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This blog was inspired by a cartoon which shows a couple sitting with a real estate agent. The agent says: “Based on comps, I suggest listing at $350K.” Wife: “But we paid $650,000 for it!” Husband: “And Zillow says it’s worth $675,000!” I found the cartoon on Facebook and reposted. The sad truth is that most consumers do not understand Zillow—or House Values, or even their county assessment office—all of which use Automated Valuation Models (AVMs) to price property. The boring stuff first: AVMs use mathematical formulae, including multiple linear regression, to assign values to certain features of houses to come up with a value. As with any program, GIGO applies (Garbage In, Garbage Out). The AVMs out there for use today by consumers, of which Zillow is probably the best known, rely on reported and recorded sales data. This is why, if you live in one of the fourteen states in the US which does not record sales prices, the information you find may be sketchy, and derived from Multiple Listing Services (MLS). You may be thinking: “Well, what’s better than that? A recorded sales price tells me what that house down the street sold for.”
Well, yes and no. A recorded price will tell you the amount they put in the deed as the transfer amount. It will not tell you:
• If there were any “side deals” or cash under the table
• If the seller paid closing costs or other fees on behalf of the buyer, known as “seller concessions”
• If it was an “arms-length sale”, or one under duress, or between related parties, or any other sale which an appraiser would not usually consider
This is where the AVMs fall apart. As I always say when teaching pricing and valuation: “All comparables are sales; all sales are not comparables.” Here’s what I mean: in order for any real estate professional to use a comparable (“comp”) to compare to your home to establish a price or value, it needs to have sold. Houses that are listed and don’t sell indicate what the market won’t pay. Houses that are listed and sold indicate what the market will pay. However, not all sales are comparables. Here are some examples of houses I would not use for comps, as an appraiser:
• The sale between two parties with the same last name, and it is verified that they are related by blood or marriage
• The sale between two parties with different last names, but verification of the data revealed that the party selling the property was acting as executor of her mother’s estate, selling the 2/3 interest she and her sister had to their brother, who already owned a 1/3 interest
• The property that did not sell at auction, and the next week the owner sold it for 20% below my appraised value to a neighbor, who was a friend
• The property that sold for at least 20% higher than market, and upon verification, the buyer was not represented by an agent, was from out of town, and was unfamiliar with the market
You will notice the same word in all four scenarios: “verification”. As an appraiser, I verify data. I’m required to. But any real estate professional who is good at his or her profession will verify data, and will only use data which is germane and pertains to the property. Zillow, and other AVMs, don’t verify data. They throw it all into the mix. Some is high, some is low, and some is just irrational. So, before you decide to sell your house based on a “zestimate”, do yourself a favor and get an opinion from a qualified real estate professional.

It’s 1993, and this is your life: you go to the gas station and fill up your vehicle at $1.16 per gallon. From there, you continue to the grocery store, and pick up a gallon of milk for $1.26 and a loaf of bread for $1.57. Your monthly rent is $532, on average. You have a new car, which you bought for $12,750. You mail your rent and car payments in using stamps that cost 29 cents. The median family income is $31,230 per year, and you are thinking of buying a house: the median price in the US is $126,500. You have checked it out and you can get a mortgage for 7%. You watch those politicians in Washington, shaking your head because they spend $1.408 trillion a year. Overall, the inflation rate from 1993 to 2013 is $1.59, or almost 30% more.
It’s 2013, and this is your life: you go to the gas station and fill up your vehicle at $3.56 per gallon. From there, you continue to the grocery store, and pick up a gallon of milk for $2.79 and a loaf of bread for $2.20. You are paying $1045 a month in rent, and you are being tempted to buy a house –you can get one for $226,400. You just bought a new car, though, for $30,748, so you may have to trade the car. You don’t mail your car payment in—you pay online—stamps are so twentieth century, and besides, they cost 45 cents each. The median family income is $40,925. You watch those politicians in Washington, shaking your head because they are now spending $4.351 trillion a year.
But let’s go back to buying that house. Today’s rates are hovering between 3.25% and 3.50%. In 1993, if you had gotten an FHA loan, you would have put down 3% (I’m going to assume you put down 3.5% in 1993, because FHA has raised the amount down, and I want the comparison to be even). So, to buy that house in 1993, you needed a down payment of $4427.50, and you borrowed $122.072.50 for 30 years at 7%. That made your monthly payment (P & I) is $812.15, which is more than your rent, but you are buying a house.
Today, to buy the median priced house, at $226,400, you need a down payment of $7924. The loan amount is $218,476. Your payment, at 3.25% over 30 years, is $950.82—less than your monthly rent.
Although inflation has been 30%, the cost of a house (even after some very bad years) is up 79%. But the cost of the house, in terms of your monthly payment, is only up 17%. Not only that, it will cost you less than renting—and you will be building your financial future. If you rent for 30 years, you’ll have a drawer full of rent receipts. If you pay on a mortgage for 30 years (fewer years if you are smart enough to pay it off early), you’ll own your house.
One last thought, from a real estate professional who watched the refinancing that accompanied the run up in prices in real estate: buy the house, and pay the mortgage off. Don’t refinance for new cars, or to get out of credit card debt, or to take a fancy vacation. Pay the house off, so that when you enter retirement, you have an asset that you own outright, and your only housing costs are utilities, maintenance and taxes.
–About the blogger: I’m a real estate educator, fascinated by economics and real estate. Catch my “Economics and Real Estate” course live—watch my website at www.TheMelanieGroup.com

