Top 9 Takeaways - Podcast 007 with Ryan Lundquist

BP Podcast 007: Making Appraisals Work For You with hosts Brandon Turner & David Green and guest Ryan Lundquist

Edited by Brandon Accomando

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2. How you can determine what a property is worth.

There are so many things. I wish it was just a matter of pulling out a number out of a magic hat and it took just a couple of minutes. But these days it seems like it takes so long to really establish value because there are so many different types of sales. And really what my goal as an appraiser is, is to compare the best available information in the market. And to find the most similar types of properties, and then add and subtract based on differences whether one has an extra kitchen or bigger lot, third car garage space, or whatever. Then find out what the market’s willing to pay for those things and then adjust for them and come up with the final value. It’s really that simple. Yet it’s kind of complicated because short sales often sell for less. There’s dirty REO's, there’s pristine investor flips. There’s just funky market dynamic where buyers are willing to overpay by $20,000. So it’s really sifting through a lot of conflicting information a lot of time to come up with that value.

1. When you should, and shouldn’t, use Zillow or other AVMs.

It’s funny people are always looking at Zillow but it’s just not an accurate appraisal especially sometimes the information Zillow has is really spotty because the information to me as an appraiser is spotty but I need to go pay for that information in certain counties. So they don’t have it. And you can look up a property and it could be off by a couple hundred thousand dollars. And sometimes they nail it but most of the time it’s off and sometimes it’s off quite significantly. Well so what about potentially going to multiple AVMs and AVM is Automated Valuation Model for those people who don’t know but Zillow would be an AVM. Could I potentially then go to say Realtor, Trulia, Zillow and basically concoct some kind of average to come up with a fair appraisal value or are these numbers just so randomly off that it’s not really going to be an accurate assessment? It all comes down to the data; how good the data is because a lot of these sources are pooling the same data and if the data is inaccurate, if it’s not complete, if it’s really not consistent with sales in the neighborhood, then you’re going to have a skewed value. And AVMs have their place because they can be sort of a good, get your foot in the door to figure out what may be a ballpark figure. I say that with a grain of salt of course but it is what it is but it’s not going to compare to a human on the ground who really understands the dynamics and the trends in the market. Say for example there was a difference in 10% between on-blink sales and short sales. Well an AVM may not know that and there really could be a huge value discrepancy by not knowing some of those things in the market.

1. How to challenge a bad appraisal.

Usually lenders have a formal way to contest and you can do that, or your realtor can do that. It’s just important to know what that is but I just always recommend when someone wants to contest an appraisal that they put it writing. You don’t want to just give the appraiser a call, you don’t want to give an emotional speech saying, “Well I think value is just higher.” Because that really doesn’t do anything to advance the conversation so if you can send in a very cordial and humble letterhead, something that critiques comps and their report, you can point out thing about Comp1 that’s the commercial property. How does this impact value; the appraiser didn’t mention it, seems like an inferior location. Comp2 A. B and C, Comp3 A, B and C but then most importantly provide additional data. Give the appraiser “Here’s two under your sales.” and would you consider, how does the appraiser feel about these two properties? Are these adequate comparisons? So I think it’s very, very important to do that because then the appraiser can take a look at the situation and realize wow if I really did beef up this appraisal and mess things up, then I can at least go back and include one of those sales. Now the thing is though I’ll say that it’s really hit and miss. Sometimes you’ll have success and sometimes you won’t. So it just really depends on the appraiser, it depends on the lender. But also I will say one last thing, that just make sure you’re really familiar with the format of an appraisal report so that you can really look at it, interpret it correctly and you can quickly analyze things and say, “Wait, tax record says the property is 1600 sq ft, the appraiser measured 1400 or 1300. So there’s a discrepancy there and you’ll be able to quickly point those things out and be able to then put that into a rebottle or an appeal. And hey if it was just a square footage error then great that’s an easy fix for the appraiser and it should instant value if the appraiser messed that up. Make sure in your heart of hearts that you’re not pressuring appraisers. I know that sounds profound but take the pressure off and I think one thing that you can do is just avoid pressure statements. When you meet the appraiser at the property, you don’t want to be saying, “Oh man I’ve got $40,000 wrapped up in this, it has to appraise if it doesn’t appraise I’m going to lose everything.” Because that puts a little pressure on the appraiser, or, “You know I really need this one to work out,” or same things like, “I don’t want to ask you to do anything unethical but just do your very best. But please don’t be unethical just do your best.”

1. What to do when sales prices are higher than the appraiser will go.

I’ll say this, is that it’s very common in my market right now for appraisals to come in lower. During the previous boom it was all about hey hit the number man, hit the number. And I’m going to find someone to hit the number but we’ve removed that direct link with appraisers. So it really should be as it should have been then an independent valuation. So some of the reason there is a discrepancy there is because properties are overpriced. Assuming it wasn’t a bad appraisal of course but right now the market in some senses it’s really propped up. It’s been influenced by external factors such as low inventory, historically low rates, exponential cash sales. In Sacramento, 35% of all sales in the whole county are cash right now, that’s up 7% over the year and under $200,000 in Quarter 4 of 2012, 49% of all sales were cash. So one out of every two sales was cash and what that’s doing is it’s increasing the median price levels. But basically under $200,000 the market’s just out of control. It’s just appreciating like wow but that same appreciation isn’t happening at every tier of the market. And what it’s doing is it’s helping the numbers look a little bit better than they actually are. So sometimes properties you really can get in the contract even though your prices 20 or $30,000 above anything else, you will get multiple offers when you list a property right now in the Sacramento area.

