Real Estate Appraisal Archives – Page 2 of 6

When to Apply Extraordinary and Hypothetical Assumptions

The process of determining a property’s market value is called a real estate appraisal. The person who appraises the property, the appraiser, physically inspects the property to measure it, take pictures of it, and make note of the condition and the quality of the construction.

The appraiser also needs to be aware of the zoning regulations, city ordinances, and other restrictions that can affect the value of the property. He may also need to know about any recent changes in the neighborhood, such as new constructions, new roads, and new amenities, as well as any special features that can affect the property value. Finally, the appraiser needs to consider the economic conditions, such as supply and demand, population density, demographics, economic trends, and the job market.

After the appraiser completes all the necessary research, he writes a report to present his opinion of the market value of the property. The report must be detailed and include all the information needed to support his opinion. The appraiser must also provide an explanation of how he arrived at the value, as well as any assumptions and adjustments made. The report must be signed and dated by the appraiser in order to be used by the client.

This is of course how a typical appraisal report is generated. Oftentimes, appraisers face situations where a physical inspection alone may not provide all the relevant data required. In the case of a new construction property, the appraiser may only be able to inspect a vacant plot of land; the proposed house is still not built. Or, the appraiser may not have been granted access to the interior of a house such as in the case of exterior appraisals. In cases like this, the appraiser has to make assumptions about information that cannot be physically verified or collected firsthand.

Whenever an appraiser determines that making an assumption is necessary, he typically makes one of two types of assumptions. The types are either Extraordinary Assumptions or Hypothetical Assumptions. This article will explain what these two are and the situations in which an appraiser might employ them.

Extraordinary Assumption:

USPAP defines an Extraordinary Assumption as a presumption that, if proven to be wrong, could change the appraiser’s judgments or findings. It is directly related to a specific assignment as of the effective date of the assignment results. What does this mean?

It means that the appraiser is dealing with uncertain information and is assuming something to be true. The information that the appraiser is uncertain about could be about the physical, legal, or economic characteristics of the subject property. Or, more generally, it could be about things external to the property, such as market conditions or trends; or about the integrity of the data used in an analysis.

A simple, common example would be when an appraiser is not able to complete a full physical inspection. An appraiser may discover that one unit in a multifamily property is locked and inaccessible. While they inspected the other units and have firsthand information about them, such as the number of bedrooms, bathrooms, the condition and quality of the interior, etc.; the appraiser doesn’t know what this locked unit contains or what condition it might be in.

In situations like this, the appraiser makes an Extraordinary Assumption. The appraiser assumes this locked unit matches the public record information, that it has the reported number of rooms, and is in line with the reported quality and condition. He further assumes the locked unit is in conformity with the rest of the subject and matches with what the appraiser was able to inspect. This assumption is specific and tied directly to the subject property and is made as of the effective date of the appraisal.

Hypothetical Assumption:

USPAP defines a Hypothetical Assumption as a condition, that is directly related to a specific assignment, and which is contrary to what is known by the appraiser to exist on the effective date of the assignment results but has been used for the purpose of analysis. What does this mean?

It means that the appraiser is making an assumption that is contrary to known facts; in other words – the appraiser is making an assumption about the subject that is not actually true. The assumption might be about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.

A simple, common example would be when an appraiser completes a report on a proposed, new construction property. The appraiser does his work based on architectural plans and construction specifications, all providing details about a subject property that is yet to be built.

At the time of the appraisal report and on the effective date, the subject property might just be vacant land. However, for the purpose of analysis and in order to actually produce the report; the appraiser assumes that the property is already complete. He or She further assumes that this hypothetical property conforms with the plans and the specifications provided.

Required Disclosures:

Whenever an appraiser makes a Hypothetical Assumption or an Extraordinary Assumption, there are requirements that these assumptions be made with proper disclosures.

Extraordinary Assumptions must be clearly disclosed in the appraisal report, and the report must notify intended users that the extraordinary assumptions might have affected the assignment results. The appraiser need not report on the impact of this assignment condition—only that it might have affected the assignment results. Though an extraordinary assumption might be employed in an assignment, there is no USPAP requirement that it be labeled as such.

Hypothetical Assumptions must be clearly disclosed in the appraisal report, and the report must notify intended users that the hypothetical conditions might have affected the assignment results. Again, the appraiser need not report on the impact of this assignment condition—only that it might have affected the assignment results. Additionally, a Hypothetical Condition might be encountered in an assignment, there is no USPAP requirement that it be labeled as such.

An appraisal is not inherently flawed because it is premised on a hypothetical assumption. An appraisal is not erroneous because it is premised on an extraordinary assumption. In some cases, it may be impossible to provide a value that is not premised on an assumption.

Assumptions and hypothetical conditions are established at the beginning of the valuation process and the valuation proceeds from that basis. The use of assumptions, whether extraordinary or hypothetical, may affect the Scope of Work for an appraisal. The Scope of Work in turn affects how the valuation or review process is carried out, and that in turn can affect the assignment results (e.g., the value opinion in an appraisal). In all cases, the use of an assumption or a hypothetical condition must result in a credible opinion or conclusion, given the intended use.

1 Comment/by Boston Appraisal Services

The Rise in Interest Rates And How It Affects Buyers and Sellers

The Rise in Interest Rates and How It Affects Buyers and Sellers

When the COVID-19 pandemic began in early 2020, the Federal Reserve was quick to act by substantially reducing interest rates, which resulted in many new buyers entering the market to purchase a home at low rates. Because of the high appeal of owning a home, buyer demand far outstripped the supply of homes, which caused home values to skyrocket by the end of 2021.

