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back to Trust the Process podcast where we talk
about the housing industry, the real estate market,
and everything in between. Today, wanted to talk
a little bit about appraisal. So kind of, that's
one of those things in the housing market, in
the housing industry as a whole, that is a temperature
check on the market. What are we seeing now?
What do we know is happening? Shortfalls, tidewater
overs, unders. I think there has been just over
time an expectation of where we think homes should
be listed. And I think now, buyers have started
to push a little harder on what they think their
home is worth. And I think that there might be
some swing that's happening in that. So curious
to get your take on it and what you think is
happening in the appraisal world. So, I mean,
I've been in the industry for about 14 years
and in the build industry for 10 of those. And
I mean, I've definitely seen... times where appraisals
are the only thing anyone can talk about, and
then other times where it's just kind of like
another step in the process. So in stable markets,
as long as your property is not really bucking
the trends, you don't really think about the
appraisal. You just say, that's one more step.
But appraisers on a purchase, you can have an
appraisal with a refinance or appraisal for a
divorce. When you have a buyer and a seller that
have come together and are under contract with
deposits and moving forward. That is price discovery.
So generally appraisers will try to meet that
value as best they can and then their job is
to document the evidence. And they are a licensed
person with insurance and I mean it is a job
that... people take very seriously as well they
should. Ultimately, they're there to protect
the bank. They're not there to protect the buyer.
They're not there to get at the seller. They're
there to protect the bank to say all your valuations,
80 % loan to value, what's the value is the number
that the appraiser's coming in at. It doesn't
mean that's what the home has to transact for
though. So if the home is under contract for
800 and has an appraisal at 775, if the seller
doesn't want to go to that number, That's okay.
I mean, at the end of the day, the buyer agreed
to pay $800 ,000 for the home, no matter how
they get there. So the contracts on the buy side
have appraisal contingencies. Sorry, on the resale
side, have appraisal contingencies, generally
speaking. You don't always have to have them.
They're not law. It's probably good agency to
protect your buyer with an appraisal contingency.
Generally in Las Vegas, that's around 21 days
from contract acceptance, 18 to 21 days. So when
you look at it, through that lens, it's a buyer's
problem. The appraisal is a buyer's problem,
and it's a condition of their loan. A cash buyer
has no appraisal. Sellers sometimes want to get
an appraisal done before they list a home, which
makes absolutely no sense because it's one person's
opinion of value at that day in time. We don't
have a contract. We don't have a buyer. Nothing.
That number is going to tell us absolutely nothing.
That appraisal could come in again differently
next week, a month from now, two months from
now. So ultimately, the seller needs not concern
themselves with an appraisal above and beyond
how it could affect the sale of their home. So
you're going to find price resistance eventually.
And if your home is not unique enough, you might
not find that buyer that will pay over that appraised
value. When homes are in hot demand and inventory
is low and we're coming off of a buyer's market
or a balanced market, that's when appraisals
... really start to matter because you have data
six months ago that doesn't support what the
current market looks like today. And I experienced
that in 2018, late 2020, but really mostly all
of 2021. We had to get through a year's worth
of sales data to have enough evidence to support
where the new market was at that time. Our buyers
and sellers were meeting each other. So when
you had Inventory down 70 % and the buyer activity
up 40 % You were you had a big mismatch in supply
and demand so therefore the only the most motivated
buyers were able to get those homes whether they
were cash whether they were waiving appraisal
and Or in the off chance you hot you found a
home that had some data behind it But generally
speaking buyers or sellers were so used to pushing
the market if they had neighborhood comps At
$700, they were going to push to $725 anyway,
and at that time, no matter what you listed,
pretty much was selling, even if it was detached
from reality, because there's just nothing to
compete with you to keep you honest. So buyers
were waiving appraisals, buyers were committing
to $25 ,000, $30 ,000, $50 ,000 over appraised
value. And that's how we were getting those values
recorded. And those are the values that we're
leaning on today for our appraisals. Appraisals
usually go back 180 days, but still that data
chained together to say, okay, well, 2022 was
leaning on late 21, 23 was leaning on 22, and
so on and so forth. And now appraisals aren't
really an issue anymore. I feel like they're
not too. No, it's just not. Yeah, what about
on the builders? We're going into a new community
where there is no cob. We haven't said that yet.
We haven't built any model match or anything
to go off of this. that's identical. A couple
of hacks that a builder can employ. They can
build the model, stage the model, furnish the
model, and then sell to an investor for cash
with a model home lease back. Many times those
lease backs are inflated to push the cost higher.
So they'll work in a three year lease or a two
year lease. That's a good trick up their sleeve.
One thing as a builder I can tell you that you
really lean on is appraisers. are really generous
with builders. I don't know. I've never had one
of my builds not appraised. I've never been on
the broker side of a production builder when
I was the buyer's representative that didn't
come in at value unless it was something maybe
they had worked in the cost of a pool. So maybe
it was one off situation if I really thought
back over. 12, 14 years where that was an issue,
but that would be one time. I can tell you that
it's really never been an issue. And you brought
up a good point when you're a new track to your
new neighborhood, they'll just go out two, three
miles and ultimately they're gonna look at what
is your builder's base price, which I can go
into my office right now and change our base
price with two keystrokes. But the appraiser
looks at that and says, what's your base price
on this home? What's the list of upgrades that
are put in this home? And as long as that all
kind of tracks, you're generally going to get
it. And I know they don't ever show us if when
we're, you know, as a builder you're the seller.
