WEBVTT

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Ever wonder what really happens behind the scenes

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in construction, real estate, and development?

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We pull back the curtain on the new home construction

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industry, the real estate market, and the trends

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shaping it all. Discover the stories, insights,

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and expertise behind the process of building

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a new home. Join us for Trust the Process podcast,

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and let's build something great together. Welcome

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back to Trust the Process podcast where we talk

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about the housing industry, the real estate market,

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and everything in between. Today, wanted to talk

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a little bit about appraisal. So kind of, that's

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one of those things in the housing market, in

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the housing industry as a whole, that is a temperature

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check on the market. What are we seeing now?

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What do we know is happening? Shortfalls, tidewater

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overs, unders. I think there has been just over

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time an expectation of where we think homes should

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be listed. And I think now, buyers have started

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to push a little harder on what they think their

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home is worth. And I think that there might be

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some swing that's happening in that. So curious

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to get your take on it and what you think is

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happening in the appraisal world. So, I mean,

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I've been in the industry for about 14 years

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and in the build industry for 10 of those. And

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I mean, I've definitely seen... times where appraisals

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are the only thing anyone can talk about, and

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then other times where it's just kind of like

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another step in the process. So in stable markets,

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as long as your property is not really bucking

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the trends, you don't really think about the

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appraisal. You just say, that's one more step.

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But appraisers on a purchase, you can have an

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appraisal with a refinance or appraisal for a

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divorce. When you have a buyer and a seller that

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have come together and are under contract with

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deposits and moving forward. That is price discovery.

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So generally appraisers will try to meet that

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value as best they can and then their job is

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to document the evidence. And they are a licensed

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person with insurance and I mean it is a job

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that... people take very seriously as well they

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should. Ultimately, they're there to protect

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the bank. They're not there to protect the buyer.

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They're not there to get at the seller. They're

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there to protect the bank to say all your valuations,

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80 % loan to value, what's the value is the number

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that the appraiser's coming in at. It doesn't

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mean that's what the home has to transact for

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though. So if the home is under contract for

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800 and has an appraisal at 775, if the seller

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doesn't want to go to that number, That's okay.

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I mean, at the end of the day, the buyer agreed

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to pay $800 ,000 for the home, no matter how

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they get there. So the contracts on the buy side

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have appraisal contingencies. Sorry, on the resale

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side, have appraisal contingencies, generally

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speaking. You don't always have to have them.

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They're not law. It's probably good agency to

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protect your buyer with an appraisal contingency.

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Generally in Las Vegas, that's around 21 days

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from contract acceptance, 18 to 21 days. So when

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you look at it, through that lens, it's a buyer's

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problem. The appraisal is a buyer's problem,

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and it's a condition of their loan. A cash buyer

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has no appraisal. Sellers sometimes want to get

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an appraisal done before they list a home, which

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makes absolutely no sense because it's one person's

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opinion of value at that day in time. We don't

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have a contract. We don't have a buyer. Nothing.

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That number is going to tell us absolutely nothing.

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That appraisal could come in again differently

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next week, a month from now, two months from

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now. So ultimately, the seller needs not concern

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themselves with an appraisal above and beyond

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how it could affect the sale of their home. So

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you're going to find price resistance eventually.

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And if your home is not unique enough, you might

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not find that buyer that will pay over that appraised

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value. When homes are in hot demand and inventory

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is low and we're coming off of a buyer's market

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or a balanced market, that's when appraisals

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... really start to matter because you have data

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six months ago that doesn't support what the

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current market looks like today. And I experienced

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that in 2018, late 2020, but really mostly all

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of 2021. We had to get through a year's worth

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of sales data to have enough evidence to support

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where the new market was at that time. Our buyers

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and sellers were meeting each other. So when

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you had Inventory down 70 % and the buyer activity

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up 40 % You were you had a big mismatch in supply

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and demand so therefore the only the most motivated

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buyers were able to get those homes whether they

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were cash whether they were waiving appraisal