Since March 2022, the Federal Reserve has increased interest rates five times in an attempt to balance the market more effectively. These changes have affected the entire market and have caused buyer demand to slow over time. On December 14, the Fed hiked rates another 0.75 percentage points. This affected buyers and sellers.

Why Interest Rates are Rising

Keep in mind that the yield curve is currently inverted, which means that long-term interest rates are lower than short-term rates. Investors are finding that short-term treasury notes and bonds are providing better returns when compared to 10-year bonds. Interest rates are currently increasing and have been doing so since March because the Federal Reserve believes that doing so will reduce inflation and slow down the market enough to keep things from getting too out of control.

The main issue with this approach is that many economists believe that the Federal Reserve is overreacting and should no longer be increasing interest rates if they want the economy to remain healthy. Many believe that the last Fed meeting in December, when the Fed rose rates by 0.50 percentage points, will be the last one.

The primary upside with the announcement is that it was slightly lower than the 0.75 percentage point increases that have been announced the last few times. While the Federal Reserve continues to state its commitment to reducing inflation, rates have increased to a level that’s near what officials are happy with.

The markets currently believed that the chance of a 0.75 percentage point increase was low since Jerome Powell, head of the Federal Reserve, has indicated that they will make smaller changes when nearing peak rates. As mentioned previously, there have been five rate increases since March, which is why many economists find that the Federal Reserve is making a mistake.

To gain a better understanding of the market reaction, let’s take a look at recent statements by a reputable stock picker, who has been working on Wall Street for over 20 years, Cathie Wood. On December 7, Wood stated that the interest rate hikes could outweigh the benefits. Wood has long been critical of these rate hikes and believes that the overall bond market “seems to be signaling that the Fed is making a serious mistake”, which is largely the result of yields on 10-year treasury notes falling by 80 basis points below the rates for two-year treasury notes. This is the largest yield curve inversion in more than 30 years.

These inversions are regularly seen as a sign that a recession is about to occur. Wood has also stated that “Deflation is a much bigger risk than inflation.”. It’s believed that inflation dropping too much in the early days of a recession can cause prices to dip to a much lower point, which worsens the economic crisis.

How Rising Interest Rates Affect Buyers

Even though interest rates continue to rise, housing inventory in Boston and Massachusetts is still relatively low. While there’s been a small reduction in buyer demand over the past six months, demand is still higher than supply, which is why home values haven’t dropped sharply. The number of homes sold in Boston in October 2022 was just over 16% lower than in October 2021, which indicates that buyer demand is dropping. However, home values have increased by more than 7% since October 2021, which means that the housing supply is low.

Buyers who are remaining in the market must contend with higher monthly payments. Higher interest rates make it more difficult for buyers to qualify for the same homes that they would have just six months ago. Even though home values haven’t risen too much as of late, an interest rate of 7% for a conventional mortgage means that a buyer must pay considerably more on a 30-year mortgage loan than they would if they received the same loan at a rate of 5%.

Buyers may still be able to qualify for a higher loan amount if they provide a large down payment and have a good debt-to-income ratio. Now that buyers are being forced to purchase homes that cost somewhat less, there’s more demand for affordable properties. For buyers, this situation will likely continue to worsen over the next six months since interest rates are expected to increase even more.

How Rising Interest Rates Affect Sellers

Housing inventory is still low throughout Boston and Massachusetts. The small number of sellers who are currently in the market continues to believe that home values will increase over an extended period of time and that they will receive multiple offers that allow them to create a bidding war. Since the market is tilted towards sellers, they are only taking offers from buyers who have received preapproval.

However, sellers have begun to make small changes to their behavior because of the continual increase in interest rates that has occurred over the past eight months. Sellers might benefit from buyers locking in a preapproved interest rate because of the belief that interest rates will rise even higher over the next six months. Keep in mind that sellers must also contend with fewer buyers in the market, which means that multiple bids become less likely.

Since demand is lower, sellers are starting to see more price dips. When market conditions were most favorable to sellers in 2021, it was common for buyers to make offers that were higher than the listing price. This is no longer the case. The higher interest rates of today mean that monthly payments on the seller’s next home will be higher.

The rise in interest rates affects buyers and sellers alike. While the Federal Reserve might not increase rates as much as they have in previous months, it will still be some time before interest rates drop. If you plan on buying or selling in the near future, approach the market with caution.

0 Comments/by Boston Appraisal Services

Boston, Massachusetts Real Estate Market Analysis

What’s going to happen with Boston real estate? In the coming weeks, months, and years, is it going to go up, down, or sideways? Is it time to buy or sell?

One thing’s for sure: No one knows. No one has a crystal ball, and there are countless factors that can affect property values.

However, in this article we’ll summarize the most salient points that most economists are talking about, and discuss what we think might happen with the Boston real estate market.

Boston, MA Real Estate Market Values over the Past Ten Years

2011: $400k
2012: $400k (+/-0%)
2013: $410k (+2%)
2014: $440k (+7.5%)
2015: $480k (+9%)
2016: $515k (+7.5%)
2017: $550k (6.7%)
2018: $610k (10.9%)
2019: $615k (+1%)
2020: $625k (+2%)
2021: $660k (+5.6%)

There’s a popular maxim that reads “the best predictor of future performance is past performance.”

