Tough day at the beach. It started off raining and heavy overcast this morning around 8am when we arrived. It was not until 10:30am when the Sun finally broke through, but when it did it was almost unbearable hot. I burned the tops of my feet, that sucks. Anyways, back home now and staying cool.
Real Estate Process - A View from the Inside
I have a pretty cool treat for the readers tonight. Long time reader Gawains wrote up a fine essay about the real estate business as he sees it and sent me the final write up. Why should you care? Maybe because Gawains has been doing this for a LONG time, that's why. There are some great historical insights in the piece as well as a complete rundown on some of the things we all talk about all the time but maybe do not really know all that much about. It's a long essay so please take your time and let me and Gawains know what you think. Here is Gawains:
The Dirty Little Secret about Price Opinions
Real estate rears its distressed head and once again intrudes on the news. As if it’s done anything else since, oh I don’t know, 1086. That was known as Domesday, when the survey of England, which determined property lines and established title, was completed for William the Conqueror. It was a dark day in history, but it has influenced real estate to this day.
Those who do not know history are doomed to repeat it, as the old saying goes. Or as Mark Twain more eloquently put it, “History does not repeat itself, but it does rhyme.”
One would do well to read up on what was going on in real estate in the late 1800s, after the Civil War, during the great Western Expansion. Land grabs, people selling property they didn’t own, people buying property they didn’t get title to, squatters, looters, walkers. Sound familiar? Something had to be done; it was madness. The first real estate commission was founded in California, the second in Texas, in the early 1900s. Contracts were formalized, agents were licensed, properties were surveyed, and title was insured. The rest of the states soon followed suit.
These days, it’s a return to madness. Or as Yogi Berra once famously said, “It’s déjà vu all over again.” We read all these stories about mortgage fraud, appraisal fraud, securitization fraud, ratings fraud, foreclosure fraud, the list goes on but it always end with fraud. I don’t want to talk about any of that. Rather, I intend to explain how to write a price opinion. This is a subject of some concern to many Americans who are concerned about the value of their homes. But before I go into detail, I digress.
I grew up in this business, not out of choice mind you. When my parents moved down here to South Texas, I was a small child of 8. My father had accepted a job as the systems analyst at the only computer company in the county, the one that all the banks and businesses ran their account statements on. My mother took a job, for a modest salary and free rent, as the apartment manager at the complex where we lived. And she immediately put me to work. “You’re the grounds keeper and pool cleaner.” But I don’t know how to keep a ground or clean a pool. “You’ll learn.”
Then the developer, this millionaire out of Minnesota, decided to open a real estate company, mainly for tax purposes. My mother took a second job as his secretary and proceeded to get her license. It didn’t take her very long, because her father had started his own real estate company in San Antonio after he retired, so she already knew the business. This is when the real fun began. On weekends, during summers, she used to pick me up in the morning and drop me off at some house. “Mow the lawn, wash the walls and windows, mop the floors, vacuum the carpet, clean the kitchen and bath, take this lamp and plug it into every socket to make sure the electricity is on, then put this sign in the yard.” She would leave and come back at the end of the day to inspect my work. “Good job. Here’s $20.” That’s it?! I bust my ass all day, and all I get paid is a lousy twenty bucks? “You’re learning.”
Moreover, because my father was on call 24/7/365—if the computer crashed, the entire economy collapsed—whenever my mother had to attend a function, she took me instead. There I was, barely a teen, sitting with bankers, brokers, realtors, investors, developers, builders, title company owners, listening to them tell their tales of misery and woe. What did they all talk about? Their failed deals. It’s just like in poker. Nobody remembers their big pots; everybody remembers their bad beats. So when I went to college, the last thing on my mind was going into this business. All those nightmare stories convinced me of that. I became a teacher.
Hey, paid summer vacations are a beautiful thing, you know. During this time my mother made so much money that she bought the company. (That’s a whole other story.) All that meant was every time I came home to visit, she had work for me to do. I’ve seen this sordid movie before. In the early 80s, there was the peso devaluation, which pretty much wrecked the economy down here for almost two decades. There were over 44,000 foreclosures in the first month alone. One out of three real estate companies went bankrupt and disappeared. But my mother prospered, because she had already cornered the repo market. Then in the late 80s, there was the savings and loans debacle. That’s when Congress changed the law so that only licensed appraisers could valuate a property. Prior to that, any licensed realtor could write an appraisal. I know, because my mother used to write four or five a week, at $200 a pop, for the local bank. Not any more.