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and Or in the off chance you hot you found a

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home that had some data behind it But generally

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speaking buyers or sellers were so used to pushing

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the market if they had neighborhood comps At

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$700, they were going to push to $725 anyway,

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and at that time, no matter what you listed,

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pretty much was selling, even if it was detached

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from reality, because there's just nothing to

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compete with you to keep you honest. So buyers

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were waiving appraisals, buyers were committing

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to $25 ,000, $30 ,000, $50 ,000 over appraised

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value. And that's how we were getting those values

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recorded. And those are the values that we're

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leaning on today for our appraisals. Appraisals

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usually go back 180 days, but still that data

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chained together to say, okay, well, 2022 was

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leaning on late 21, 23 was leaning on 22, and

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so on and so forth. And now appraisals aren't

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really an issue anymore. I feel like they're

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not too. No, it's just not. Yeah, what about

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on the builders? We're going into a new community

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where there is no cob. We haven't said that yet.

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We haven't built any model match or anything

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to go off of this. that's identical. A couple

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of hacks that a builder can employ. They can

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build the model, stage the model, furnish the

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model, and then sell to an investor for cash

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with a model home lease back. Many times those

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lease backs are inflated to push the cost higher.

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So they'll work in a three year lease or a two

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year lease. That's a good trick up their sleeve.

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One thing as a builder I can tell you that you

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really lean on is appraisers. are really generous

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with builders. I don't know. I've never had one

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of my builds not appraised. I've never been on

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the broker side of a production builder when

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I was the buyer's representative that didn't

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come in at value unless it was something maybe

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they had worked in the cost of a pool. So maybe

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it was one off situation if I really thought

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back over. 12, 14 years where that was an issue,

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but that would be one time. I can tell you that

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it's really never been an issue. And you brought

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up a good point when you're a new track to your

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new neighborhood, they'll just go out two, three

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miles and ultimately they're gonna look at what

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is your builder's base price, which I can go

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into my office right now and change our base

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price with two keystrokes. But the appraiser

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looks at that and says, what's your base price

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on this home? What's the list of upgrades that

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are put in this home? And as long as that all

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kind of tracks, you're generally going to get

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it. And I know they don't ever show us if when

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we're, you know, as a builder you're the seller.

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This is a good misnomer or misconception too.

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Oh, what did the appraisal come in at? The buyer

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bought that appraisal. you'll never see that

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appraisal unless it's low and they're using it

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to leverage lower price seller wants to know

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what was it really worth yeah okay well it's

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usually a pass fail you made it or you didn't

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but they don't give you a true value typically

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yeah and and and i have seen as the market's

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gotten soft this year homes appraising for higher

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than our contract price you know when i look

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at some of our brokerage clients we had one recently

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yeah appraised for higher significantly higher

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So it shows you that's an example of a market

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cooling. The comps were better six months ago,

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three months ago, two months ago. There was enough

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in there for the appraiser to say, oh, this is

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appraising for one million. We were on a contract

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for 9 .15, I want to say. So that's a huge discrepancy.

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So that buyer either got a ton of great equity

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or it was the beginning of the values kind of

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getting soft in that area. And I think it's probably

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the beginning of the values getting soft in that

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area. But it'll take a while now because now

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that appraised out his recorded sale will become

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part of the appraisal calculus going forward

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so it's very hard for homes to appraise over

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contract value because there's no greater representation

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of a home's value than one of what ready willing

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and able buyers ready is willing to pay for a

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Property that is so willing to sell so that establishes

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the market right right then and there but There

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are times where the evidence is that compelling

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that well, yeah, it's 915, but we think it's

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Worth more than like a million. Yeah, so and

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I do think new homes often set the comp, you

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know, I think there's a I mean I can think of

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times where in selling in a big home track You're

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you know, you're selling the home that you haven't

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You're trying to get an appraisal on a home that

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you haven't had appraised yet now We've had a

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price increase on our base right new home price

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is gonna be higher We haven't so then you set

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that but that gives a trend for the whole rest

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of the community moving forward including yours

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and everything outlying right, right I agree,

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you're definitely making the market as a builder.