When it comes to certain investment classes, this idea has been thoroughly debunked — but it largely holds true for certain areas in the real estate market. After all, the three biggest rules for real estate are location, location, location — and Boston still regularly ranks as one of the best cities to live in in the United States, and the world:

Boston comes in at #13 according to BestCities.org
The US News and World Report puts Boston at #18 in Best Places to Live in the US.
Deutsche Bank ranks Boston as #1 in terms of “Quality of Life” in the US, and #8 in the world.

That doesn’t mean Boston will grow at the same rate as previous years. In fact, we think there’s some reason to believe that the days of fast growth are behind us — and there’s even the possibility of a looming crash.

All-Time Low Interest Rates Are Driving Up Prices — But Boston’s Growth Lags Behind the Average

To anyone even remotely involved in real estate, this shouldn’t come as a shock.

Interest rates are at decade-lows. According to Freddie Mac, one of the nation’s largest federally-backed mortgage companies, the rate for a 30-year fixed mortgage is at 2.8-3.0%. The average over the past 30 years has fluctuated anywhere from 3.5-6%.

However, the median sales price for all homes in the United States is up 14.3% year-over-year, while the picture in Boston looks a bit more bleak: only up 2.9% year-over-year. Personally, at Boston Appraisal Group, we’ve noticed a significant price decline in the downtown market, which could possibly signal an incoming crash.

Why might this be?

Great Migration Spurred by the Work-at-Home Movement

Some people have predicted that, due to the pandemic, work-at-home might just become the new normal. Two-Thirds of Massachusetts office workers said they would prefer to keep working at home even after the pandemic. With more people working at home, that might drive less business toward the city center.

After all, if you could buy a house for $200k in the suburbs 45 minutes away from Boston and the same house would cost you $800k to live in the city, if you’re working from home, it simply doesn’t make sense to shell out another $600k (unless you really want to lock in a big loan on a low interest rate).

A Lack of Migration into Big Cities

But even more importantly, while small numbers of residents might be moving out of Boston to the less-expensive suburbs, there’s another problem: more people aren’t moving in to take their place. Policy Economist Stephen D. Whitaker asked the question, “Did the COVID-19 Pandemic Cause an Urban Exodus?” in a recent research study. He tracked migration patterns using an anonymous survey that tracks Americans with a credit file (which includes 9 out of 10 Americans).

In and around the Boston area in particular, there’s a 15% change in outflow, meaning that 15% more people are moving out of Boston than they usually would, but also a 20% decrease in inflow (so 20% fewer people are moving into Boston than normal). The result? A 36% total decrease.

Many big cities, including Boston, have relied on a steady inflow of migrants to drive growth. But with lockdowns forcing many people at home and a workforce that’s gotten used to the idea of working from home, it might mean that the Boston real estate market isn’t poised for the same growth that it’s seen over the past ten years.

Conclusion: Boston, Massachusetts Real Estate Market Analysis

Over the past ten years, Boston market values have only gone up. If you bought a house in Boston in 2010, it’s increased by nearly 60% in value YTD. That’s one great investment.

But past performance is no indication of future success.

With interest rates at decade-lows, housing across the United States has been having its best year in a long time, but Boston real estate isn’t quite seeing the same level of gains, and that could be due to a number of factors.

At Boston Appraisal Group, we’ve noticed a downtrend in some of the sale prices in the downtown market, and we think it could — in part — be attributed to the overall migration patterns of the city in general: some people are moving out, but, even more importantly, fewer people are moving in, causing a 36% decrease in total migration.

Whether or not that indicates a coming crash is anyone’s guess. It’s also entirely possible that, as people become vaccinated, they start pouring back into big cities, eager to spend their savings on all of the world-class restaurants and cafes that an award-winning city like Boston has to offer.

0 Comments/by Boston Appraisal Services

3 Reasons Why an Appraisal Comes in Low

Have you jumped on the refinance bandwagon? If not, you may want to consider it. As of the end of October 2020, interest rates on a 30-year refinance mortgage were averaging around 3.2%. These are the lowest rates in the last 40 years! If you decide to take advantage of these all-time low rates, your lender will most likely order an appraisal. What happens if the new appraisal is less than original one? Before you assume the appraiser made a mistake, let’s look at three reasons why a new appraisal could come in low.

The Case File

Three years ago, James Brown purchased a nice three-bedroom home in a quiet town with good schools. The home had been recently renovated and was in great condition. He paid $475,000. The appraisal at that time matched the purchase price.

James wants to do a cash-out refinance and get $15,000 to pay off some other debts. To make that happen, the lender says the appraisal needs to be at least $494,000. James expects it to come in close to $505,000. When the appraisal comes back, however, it was for only $489,000.

James is devastated. The lender suggests that he takes out only $10,000 instead of the $15,000. The appraiser looks like the bad guy. But what could be the cause of the lower than anticipated value?

Reason #1: The Range of Value

The primary reason appraisals differ is because, in reality, real estate appraisals are designed to provide a range of value rather than one set price. A real estate appraisal measures the actions of typical buyers and sellers in the marketplace and rarely do two buyers offer the same exact amount.

