When a rainbow appears, it can put a smile on our face. They are so beautiful! When one appears, you can be sure that images of one will appear on social media, as people share their beauty with others. Rainbows are artwork in the sky. For many, including me, they invoke happy feelings. Perhaps they put a smile on your face as well. How do rainbows work? They are caused by light reflection and dispersion through water droplets. When we are looking at a rainbow, what we are viewing is the light being refracted off water droplets.
Did you know that no two people see the same rainbow? You might be standing right next to someone, looking at what seems to be the same rainbow. However, what we are seeing is technically different. That’s because the light refractions we see are slightly different than what the person standing next to us sees, due to their angle of view being slightly different. Rainbows are formed by an exact alignment of light from the sun in relation to our line of sight. The size of the rainbow’s arc is proportionate to how far from the water droplets we are.
If you don’t want to take my word for it, there are some nice articles that discuss this. Here’s a link to one article entitled, “No Two People Ever See the Same Rainbow”. Check out this cool video of different kinds of rainbows.
Here’s a little video that shows 15 rare rainbows!
Pretty cool, don’t you think? But how do rainbows relate to real estate transactions? I am glad you asked!
In a real estate transaction, everyone has a different view. There is the owner of the home, who has a view of what they feel their home is worth. Buyers have their view of how much they are willing to pay for a home. Real estate agents have a view of what the home should be listed for, based upon their research and experience. And, of course, we appraisers have our views of what a home is worth.
In the current market, those views may be light-years apart. Let’s talk about some possible reasons why.
A homeowner, especially one who lives in their home, no doubt has memories associated with each room of their home. They are keenly aware of every bit of work they ever did to the property. Every room that was painted. The time when the bathroom plumbing failed which ultimately turned into a new bathroom being installed. The bedroom that was converted into a nursery for a new baby, or the conversions made to a home to care for elderly parents or family members.
That’s a lot of emotion attached with a home. Those experiences build emotional value in the home. That sometimes relates to what a homeowner is or is not willing to sell their home for. Is their view wrong? Not at all! It is their view, based upon their experiences.
THE BUYER’S VIEW
People who are in the market to purchase a home, may have different motivations for doing so. Some are looking to purchase a home for as little as possible and then improve it and sell it to make a profit. Others are looking to build cash flow by owning a home that they can rent out. Still others may be looking for a second home to purchase as a vacation home. However, most home buyers are looking for a place to live.
Right now, it is extremely challenging to buy a home because of competition and few homes for sale. In most areas that I appraise in, which is reflective of most parts of the country right now, as soon as a home is listed, within days, and sometimes hours, many bids are made. The more bids that come in, the higher the price of the home goes. The person with the greatest buying power is often the winner. Today, if someone wants to buy a home, they may have to pay considerably more than what other homes are selling for or walk away from the deal.
If the buyer is willing to purchase a home for a price that is much higher than other homes comparable homes are selling for, are they wrong for doing so? Not at all! It’s the buyer’s money. It’s their business. And right now, many buyers are forced to bring cash to the table to make up the difference between what the home’s market value is determined to be, and the contract price. What is a buyer to do? It may still be worth it to the buyer to move forward, despite paying more than market value.
THE SELLER’S VIEW
This is the strongest seller’s market I have ever seen. So, it is a fantastic time to sell a home. Or is it? The problem is not selling a home. It’s finding another one to buy that someone can afford. Home prices and construction costs are surging so rapidly that it is difficult to find an affordable home, let alone one that will not require paying more than market value for. I do believe that this situation has continued to keep some people from selling their home, which in turn keeps inventory levels low, which in turn keeps prices rapidly increasing. It is a catch twenty-two. Especially with the historically low interest rates which is fueling the fire.
Last year, I appraised a home of a couple who had were getting ready to build a new home. So, they sold their home. In the process of selling their home, the builder told them that they had to revise their contract to reflect the increase in building materials. Well, that increase was more than they could afford. So, they were not able to build their home. At the same time, they had just sold their home. So, they were going to move their family in with their parents until they figured out what to do.
So, this market is not really a picnic for someone looking to sell their home and look for another one.
THE REALTOR’S VIEW
It may look like Realtors are just sitting by racking in the cash in this hot market. However, the truth is that this is not really the case for many. If they are trying to help someone find a home, they may find themselves writing bid after bid for months. And for those listing a home, trying to figure out what to list a home for can be challenging. I’ve had more than one Realtor tell me that they know that their client is paying more than market value for the home, but that’s the only way to buy it sometimes. To their credit, many Realtors are warning their clients that they are over-paying. But they are really in a tough position.
What about listing agents? They may list a home for what their research reflects is the most probable selling price, or at least in the ballpark. But then, due to the high demand and low inventory, the home gets bid way over market value. Then, the appraiser comes out. They appraise the property based upon the data that they have analyzed, which may indicate a value well below the contract price in some instances. It’s no surprise to the agent. But now they are stuck in the middle trying to figure out how to make this deal work.