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So generally in Las Vegas and a lot of areas

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that have significant suburban sprawl, new is

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around other new, so you do have that kind of

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proof of value. But one builder builds a very

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different 2 ,500 square foot home than another

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builder. So it's not just purely off of size,

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it's not purely off of lot size, location, or

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views. A lot of it is quality of builders. I'm

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not gonna use that word quality loosely, it's

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just category of finishes. you can have a cheap

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finish that is good quality. It's just a good

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version of cheap wood flooring. Yeah, exactly.

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Right, it doesn't mean that it's inferior, just

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it's a lower spectrum. And relative to that price

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point, right? It's great for that price point.

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It's great for $500. It's not good for $700.

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Exactly. But that's the kind of flexibility that

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builders enjoy. And then on the luxury side,

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I will say... I don't know, probably only 50

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% of our builds that sell even need an appraisal.

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There's a lot of cash in our - A lot of cash.

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Yeah, and it's a different buyer profile. Custom

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luxury. Yeah, custom luxury for sale is a very

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different buyer pool. And truly, what we're comping

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against in those custom communities anyway, we

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wouldn't have to worry about the value there.

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Right, generally. And plus, you know, my methodology

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is I tend to underdevelop. So if a neighborhood

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can hold $700 a square foot at a $3 million sales

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price, I'll look to build $600 a square at a

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$2 .2 million. So I'll scale down the home, I'll

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scale down maybe what I'm doing in the yard to

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hit, to be a really nice $2 .5 million home in

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a $3 million neighborhood. Something that I've

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always done, a lot of developers go to max it

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out completely, but I've just never, I've never

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leaned on that strategy. I'd rather build a really

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premium. $2 .5 million home than a really, really

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premium overdeveloped 3 .5 that's got to push

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the market 500 ,000. I've just seen too many

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developers get taken down with that type of logic.

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Interesting. Yeah. Yeah. So no big surprises

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in the world of appraisals. Nothing that seems

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alarming or shocking. I mean, I know there were

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changes in the market as a whole. One thing that

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happened during COVID to limit the amount of

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visits to a home, a lot of lenders were offering

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PIWs. which is a property inspection waiver,

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which is a fancy word for appraisal. So if the

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comps were good enough that the computer or the

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bank, the lender's basic valuation model could

00:11:15.100 --> 00:11:18.059
evaluate within a confidence interval of 20 ,000

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one way or another and they were in that interval

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and they were putting 10 % down or whatever.

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They had different metrics. If this and this

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and this and this, no appraisal. And a good talking

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point with buyers. I was doing a lot of brokerage

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business at that time. Should we still get one?

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If you want to spend $500 for a report that you'll

00:11:35.809 --> 00:11:39.389
look at once, you can, but the market's the market.

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And some of those zestimate kind of a thing,

00:11:41.129 --> 00:11:44.070
that's going to be similar to what that, you

00:11:44.070 --> 00:11:47.110
know, AI -generated appraisal is going to give

00:11:47.110 --> 00:11:50.509
you. Yeah, exactly. Yeah. So yeah, nothing crazy.

00:11:50.570 --> 00:11:53.590
I think that we're in for... A lot of smooth

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sailing. We're also in a market that has a lot

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of reproduction, so there's just a lot of very

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similar homes that make appraising properties

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very easy. Sometimes I feel like it's the easiest

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job in the industry, with all due respect to

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appraisers, in a market like Las Vegas or Phoenix

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or an area with a lot of production homes. All

00:12:16.759 --> 00:12:20.019
right, okay. Well, thank you for your information

00:12:20.019 --> 00:12:22.419
for your time and thank you guys for joining

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us today on another episode of trust the process

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Thanks for tuning in to the press the process

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podcast Make sure to follow us on Spotify to

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stay in the loop with the latest insights project

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updates and everything in between See you next

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time