Let’s say that Mr. Brown decides to list his home. He lists it for $530,000 and expects to get an offer at $505,000. Within one week, he receives 100 purchase offers. Of those 100 offers, we could expect that approximately 30% would be ridiculously low and 10% would be really high with a slew of ridiculous contingencies. The remaining 60% would be considered reasonable offers. There would be some low cash offers and some high offers with contingencies such as seller paid closing costs or closing delays (i.e. buyer needing to sell their house first); but generally speaking, all the offers should be within 10% of each other. All the reasonable purchase offers created a range of value.

Using our example of Mr. Brown’s house, 60% of the offers would be between $480,000 and $530,000. While every seller would love to get the highest price, nearly all of the high-priced offers will have some sort of contingency that would make the offer less appealing. It is very possible that Mr. Brown may accept an offer of say, $490,000 if the buyer is paying cash and can close within two weeks. That accepted purchase price becomes the “market value” of the property.

An appraisal measures that value range within the report. Hence, Mr. Brown’s most recent appraisal of $489,000 is within that appraisal range of $480,000 to $530,000. It is possible that the appraiser may be willing to adjust the value up to the desired $494,000, since it is also within the range.

Now, here is a word of caution: federal lending requirements and appraisal standards do not allow lenders (or property owners) to “pressure” the appraiser into “hitting” a target number. The lender hired the appraiser as an independent third-party to provide a non-bias estimate of value. The appraiser will decide if the market data can support a change of value, but they cannot be pressured to do so.

Reason #2: Lack of Market Data

Another reason for a difference in appraised value can be caused by a lack of supportable evidence. All appraisers rely heavily on recent sales of properties that are similar to the property being appraised. Most lenders will require that all of the sales used in the appraisal have to be sold within 6 months and be within a limited distance. This can severely limit the data available to the appraiser.

Let’s say that Mr. Brown decided to refinance in the spring after what was a record-breaking terrible winter. When you combined below zero temperatures, tons of snow and COVID-19 it isn’t much of a surprise that there were hardly any sales all winter. The appraiser has to use what few sales are available if he wants the bank to accept the appraisal. This lack of data can, unfortunately, slightly skew the true market value. The appraiser has to balance the requirements and stipulations set by the mortgage market with his ethical requirement to determine a fair market value for the property. In these cases, it is common for the new appraised value to differ slightly from a prior value.

Reason #3: Economic Impact

A third, and less common, reason an appraisal comes in low is due to a change in the economic climate within the market area of the subject property. We have all seen how the national economy affects property values. A change in the local economy can also raise or lower local property values.

For example, let’s say a major employer in the area of Mr. Brown’s home shut down. There was a loss of over 2,500 jobs. Because of the uncertainty of future employment, fewer people are looking to buy homes in the area. In order to encourage buyers, sellers slowly reduce the list price of their homes. This creates lower sale prices than were seen only one year ago. An appraisal must reflect this loss in value – even if it is only temporary.

A homeowner always hope that his property is appreciating in value. A lower appraised value can seem devastating, but before you freak out and assume the worst, consider the possible causes. Look at the range of value contained in the appraisal report. What was the value of the cost approach (usually establishing the high range) and what were the adjusted values of each of the comparable properties (creating the low and mid-ranges)? If your first appraisal is inside that number, then as long as the appraisal can be used by your lender for the refinance, do not fret, the value is still there.

0 Comments/by Boston Appraisal Services

The Hidden Value in Transitional Properties

The backbone of any real estate appraisal is the highest and best use analysis. All properties have a highest and best use – and this is not always the current use. There are four qualifiers that help to determine the highest and best use of a property. The use of a property must be…

Legally Permissible
Physically Possible
Financially Feasible
Most Productive

The goal of the real estate appraiser is to identify the use of the property that will be the absolutely most profitable use within legal, physical and financial boundaries. Property owners are often blinded by the current use of the property, and they fail to see that a change in use could be more profitable. This is where a real estate appraiser can help.

Real estate that has a more valuable future use is called a transitional property. A transitional property may respond to an immediate use change or the most profitable use may come after the passage of some time, as would be the case with a future zoning change.

Traditional properties are true diamonds in the rough. A savvy real estate investor often sees developmental value in grandma’s old farm house when the children only see stinky cows and chipped paint.

When a real estate appraiser is working for an owner/client, they will be able to help the owner to see the true developmental potential of their property to maximize a future sale price. When an appraiser is working for a purchase/developer/client, they can project the actual, or even future, market value of a property after its transition into a new use. This can justify a purchase price or be used as a basis to seek third-party funding for development.

Let’s examine each of these four highest and best use qualifiers to see how they can shift a property from their current use into a more valuable future use.

Legally Permissible

Transitional properties are commonly created when the zoning is changed. Properties that used to be strictly residential may now be approved for multi-family use. Land that was multi-family could be changed to office/service or retail/commercial. Once a new zoning designation is applied to the property, it becomes legally permissible to transition to another use.

In some cases, an existing zoning designation may allow for a change in use. For example, an R2 zoning may allow for two-to-four family dwellings. Could the existing single-family home be converted into a duplex? Could the storage warehouse be converted into a retail store?

In other cases, a change of zoning particular to that property could create a more profitable use. For example, a residential property may be located adjacent to an office/service zoning. It has been determined that the house could be easily converted into an office, so the property owner files with the local zoning authority requesting a change in zoning. Perhaps you have seen real estate offices, attorneys, counselors, or even dentists set up shop in what was clearly someone’s home in the past.