Most agents that I visit with are exhausted and would like things to be more balanced in the market. I think that goes for most of us, whether we are a Realtor, an appraiser, a buyer, or a seller.
THE APPRAISER’S VIEW
As appraisers, we view things completely differently than the other parties involved in the sale of a home. We are looking at the data, as it relates to the home we are appraising. We do not have any emotion involved in our analysis. We are not making a commission based upon the results of our research. We look at things from a very analytical standpoint. We must have solid support that we use when developing our opinion of value. What is solid support for market value?
Having twenty offers in two days on a property, and having the price bid up 20% or more, is not necessarily support for the purchase price. It‘s evidence of the high demand. Yes, high demand, and a shortage of inventory creates a situation in which home prices go up, clearly. However, a home may be bid up far beyond what is supportable by other comparable sales in the neighborhood. We develop our opinions of the value primarily upon closed sales. We do consider what other comparable homes are listed for, as well as comparable pending sales. Because analyzing demand and how it relates to a home’s value, is part of our research and analysis. However, we must use closed sales to develop an opinion of market value. Why?
A home may be pending at one price. However, the contract may state that the home must appraise at or above the purchase price. What if it does not? Depending on how the contract is written, the deal could fall through if the home does not appraise for at least the contract price. Or, what if during the home inspection, a major repair is discovered? The contract price may need to be renegotiated.
Now, it is true that many buyers are currently bringing cash to the table to close the gap between what a home appraises for and what the contract price is, if the appraised value is less than the contract price. One reason there has been a big surge in home prices is because many buyers are bringing cash to the table to purchase a home where they are bidding against other buyers. The increase in sales prices that we are seeing around the country, are seen in the closed sales prices. The sales that we are using to develop our opinion of the subject’s market value, usually had multiple bids, with their prices being drive up. So, yes, closed sales are the best indicators of market value.
By the way, if you have an appraisal in front of you, please read the Definition of Market Value in the report. You will notice that part of the definition states that the Market Value is the most probable sales price, based upon a specified date, and is based upon the passing of title from seller to the buyer. When does the title transfer from the buyer to the seller? Not when a home is listed, or even when it goes under contract. It happens at closing! Therefore appraisers must have closed sales to support our opinion of value of a property, no matter how many offers a home may have.
WHY VALUES ARE IN RANGES
Because every buyer has their own views and motivations, with no two people being exactly alike, true market value comes in a range. One buyer might be willing to pay a little more for a property than another buyer. Everyone is in a different situation in life. Everyone has different tastes and preferences. This is one reason why market values are never really one specific number. Of course, in an appraisal, we are usually asked to develop a specific number of what we think the most probable sales price of the property will be. However, I still like to provide a range in my reports, when communicating value.
DIFFERENT OPINIONS OF VALUE
Have you ever had two appraisals completed on your home? Were the opinions of value the same? Probably not. Why? There are many things that may cause two appraisers to have different opinions of value for the same home.
Different effective date. An appraisal is based upon a set date. There are times when a day can make a difference. Within one day, new sales may have closed, which have an impact on our opinion of market value. If we have learned anything from the past year, it is that things can change quickly on a global scale, which can impact home prices. At times, my opinion of value may be disputed. Sometimes, the sales that are used to dispute my opinion of value, are sales that have closed after the effective date of my appraisal. Those properties cannot be used because, as of the effective date of the report, they had not yet closed. Even in a retrospective appraisal, where we appraise a home based upon a date in the past, we cannot use sales that had not closed as of the effective date of that report.
So, one appraiser may have appraised a home one day, and the other appraiser came out another day, and used a different effective date, which may have changed their view of the home’s market value. Of course, usually the difference would not be large.
Different scopes of work. One appraiser may have completed a desktop appraisal, relying on data from public records and the MLS, for the description of the home, while another makes a full observation (Inspection) of a home, measuring it, walking into each room, and really getting a good understanding of the characteristics of the home and what’s around it. That can make a big difference. I cannot tell you how many times I measure a home and the County Auditor’s records are incorrect when it comes to the gross living area.
I was recently visiting with a real estate agent that said that she has been burnt so many times by this that now she hires an appraiser to measure every home she lists before she lists it. Smart thinking! I wish all agents did so. By the way, she gave me the sketch that the other appraiser had measured. I always measure the home. But I did compare my measurements with the other appraisers, and they were the same.
Different methods of extracting adjustments from the market. Adjustments are amounts that are added or subtracted from the sales prices of the comparable sales being used, to make a comparison to the home being appraised. The idea is to adjust the sales prices of the comparable sales, to make them equal, or at least more similar to the subject, in terms of characteristics such as gross living area, bathroom count, condition and so on.
The adjusted sales prices of the comparable sales should reflect a range of what is the most probable sales price of the property being appraised. There are many ways to extract adjustments from the market. Even when done correctly, there is a range for each adjustment. The appraiser must determine where in the given range, best reflects what the market’s reaction is to the difference. For instance, if a home has one bathroom and another home has two, all other things being equal, what is a likely price that most in the market would pay for that second bathroom?