Unfortunately, ten years ago my father passed away from cancer, and I had to resign from teaching, give up my dream summer vacations, to help my mother run the company. I took all the courses—contracts, agency, principles (I, II and III), marketing—passed all the tests and got my license. I am now a third generation realtor. But enough of that.
Every discipline has its own specific vocabulary. Suppose I came up to you and said, “I have an STD.” What would be the first thing that comes into your mind? Substitute Trustee’s Deed. I’m a realtor. (Yeah, I know, an STD and an STD are two of a kind, but you get my point.) It’s the same with the article that GYSC linked to some weeks back, about several states wanting to pass laws so that appraisers can’t use “foreclosure sales” for property valuations. That term means something completely different to me than it does to most people. And this is why I don’t pay any attention to what the media and most blogs have to say about real estate. They don’t know what they’re talking about. What’s really going on is these states are desperately trying to prop up property values to preserve tax revenues. I know that because our junior partner happens to the head of the county appraisal district. Two years ago, thousands of people protested their property taxes, and he had to be hospitalized for high blood pressure.
Technically, a foreclosure sale occurs on the courthouse steps, the first Tuesday of every month in Texas. Basically, it’s an auction. The minimum bid is the amount owed on the note, plus attorney’s fees. Anyone can make a bid, but you have to have proof of cash or proof of financing and be able to close in two weeks. That would be a risky venture though, because you are not allowed an inspection or even a walk through; you’re buying sight unseen. After maintenance, repairs, and taxes, by the time you sell, you’ll be lucky to earn $500. More likely, you’ll lose thousands. Flip This House was an Unreality Show. Usually, the bank or lender or mortgage company or Fannie or Freddie buys the note from itself. At that point, the house becomes repossessed. Then the new note holder contracts with a realtor for the marketing and sale of the house. This is where I come in. The sale of a repossessed home is not the same as a foreclosure sale. The former is based on fair market value; the latter on the amount owed. If these states intend to prohibit appraisers from using the sales of repossessed home in valuations, then it’s an act of lunacy. Only a complete idiot would use a foreclosure sale to value a property.
Repos are the only houses that sell in a down economy. What you need for a price opinion is the nearest, most recent sales. That’s the only indication of value. Otherwise, the appraiser has to go further away and farther back in time to find comparables. But then the appraiser doesn’t work for the seller, you. He works for the lender, and gets paid by the buyer. If you intend to sell your house, the last thing you want is an appraisal; what you need is a broker’s price opinion.
Over the last decade, I’ve probably been in over 2,000 houses. Everything from shacks that weren’t worth the land they were on to million dollar mansions, which weren’t worth a million dollars. I mean, really. The high ceilings, open living areas, how much does it cost to air condition one of these monstrosities? Obviously more than the buyer, who’s supposedly a millionaire, could afford, or else the house wouldn’t have been repossessed.
I get an assignment. Normally, it’s the borrower’s name and a physical address, both of which are practically useless. It’s not like the county clerk doesn’t make mistakes, misspell the name or invert a number. And it’s not like cities don’t change street names and numbers on a whim. Some assignments are more difficult than others. I’ve actually been to houses that have one number on the mail box and another on the curb. But let’s assume the borrower’s name and street number are correct, just to keep it simple. This is the process I go through to write a price opinion. (These are subscription services that are only available to licensed agents; which is why contracting with a realtor for the sale of your house is of the utmost importance. We have access to search engines that you do not. You cannot try this at home.)