Physically Possible

Before any other qualifier can be analyzed, the legal uses of the property must be established. Once that is determined, the next step is to look at if a change of use is physically possible. In many instances, the existing structure could be converted to a new use. A home could be changed into apartments or an office, a warehouse into light industrial or retail. The changes to an existing building are almost endless – as long as they are physically possible.

Financially Feasible

But in the end, it does really come down to the cost. If it will cost $40,000 to convert a house into a duplex but the market value of the property will only increase $20,000, or in some cases may lower the value, then just because it is legally permissible and physically possible it is not financially feasible and thus not the best use of the property.

Now on the other hand, there comes a time in a property’s life where the structure may create a negative drag on the value. For example, there was this 1,200 square foot quaint turn-of-the-century cottage with 150 feet of frontage on a very beautiful inland lake. The land was selling for $1,000 per front foot. The home had a depreciated value of about $40,000. A buyer would most likely tear down the house, remove any site improvements and start over by building a multi-million-dollar home on the land. The demolition cost was estimated at $35,000. The appraiser estimated that if the property sold with the house, the market value would be $1,465,000 and if vacant, $1,500,000. The owner decided to sell first the house for $10,000 you-haul and then listed the now vacant property for $1,500,000 earning $45,000 more than if he listed the property “As Is” with the house.

Most Productive

The fourth qualifier is establishing all legal uses that would be physically possible and financially feasible the appraiser would need to make sure the use is also the most productive. In other words, what would be the most productive use of the land that would give the highest return.

In some cases, the best use of the land is in its division. This is often the case with smaller parcels of farm land that are just outside a residential area. Development into a subdivision rather than its continued single-family use is usually always more profitable.

In other cases, joining several adjacent smaller parcels together will create a higher value than if purchased individually. For example, an area near a highway was recently rezoned from multi-family to commercial. A developer, seeing the transitional use potential, bought three old run-down rentals all next to each other. After demolishing the buildings and assembling the land into one parcel, he sold the property to a commercial developer for 50% more than what he paid. While each of the three residential lots were originally valued at $15,000, as a commercially zoned larger vacant parcel it had a value of $125,000. A true diamond in the rough.

Transitional properties are what developers live for. There is money to be made if you can see past what is and envision what it could be. Your local appraiser would be more than happy to help you determine what would be the highest and best use if you ever discover one of these hidden gems.

0 Comments/by Boston Appraisal Services

What an Appraisal Report is Really Telling You

Receiving a copy of a residential real estate appraisal report can be a little intimidating. It may seem like a lot of money for such a such a short report. But that is hardly the case. That appraisal report you are holding tells you so much more than a simple property value.

We’re going to examine, in detail, the standard form appraisal report that is most commonly used for residential appraisals. It is called the Uniform Residential Appraisal Report (URAR). This appraisal report can be used for a variety of real estate-related transactions such as a obtaining a mortgage, verifying a purchase price, estate planning, or settling a divorce. While there are other appraisal reporting methods, the URAR is the appraisal you will most likely receive when valuing any single-family residential property.

The Three Valuation Sections of an Appraisal Report

There are three valuation sections of an appraisal report – the cost, sales comparison and income approaches to value. These are contained within the appraisal form, but depending on the property, not every approach to value may be utilized by the appraiser. Let’s look at each of these three real estate valuation sections to see what your appraisal report is really telling you.

The Sales Comparison Approach

The sales comparison approach is designed to compare your property, the subject, with three or more similar properties that have recently sold. The grid below allows an appraiser to compare important features such as the land (called the site), the design or style of the home, the age, condition, rooms and size (called the Gross Living Area). There is also space for the basement, heating and cooling systems, garage, decks and a few lines for non-standard features.

To the right of each comparable you will find monetary adjustments that add or subtract value from the comparable’s sales price. In the above example, your home has 2,862 square feet but comparable #2 only has 2,310 square feet. The appraiser must add the value of the 552 square feet to make the comparable similar to your property. In other words, if the comparable was the same size as your property, what would the buyer have paid for it? That is the concept behind the sales comparison approach.

There is a section after the comparison grid whereby the appraiser will explain his or her reasons for making the adjustments. Then they will take the adjusted sales prices of the comparables and use it to set the value of your property. Sometimes it will be a simple rounded average and other times, one of the comparables are more similar to your property, so the appraiser may place more weight on that value.

In the example show above, it looks like comparable #3 was more similar. Notice that the “Gross Adjustments” were only 4.3% but they were 21.4% for comparable #1. So, let’s say the appraiser decides that comparable #3 is a better indicator of value and places more weight on that value, the appraiser may conclude that the market value of your property is $242,500.

The Cost Approach

The cost approach looks at what it would cost to buy an identical parcel of land and construct an identical home – just like it is right now. The principle behind this approach is that a buyer would not purchase your home if he or she could build an identical home for less.

This approach works well for newly constructed homes, but does not help much if the property is old, antiquated, or suffering from extensive deferred maintenance. This approach may or may not be included in your appraisal report.

In this example, the appraiser determined that the indicated value by the cost approach was $259,050. It is common to have the cost approach be slightly higher than the sales comparison approach, that is unless your home has been built within the last 5 years.

The Income Approach

The income approach is used only if the property is being rented or would be most likely rented by a new buyer. This approach is rarely used with single-family residences. Even if your property is currently being rented, if it is surrounded by owned homes then the appraiser will most likely not consider this approach a good indicator of value. It is common that the income approach value is substantially less than what is indicated in the sales comparison approach.