This is a good misnomer or misconception too.
Oh, what did the appraisal come in at? The buyer
bought that appraisal. you'll never see that
appraisal unless it's low and they're using it
to leverage lower price seller wants to know
what was it really worth yeah okay well it's
usually a pass fail you made it or you didn't
but they don't give you a true value typically
yeah and and and i have seen as the market's
gotten soft this year homes appraising for higher
than our contract price you know when i look
at some of our brokerage clients we had one recently
yeah appraised for higher significantly higher
So it shows you that's an example of a market
cooling. The comps were better six months ago,
three months ago, two months ago. There was enough
in there for the appraiser to say, oh, this is
appraising for one million. We were on a contract
for 9 .15, I want to say. So that's a huge discrepancy.
So that buyer either got a ton of great equity
or it was the beginning of the values kind of
getting soft in that area. And I think it's probably
the beginning of the values getting soft in that
area. But it'll take a while now because now
that appraised out his recorded sale will become
part of the appraisal calculus going forward
so it's very hard for homes to appraise over
contract value because there's no greater representation
of a home's value than one of what ready willing
and able buyers ready is willing to pay for a
Property that is so willing to sell so that establishes
the market right right then and there but There
are times where the evidence is that compelling
that well, yeah, it's 915, but we think it's
Worth more than like a million. Yeah, so and
I do think new homes often set the comp, you
know, I think there's a I mean I can think of
times where in selling in a big home track You're
you know, you're selling the home that you haven't
You're trying to get an appraisal on a home that
you haven't had appraised yet now We've had a
price increase on our base right new home price
is gonna be higher We haven't so then you set
that but that gives a trend for the whole rest
of the community moving forward including yours
and everything outlying right, right I agree,
you're definitely making the market as a builder.
So generally in Las Vegas and a lot of areas
that have significant suburban sprawl, new is
around other new, so you do have that kind of
proof of value. But one builder builds a very
different 2 ,500 square foot home than another
builder. So it's not just purely off of size,
it's not purely off of lot size, location, or
views. A lot of it is quality of builders. I'm
not gonna use that word quality loosely, it's
just category of finishes. you can have a cheap
finish that is good quality. It's just a good
version of cheap wood flooring. Yeah, exactly.
Right, it doesn't mean that it's inferior, just
it's a lower spectrum. And relative to that price
point, right? It's great for that price point.
It's great for $500. It's not good for $700.
Exactly. But that's the kind of flexibility that
builders enjoy. And then on the luxury side,
I will say... I don't know, probably only 50
% of our builds that sell even need an appraisal.
There's a lot of cash in our - A lot of cash.
Yeah, and it's a different buyer profile. Custom
luxury. Yeah, custom luxury for sale is a very
different buyer pool. And truly, what we're comping
against in those custom communities anyway, we
wouldn't have to worry about the value there.
Right, generally. And plus, you know, my methodology
is I tend to underdevelop. So if a neighborhood
can hold $700 a square foot at a $3 million sales
price, I'll look to build $600 a square at a
$2 .2 million. So I'll scale down the home, I'll
scale down maybe what I'm doing in the yard to
hit, to be a really nice $2 .5 million home in
a $3 million neighborhood. Something that I've
always done, a lot of developers go to max it
out completely, but I've just never, I've never
leaned on that strategy. I'd rather build a really
premium. $2 .5 million home than a really, really
premium overdeveloped 3 .5 that's got to push
the market 500 ,000. I've just seen too many
developers get taken down with that type of logic.
Interesting. Yeah. Yeah. So no big surprises
in the world of appraisals. Nothing that seems
alarming or shocking. I mean, I know there were
changes in the market as a whole. One thing that
happened during COVID to limit the amount of
visits to a home, a lot of lenders were offering
PIWs. which is a property inspection waiver,
which is a fancy word for appraisal. So if the
comps were good enough that the computer or the
bank, the lender's basic valuation model could
evaluate within a confidence interval of 20 ,000
one way or another and they were in that interval
and they were putting 10 % down or whatever.
They had different metrics. If this and this
and this and this, no appraisal. And a good talking
point with buyers. I was doing a lot of brokerage
business at that time. Should we still get one?
If you want to spend $500 for a report that you'll
look at once, you can, but the market's the market.
And some of those zestimate kind of a thing,
that's going to be similar to what that, you
know, AI -generated appraisal is going to give
you. Yeah, exactly. Yeah. So yeah, nothing crazy.
I think that we're in for... A lot of smooth
sailing. We're also in a market that has a lot
of reproduction, so there's just a lot of very
similar homes that make appraising properties
very easy. Sometimes I feel like it's the easiest
job in the industry, with all due respect to
appraisers, in a market like Las Vegas or Phoenix
or an area with a lot of production homes. All
right, okay. Well, thank you for your information
for your time and thank you guys for joining
us today on another episode of trust the process
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