, my fingers are tired, hopefully this helps someone...