The Real Estate Appraisal Range of Value

Right below the sales comparison approach, you will find the reconciliation section. This is where the appraiser will determine the property’s value and explain their reasons for their conclusions.

It is most likely that the appraiser will decide that the sales comparison approach is the strongest indicator of the property value. In the bold section at the bottom, the market/appraised value of the property was determined to be $242,500. But, in reality, the appraiser is supplying you with a range of value.

Where is the Appraisal Range of Value?

Even though the appraisal report must conclude with one value number, it is more accurate to say that the appraisal as created a range of value. Notice what the appraisal report has revealed.

How Can I Use the Appraisal Range of Value?

The appraisal contains at least six different values. The combination of these values creates a range of value. Knowing this range can help you to make more informed decisions. For example, if you will be selling your house, the appraisal just told you that the list price should be close to $254,500 and the lowest accepted price should be $240,300. Anywhere in between and you have received the market value for your property. If the appraisal is being used to get a mortgage, the bank is going to use the appraised value ($242,500). If that number is too low for you to finance as much as you would like, the range of value shows you the appraiser’s “wiggle-room.”

In a perfect world the appraised value should come in the middle of the range with there being no more than a 5% difference plus or minus within the range. In this example, the appraised value is less than 1 percent from the low range of value. This could indicate that the appraiser may be justified in raising the value closer to the $244,000 mark. Though remember that comparable #3 was the best indicator of your property value, so the appraiser may decide the value must remain where it is.

The next time you receive a residential real estate appraisal, look beyond the appraised value and see what the appraisal report is really telling you.

6 Comments/by Boston Appraisal Services

Market Outlook for 2019 and 2020: Trends to Watch

The housing market across the country, and especially in Boston and New England, is experiencing a growth trend that’s accelerated over the last few years. The median home and condo prices in the U.S. have dramatically risen, reaching a record high in early 2019. Despite the continued appreciation, both real estate economists and the general public are starting to worry about the shadow of a second recession (the dramatic downturn of 2007 still on their minds). With this apprehension in mind, we’ll discuss some of the things to expect from the housing market in the second half of 2019, going into 2020.

The Housing Market Is Going Strong… for Now

The year 2019 started with a bang, and this wasn’t even news. Ever since 2012, home prices have been on the rise, reaching unprecedented numbers in some markets. The Greater Boston Area is a good example: in March 2019, the median price for single-family homes hit a record-breaking $377,000. According to the latest CoreLogic HPI Forecast released in May 2019, home prices have increased by 3.7% year over year from March 2018. This trend may continue into the next year with home prices expected to increase by 4.8% on a year-over-year basis from March 2019 to March 2020. Also, the Case Shiller Home Price Index in the United States reached an all-time high of 215.68 Index Points in April of 2019.

There are several other encouraging factors. One of them is the arrival of a new pool of homebuyers (the Millennial generation) on the housing market. Despite their reputation for refusing to settle down, Millennials⁠—compared to older generations⁠—account for the greatest share of primary home loan originations. This number should continue to increase as more and more members of this age group reach their prime home-buying years. Low interest rates continue to support strong demand, and experts anticipate these rates will remain low for the foreseeable future.

After estimating in late 2018 that 30-year mortgage rates could reach 5.1% for 2019, Freddie Mac revised this estimate down to 4.3% and projects it will remain low in 2020 at 4.5%. Finally, unemployment rates are minimal as well at 3.7% in June 2019, a minor increase from a 49-year low of 3.6% in the previous month.

Housing Market Growth May Be Slowing Down

The housing market is starting to show signs that the unbridled growth of the past few years may be coming to an end. This will be a relief for aspiring buyers burdened by dwindling inventory, high prices, and competition, particularly in hot markets like the Bay Area and Greater Boston.

The number of listings available on the market has progressively improved in recent months across the country, with unsold inventory reaching a 4.3-month supply at the current sale pace. This is an improvement from the 4.2 months of supply of the previous month, but still a long way shy of the six months’ supply required in a balanced market. Although house prices remain on the rise, they are increasing at a slower pace than they have in recent years.

This gradual upturn in the quantity of available housing does not necessarily mean that new buyers will find suitable housing wherever they want, as affordability remains a major concern in many markets. The San Francisco Bay Area, Seattle, Los Angeles, San Diego, and Boston are still out of reach for most buyers despite an increase in inventory and a reduced number of bidding wars. The rise in stock is not always due to the appearance of new listings, but also the result of properties sitting on the market. In New England, the increase in the number of listings—especially in the single-family home market—is barely keeping up with the demand boosted by favorable mortgage interest rates. The best-faring markets in this area are the ones that remain relatively affordable for most buyers, notably Rochester, NY.

Rising Prices and Diminishing Affordability

The real estate market is by nature cyclic and it is clear that the housing market will not maintain this pace in the long term. As a result, economists and homeowners are wondering how sustainable the current housing trend is, with numerous experts pointing to 2020 as the onset of the next recession.

In many cities across the country, housing prices are back to (if not above) their pre-2008 levels, and potential buyers are struggling to secure reasonably priced housing. This affordability issue is a key reason many industry stakeholders believe the real estate market is due for a correction, particularly in inflated markets.

It is unlikely that we will see a real estate crash comparable to the one we experienced a decade ago. Firstly, lending requirements (which were one of the critical factors of the 2008 financial crisis) are very different today. Also, the market’s key players are continually learning from past mistakes; banks now apply strict standards to select potential borrowers. Appraisers who reported feeling pressured by lending institutions in 2007 have been working towards establishing appraiser independence and higher education requirements to improve industry standards.