There are some appraisers who use the PFA method. They pluck a number from the air, with no real support. There are many problems with this. In my experience, most appraisers who do this, make adjustments that are lower than what is really the market rate. This leads to inaccurate values.
If two appraisers use different techniques for supporting their adjustments, if their methods are repeatable and recognized as being credible methods of measurement, and as long as the data they use is from the market area of the home being appraised, their opinion of the market value of a home should fall within a range of what is supportable for that market.
Different levels of experience and expertise. A new appraiser can certainly do a good job in putting together a good appraisal. Of course, at times they may miss something because of a lack of experience in appraising a particular kind of property. Human error can also factor in. Even the most skilled and experienced appraiser can make a mistake, which leads to a much different opinion of value than someone else. Appraisers are human. We all make mistakes at times. A mistake could lead to a difference in value conclusions. We work hard not to make major mistakes. However, if a mistake we made is pointed out to us, we work hard to fix it.
If two appraisers have different opinions of value of the same home, they may both be right. That is, if their opinions are supported properly. I have heard of a case in which two appraisers appraised the same home. The difference in their opinions was around one hundred thousand dollars. I think in a case like this, a little context is important. Was the market value of the home being appraised a multi-million property or a half a million dollar property? In a multi-million-dollar property, or even a million-dollar property for that matter, a value difference of a hundred-thousand dollars may not be that bid of a deal. However, if the value is around a half a million dollars, that may be a different story. In either case, an appraiser needs to have solid support for their opinion of value.
At the end of the day, it’s important to remember that when a home is being sold, everyone involved in the party has a different viewpoint. Is the buyer’s willingness to spend what they want, even if its over market value, to purchase a home wrong? Is the seller’s view that they want to get as much for their home as they can wrong? Is it wrong for real estate agents to do everything in their power, ethically, to make a transaction work wrong? Is the appraiser’s opinion of value, which at times may be lower than the contract price, wrong for their having their opinion?
The answer to all those questions is no. It is simply a matter of different people having different views of the same property, depending on their position.
I hope that you enjoyed this topic. It’s good to be back in the blogging saddle. I’m working on my next article that I will post two weeks. Next week, I have a bonus post that HomeLight wrote for the Cleveland Appraisal Blog. It will discuss the hot topic of backyard upgrades. In the meantime, enjoy the sunshine and spring showers. Hopefully, you will catch a rainbow or two.
I love this song, and Israel Kamakawiwo’Ole’s version of it. By the way, according to my research, Hawaii has more rainbows than any other place on Earth!
You may have already seen this, but if you have not, it is hilarious, and pretty much spot on.
I had the honor of joining Dustin Harris on The Appraiser Coach Podcast again. If you have any interest in listening here it is. Thanks again Dustin for having me on!
Have a great weekend everyone!
If you enjoy listening to podcasts, check my new podcast out. I hope you enjoy it! You can find me on Apple Podcast, iHeart Radio, Spotify, Google Play Music, Sound Cloud, Radio.com, RadioPublic, Deezer, Breaker, Stitcher as well as other feeds.
You can also listen right here at Cleveland Appraisal Blog!
If you are interested in stats, and nothing but the stats, for neighborhoods in Northeast Ohio, check out my other podcast. In it, I provide short episodes that provide you with stats on median sales prices, marketing times, housing inventory and other related stats, on specific neighborhoods in Northeast Ohio. You can find me on Apple Podcast, Spotify, Google Play Music, Breaker, Overcast, Pocket Casts, Radio Public or you can listen right here at the Cleveland Appraisal Blog.
I am a member of the National Association of Appraisers. If you’re an appraiser, and you’re looking to join an appraisal organization, please check them out. The NAA is made up of fantastic appraisers from across the country who are working hard to keep their fellow appraisers up to date on what’s happening.
Here are some links to other articles I’ve enjoyed recently! I hope you will also…
Housing Migration As An Unaffordable Sport – Housing Notes by Jonathan Miller
It’s The Market It’s Not You – Birmingham Appraisal Blog
The Importance of Taking a Break – The Appraiser Coach
Hello, State Appraisal Board! Here’s My Boilerplate! – Tim Andersen is The Appraiser’s Advocate (Podcast)
Appraisers and the Psycho Kitty- APPRAISAL TODAY
Are You Highly Effective! – Real Value Podcast with Blaine Feyen (Podcast)
Time to Adjust? – George Dell’s Analogue Blog
Home Prices are insane (so is the rental market) – Sacramento Appraisal Blog
What to Wear? – DW Slater Company Blog
Connected: Red Line Greenway opens, linking a two-mile trail to downtown Cleveland – Karin Connelly Rice on FreshWater
Metroparks named as finalist in national parks and rec group’s ‘best in nation’ Gold Medal – FreshWater