First, I go on to Land Title to get the appraisal district print out. There I can find the legal description, the subdivision name, phase and lot number. That’s what I need. I can also get the tax records and a sketch of the house. Second, I go on to Carson Maps. There I can print a map of the subdivision, so I know exactly where the house is located. Third, I go on to MLS to see if the house has been listed and at what price, also to see what other houses in the same subdivision are listed or have sold for. Sometimes I go on the county clerk’s website, which is free as a matter of public record, if I’m curious about the original loan amount. There I can find the deed of trust, which won’t show the sales price but will show how much is owed on the loan, depending on when the note was foreclosed on. Not that that matters in determining a price opinion, just that it’s interesting. Finally, I look up the address in the road atlas (never leave home without it), so I know where I’m going. Now I’m ready to find the house. Let’s assume it’s vacant. If not, I simply inform the eviction attorney and wait for the sheriff to do his job. (A lockout or forcible eviction is an ugly thing.) Then I’ll call the locksmith and have the house rekeyed. I do a walk through inspection, taking pictures and notes. Now it’s time to write the price opinion. This is when the real research begins. What I want are the nearest, most recent sales, preferably in the last six months, of similar homes. That’s the only indication of fair market value. List prices of houses for sale are irrelevant. A house is only worth what someone is willing to pay for it. But how am I supposed to know what that is? I’m not a psychic. I have no way of knowing what a buyer is willing to offer or what a seller is willing to accept. All I can go by is what the market is telling me. I start my search on MLS narrowly and gradually expand—subdivision, neighborhood, school district, city. Sometimes comparables are hard to find. I’ve walked through houses where the first thought that came to me was, “What the hell was going on in the mind of the idiot who designed this house?” I mean, seriously, a rock garden in the living room and a poodle room in the master suite--are you kidding me? (Surprisingly, that house sold in a few weeks. It was in an established neighborhood in a good location.) This is what I’m talking about, personal taste. Paint schemes, flooring, décor, these things matter. A house is very personal. For an owner occupied home, many times the buyer will fall in love with the furnishing. But that doesn’t come with the house. So when the buyer moves into an empty house, it’s a disappointment.
That’s why with repos, whenever they need repainting, it’s always off white, sort of like a blank canvas. After purchase, the buyer can do whatever he or she wants with it. Of course, the problem with that will come later when it’s time to sell. Not everyone shares your tastes. And every seller thinks the house is worth more than it really is; it’s personal. Every buyer thinks a dream home can be bought cheap. It’s complicated.
Anyway, let’s assume that I can find some comparable, recent sales. Now I have to make adjustments: positive if inferior, negative if superior. That’s the rule. For example, suppose the subject has 1,500 square feet. One comparable has the same; the other two have 1,300 and 1,700 respectively. Okay, if I assume $20 a square foot, that means I would add $4,000 to the sales price of the former and deduct $4,000 from the sales price of the latter, to arrive at a fair market value. See how that works? If the subject needed repairs, and it could be anything like fresh paint, new carpet, sheetrock holes, fallen down fence, whatever, I estimate the cost of those repairs, double it and adjust for the comparables by the same rule. If the subject has been stripped, missing cabinets, commodes, wiring, that’s a little more problematic, but the rule still applies. The easiest price opinion I ever wrote was some years ago. I got a call from some company and was asked to give a valuation on a house. I did the research, drove over there, took the necessary pictures and notes, then went back to the office to find comparables. Oh, look, here’s one across the street and another two houses down and another on the next block. Same subdivision, same builder, these were basically the same house. All sold in the last three months and the average price was $85,000. There were also six comparable listings in the subdivision between $80,000 and $90,000. What is a reasonable estimation of the fair market value of this subject? I submitted my price opinion, and everyone threw a fit.
I got a call from the company. “We were expecting a price opinion of around $120,000.” (This was at the height of the bubble, and the valuation was for a home equity loan.) They even sent a copy of the appraisal—this guy was using sales of new homes in a gated community ten miles away! (His job is to justify the loan.) “Can’t you change your comparables?” No, I cannot. I’m using next door comps. Then they called my mother and complained. She came up to me and asked what I was thinking. So I showed her my research, the pictures, and the comps. She said, “You’re right.” Then she stayed up until 4:00 AM writing a blistering response to this stupid company, explaining that we do not change our price opinions. We provide accurate comparative market analysis. Another time, I wrote this price opinion for a house. Let’s say it was for $100,000. I showed it to my mother, having learned from prior experience. She said, “That house isn’t worth $100,000. I couldn’t sell it for $70,000.” But these comps show. “I don’t care about the comps! Make more adjustments.”
This is the dirty little secret about price opinions. They’re all subjective. I don’t care what you think your house is worth. If you want to know what it might sell for, ask an experienced broker, preferably one who’s been in the business for at least twenty years. She’ll tell you what you don’t want to hear. Prices are going down. I laugh at these people who say that the economy won’t recover until the housing market recovers. That’s a disconnect if there ever was one. The housing market won’t recover until the economy recovers. And that will take a while.
Great job, thanks so much Gawains.
Have a good night.