Should You Be Worried About the Housing Forecast?

Trends indicate that the market will slow down in the short term–to the relief of home buyers dealing with the listing shortage and high prices. However, the chances for a 2008-like real estate crisis are remote. If an economic crisis takes place, it will most likely be due to political and financial factors rather than the state of the housing market.

Where do you think we’re headed?

Please leave a comment with your thoughts and questions:

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Appraising Green Buildings: Do Solar Panels Add Value to the Property?

From eliminating disposable straws to banning single-use plastic bags, reducing human impact on the environment is at the forefront of many citizens’ minds in recent years. As a result, the real estate industry is progressively adopting ecology-minded trends, resulting in the gradual emergence of green buildings (both commercial and residential) across the country. Green buildings are defined as properties that use renewable energy and efficient building materials in their operation, construction, and design to create positive impacts on human and environmental health. One of the key technologies that embody this growing shift towards sustainability is Photo Voltaic (PV), otherwise known as solar panels. Although we can rejoice that the green building movement is becoming more mainstream, the question of whether or not this energy source and other green features add value to a property is still up in the air.

Property owners are often surprised when the time comes to estimate the fair market value of their green building. Many appraisers believe that these green features, although expensive, add little value to the property, while potential buyers find these features appealing and valuable. This dichotomy between the perceived value of the property and the one reflected in the appraisal can lead to many issues when selling or refinancing. Let’s explore how solar panels and other green features add value to real property.

Solar Panels and Other Green Features Are a Good Investment

The good news for owners of green buildings is that several studies demonstrate that they tend to sell for more than the average property. In the residential world, a 2015 report from the Lawrence Berkeley National Laboratory concludes that houses equipped with solar panels sell for $14,329 more on average than a non-solar comparable property, which represents a 3.74% increase. Other recent reports support these findings, with green homes selling, on average, for 2.19% to over 8% more than traditional buildings, depending on the property’s features and location.

Given the significant investment that these features represent, particularly if they are added once the building is already built, the previously mentioned numbers seem low. However, the most compelling argument for installing solar panels or other eco-conscious elements in a building remains that they pay for themselves in the long run, as the owners save money every month on their energy bill. For commercial buildings, green features like solar panels can significantly decrease their operating expenses. Additionally, tax credits for commercial and residential buildings are an added incentive for those who install energy-efficient products or renewable energy systems in their property. Finally, as technology progresses, these elements will become not only more efficient but also more affordable.

With analysts predicting that energy prices will continue rising in the coming years, it is likely that green features, such as photo voltaic, will become more widespread and something that buyers will demand and be willing to pay more money for.

The Other Side of the Coin: The Appraisal Process Doesn’t Always Reflect the Contributed Value of Green Features

Sometimes, appraisals do not reflect the perceived value of these improvements, to the dismay of building owners.

This is due in part to the fact that, to establish the market value of a property, appraisers must present in their report comparables with similar features to support the opinion of value. Although green buildings are becoming more popular in some markets, often at the initiative of the state—for example, California’s goal is to have 33% renewable energy by 2020 and 50% renewable by 2030—they are still scarce in many parts of the country. In the absence of green comparables, appraisers have little evidence to conclude that solar panels and other features add value to a building.

To objectively derive the additional value that solar panels contribute the property, appraisers turn to the discounted cash flow (DCF) method. DCF consider the present value of the future cash flows (or savings) that the array will generate over a given period of time.

While DCF is useful, some appraisers lack the specialized training needed to fully consider the value of these features. They have little incentive to educate themselves on the subject, especially if green buildings are not prevalent in their area and if the chances that they will need to value one are slim. Appraisers specializing in green buildings exist, but they can be few and far between in geographic areas where green technologies have yet to catch up.

Finally, with the constant changes in technology, the information required by an appraiser to evaluate the added value of each feature accurately is not always available. Some features are not visible to the untrained eye, and unless the owner informs the appraiser of which elements are present on the property and their characteristics, he or she may easily miss them.

Keeping Up with Green Trends: Appraisers Are Catching Up Quickly

Nevertheless, with more green buildings constructed, bought and sold every day, the issue of finding appropriate comparables will diminish over time. Moreover, the appraising community is making a conscious effort to catch up with these trends. Companies are offering specialized training to educate appraisers on the different features to take into consideration when valuing a building and how to incorporate them in an appraisal.

The Appraisal Institute (AI), which is the largest professional association of real estate appraisers in the United States, released “The Residential Green and Energy Efficient Addendum” in 2011 (updated in 2017) to help appraisers communicate the green features of a property transparently and efficiently in the appraisers’ reports. AI is also at the forefront of green building education for appraisers with its Valuation of Sustainable Buildings Professional Development Program.

How can building owners ensure that green features are reviewed in an appraisal?

Appraising a new feature is always a challenge, and it can take time for the perceived value to be reflected in the appraisal, based on sales comparison. Builders, homeowners, and real estate agents should prepare to provide the appraiser with all the documentation necessary to identify the characteristics of each green feature and prove that these features contribute to the value of the property by saving money every month. Detailed technical specifications, HERS rating, comparative energy bills, etc., help the appraiser to support the added value for each high-performing and energy-efficient element.