1. Dealing with the Hedge Funds in the market.

So we have all this growth driven by outside forces. And one of those forces is private equity funds like Blackstone. They purchased about 500 properties since August 1st, 2012 which is a significant amount, they own about 900 right now in Sacramento County because they’ve been here, owned properties before. But really what they’ve done is that they’ve gone in and purchased really anything. They’re buying on the court steps; they’re buying on MLS and really have been real estate locusts in a certain regard. But the thing is that they aren’t buying everything, there still are properties. It’s difficult for others to get in on them sometimes and so it’s only about one month’s supply of inventory. But what it’s done effectively though is it’s really driven up prices. It’s created increased competition sometimes Blackstone I’ve seen them overpay a good 10, 15,000 on properties. They’ve also purchased flips, so it’s been good for investors. So investors who have properties and who have held on to them for years, I’ve seen a lot of private deals but I’ve also seen deals on MLS where investors have been selling to them. So the vast bulk of what they focused on is sort of the first time buyer market. So because they’re not focusing on every neighborhood, I would say to other investors, it’s time to diversify. Focus on where they’re not going, or focus on other price points above $300,000. Diversify, get a different plan together. And of course, I don’t think they’re going to be buying forever either because your money is going to run out at some point even though they have millions.

1. Tips for getting your appraisal amounts higher by bringing your own comps.

Why not be proactive instead of reactive? So I would say as part of your normative practice in business and flipping properties, yeah come with data. And even rather than calling them comps where you’re saying, “Hey here are your comps, here’s how you can do your job, here’s number one, number two and number three.” Just come and say, “Hey here’s some data I used to list the property.” So really what you’re getting at is that this is support for your purchase price, or for the contract price. And then you can make notes on Comp1 in the MLS sheet if you’ve talked to the other agent or if you have inside information then do all those things I think that’s important. If you know how to make graphs which is such a good skill to have and then you can show trends in the neighborhood with those graphs, bring those. I mean bring whatever you can I’d say that’s great. Just don’t bring the baseball bat. And include all the costs you spent to rehab the property as well as any other information like an itemized list, written list of all your repairs. Sometimes get to a property then someone wants to go over that verbally, I’d love to just get that over email. Something I can quickly cut and paste in the report and say, “Hey they spent $23,000 on this house.” And if you got the house for a really good deal then let the appraiser know and say “Yeah I bought this on the court steps. I just got a slamming deal.” So I mean it shouldn’t matter what you purchased it for previously but the lender is going to want to know, why is this house selling for twice what it did before. So there’s got to be some sort of justification for that and they’re going to be looking at the appraiser to address that.

1. Dealing with FHA loans in your investments … and the dreaded FHA Appraisals.

FHA guarantees loans and these are really a hot commodity in the market because buyers only have to put down 3.5% of the purchase price. In some markets like in California where prices are still higher than a lot of places, that really means a lot because then buyers can get into properties. And then really FHA has strict guidelines too where they want properties that are safe, sound and secure. Those are their three S’s and they have really a detailed list of minimum property requirement. So the appraiser it going to go in there and they’re making sure that everything works and they’re making sure that there’s no health and safety hazards as much as the appraiser can do. Because there are some things that appraisers aren’t specialized in toxic mold and environmental hazards so to speak. So it can really be a good deal for buyers because they can get into a property that should be in pretty okay condition and get a loan to where they don’t have to put down a lot of money.

1. The most common property condition problems an appraiser is going to ping you on.

One of the things I see most often is defective paint surface where there’s chipping, peeling, flaking paint or there’s bare wood. It’s got to be covered and houses built before 1978 where there can be the potential for lead based paint that’s a safety issue. So that’s why it has to be properly cured. So if you’re flipping a property just make sure that’s cured. Make sure all the appliances work, if there’s a heater there; if there’s air conditioner there they should work. That’s very common in California, there’s carbon monoxide detectors required now. So make sure that those are there. Basically just go through the house as if you were a 12 year old and make sure things work. If the windows aren’t open, then make sure that they can open, sliding glass door doesn’t open, it’s got to open. So one thing that I see there that this has kind of been coming up quite a bit lately is that as an appraiser, I have to inspect the attic. I must do inspection from the shoulders to just sort of visually observe what’s going on up there. And if there’s not an attic access and there is an attic then before you list the property on the market, just make sure you put in a scuttle because the appraiser is going to have that and I just called one out it’s actually an investor flip and I made the value opinion subject to me inspecting the attic. So now I have to go back out there, cost about $100, hold up a loan for probably a week or so while they make sure that they cut a square in the ceiling.

1. How to deal with lead-based paint in your investments.

Well according to from an FHA perspective there shouldn’t be any defective paint surface which would be chipping, flaking peeling paint which would basically allow potential lead to be breathed. So it’s important if there’s any surface like that, the paint has to be properly scraped and then sealed with a paint or an FHA approved sealing because so then that way it can’t be just flaked off and little Johnny starts munching on chips. We don’t want them eating those kinds of chips. So that’s really what it comes down to I mean if we had to totally remediate lead, I mean our housing stock in America would just be in deep trouble. So that’s really what’s most important. If you’re interested FHA actually has about a 50 page handbook about how to properly cure defective paint surface. So if you’re looking for some inspired reading then go for it.