Have you encountered a situation where a building’s features were not reflected in an appraisal? How was the situation resolved?

1 Comment/by Admin

Estate Appraisals in Massachusetts: Everything You Need to Know

When a family member passes away, his or her relatives can be overwhelmed quickly. Not only are they grieving, but they must also take care of the legal obligations and paperwork necessary to settle the deceased’s estate. And because real estate properties are usually the most significant financial asset of the deceased, establishing their fair market value is a priority.

Whether the plan is to sell the property, pass it on to the designated heir(s), or estimate how much obligatory taxes will be paid on the estate, it is important to know the exact worth of the property at the time of the owner’s death. If the estate is going through probate, an accurate inventory of the decedent’s possessions—including any real estate properties—is required.

In any case, the most reliable way to find out the fair market value of a home is to order an estate appraisal, also known as a time-of-death appraisal or probate appraisal. Here is everything to keep in mind regarding this critical element of any estate settlement procedure.

What Is an Estate Appraisal?

After a death, it is often necessary to establish an exhaustive list of the deceased’s possessions, including what is often the most valuable asset: real property. Even if the deceased had a will, a time-of-death appraisal may still be required to settle his or her estate. This unique appraisal type is employed to distribute the estate equitably among the heirs, to plan the estate’s future, and to calculate the estate tax incurred.

If probate is necessary—as is the case when the owner passes away intestate (without a will) or when issues arise regarding the existing will—the court usually demands a detailed inventory of the estate, including the cash value of the decedent’s home as of the date of his or her death.

As such, the executor of the estate or the legal representatives should be prepared to order an estate appraisal promptly. To do so, they need the assistance of a professional real estate appraiser. Licensed real estate appraisers are neutral third parties with no interest in the future sale of the property. They produce objective reports that are defensible in court and will resolve disputes over value that may emerge later.

Understanding the Estate Appraisal Process: A Practical Way to Ease Probate Burdens

In most cases, an estate appraisal assesses the property’s value as of the deceased’s date of death (DoD). The effective date of the appraisal is not the day the appraiser inspected the property (which is usually the case in other forms of appraisal), but prior. This type of appraisal is known as a retroactive appraisal or historical appraisal and is ordered months, or even years, after the property owner passed away. To determine property value, the appraiser needs access to information regarding the property such as retrospective photographs, a detailed list of the improvements made since the decedent passed away, and other supporting documents.

Additionally, the cost of an estate appraisal depends on many factors, including the size and location of the property. Occasionally, any of the following conditions may elevate estate appraisal prices: the retroactive appraisal requires extensive research by the appraiser, the information is not easily accessible, or the effective date is in the distant past.

The appraiser will inspect the property without taking into account the improvements that may have been made after the decedent’s death, and he or she will compare it to properties in a similar condition that sold proximate to the date of death. Although it is not always immediately required (if the property is held in a living trust, for instance), a date-of-death appraisal will likely be needed at some point.

Estate Appraisals and Taxes: The IRS Are Also Involved in Inheritance

When an estate has a transfer of ownership due to death or inheritance, the Internal Revenue Service will demand the homeowner’s relatives provide an appraisal showing the property’s market value. The property is usually appraised as of the deceased owner’s date of the death; however, the IRS may permit an alternate valuation date (AVD), which is up to six months after the date of death of the owner. A time-of-death appraisal is pertinent if the market has declined and the estate has decreased in value over time. Two appraisals are required in this case: one based on DoD and another with an AVD.

If the property is placed in a trust, the IRS will insist on an appraisal after the death of the final grantor, to determine the value of the estate and establish the basis of the property held in trust. The IRS uses the information obtained to confirm whether or not (a) the estate value exceeds the currently enacted exemption amount ($11.4 million for 2019) and (b) the estate is subject to estate tax, commonly known as the ‘death tax.’ The federal tax code allows estates to exclude a portion of value in a tax year—up to a certain threshold—from being subject to estate tax. Estates may also be subject to state taxes, depending on the state of residence of the decedent; these state estate taxes often have a threshold level lower than federal.

Knowledge Is Power: A Summation of the Estate Valuation Process

Overall, estate appraisals are often necessary, mainly because they are essential to facilitating estate settlement and help solve many issues preemptively. When family members are actively mourning, the last thing they need is an insensitive approach to property valuation, which will only further compound their sorrow. To avoid the emotional consequences of drawn-out property valuations, the first step is to create a comprehensive record of the deceased’s assets. Secondly, the heirs, executor, or attorney should order an appraisal. Before doing that, however, they should seek professional help to determine what kind of appraisal they need (typically a retroactive appraisal or historical appraisal). Lastly, it is worth noting that the IRS will get involved at some point; hence, the grieving heirs should prepare for this eventuality. The best way to proceed is for inheritors and their representation to brace for potential litigation and the IRS’s participation by equipping themselves with relevant and timely information on value and the estate settlement process.

If you’ve ordered an estate appraisal before, what are your recommendations for someone currently facing this situation?

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Divorce Appraisals in Massachusetts: Answering Settlement Process Questions

Even in the best-case scenario, divorce is a difficult and emotional time for any couple. Besides child custody, deciding the fate of the family home is often one of the major issues and sources of conflict. Not only is there an emotional attachment to the family home, but it is usually the most significant shared asset and the result of years of financial investment for both parties. As a result, most state courts require a recent appraisal as part of the divorce property settlement to establish the value of the property.

3 Comments/by Admin