Last month, I taught at the Triple Play Convention in Atlantic City New Jersey. It’s a tri state convention for New Jersey, New York, and Pennsylvania. For the first two days, I taught the CRB course: “Real Estate is Risky Business”. On day three, I taught a risk reduction course I had written for agents: “Risk Management: What You Do and Say May Be Held Against You”.  On the last day, I taught a course “Pricing the Oddball”, which was approved for appraisers and agents. . At all three classes, risk came up, and in all three circumstances, the approach to risk was different among the types of attendees.

Let’s start with the broker/managers. I had a great group of these folks, including a very nice man from the corporate level of a large, national franchise. He took notes copiously and told me and the class, that he had never considered in detail how much a risk policy should be part of the overall approach from the franchisor to the franchisee. The brokers and managers included large companies down to the two person “Mom and Pop” real estate office. In many cases, the name on the door is the last name of the person in class.  One of those in the CRB class is a 4^th generation REALTOR®.  The brokers and managers, to a one, cared about risk; wanted to identify it; wanted to find ways to avoid or mitigate it, and cared deeply about the reputation of the firm, and themselves.

The agents were a mixed bag. Many of them expressed the sentiment that they enjoyed the class, and realized many things that they aren’t doing they should be doing. This class, as I wrote it, is big on defensive real estate: get all the facts on the property, document what you do; build a file that can defend you, if necessary.  Some of them “pushed back” with the “I’m too busy to worry about that, and besides it’s not my job”.  This included one student who asserted that even deed restrictions or covenants are not something he researches, because “the title company does that”. Of course, the title company typically discloses those findings at the settlement table, which is often too late for the buyer to change his mind—but not too late to sue the broker.   I could sense that some were much more concerned about the next commission check, as opposed to a long term reputation in their community, or a long term relationship with clients.

The final group was a mix of appraisers and agents. Appraisers are, by nature and training, detail oriented people.  One of those appraisers shared a story I wished I would have had for the three days previous to this course (which was the last day of the convention). We were covering highest and best use of a property, which needs to be done to price it properly. To determine highest and best use, appraisers determine what uses are physically possible, legally permissible, economically feasible and maximally productive.  You start with verifying known facts—like zoning. The appraiser told this story. An agent was called upon by an estate to price a property. She did not check the zoning, and thus did not realize that the zoning had changed from residential to “village commercial”. In this community, “village commercial” allowed professional offices, with the result that as large older homes came on the market, they were being purchased by doctors, dentists, real estate companies, insurance companies, attorneys, etc.  The agent used comparables which were residential properties, and zoned residential.  Based on her advice, the sellers listed the property for $185,000, and it promptly sold. The new owner converted it (with a minimum of expense) into two professional offices, paved the back yard for parking, and resold it very quickly for $425,000. The agent got sued. The appraiser telling the story had been brought into court as a professional witness for the estate, testifying to the value of the property at the time of sale (which was way more than $185,000!) Other students asked what the outcome of the case was (I was curious as well!)—he did not know, but the true point for me is that she got sued. It cost her time, money and reputation. She may have thought it could never happen to her, but it did.

Risk is inherent in our business. We carry E & O insurance to protect ourselves, and most of us diligently pay attention to details, keep good records, and try to keep our clients and customers happy. But, even an innocent REALTOR® can be sued by a litigious client.  Lawsuits cost money, time and reputation. Seasoned brokers and agents will agree that they would rather have a sale fall apart before closing, than suffer through a lawsuit post-closing. As we enter 2013, please be careful out there, and do all you can to contain risk!

Real estate transactions, as we know in the industry have two sides. One side is the buyer side, one side is the seller side.  We all know that sometimes, in an attempt to represent our clients’ best interests , some of us breach the boundaries of common courtesy and common sense.  But what struck me during a recent interchange was how many people in our industry, and related industries, are tone deaf to the implications.  Here’s what happened: I have a client who has a long-standing relationship with a local bank. In fact, he took the contract from this buyer because he likes and trusts the bank where the buyer is getting the mortgage.  The loan officer is focused on her “customer”—the buyer. What she is missing s that the seller is also a customer—of the bank.  She thinks if she gets this transaction to closing she will be the buyer’s hero (and she may be over estimating that; currently they are not happy campers), and the seller does not come into her equation at all.  Now, consider the behavior of the average agent in a number of transactions—whether it is an Open House, or the “other side” of a transaction.  In any situation where a potential customer or client has the ability to observe our behavior, we are essentially being “interviewed”.  The “other side” is watching to see how we conduct ourselves and asking these questions: “Is that agent professional?” “Does he/she respond promptly to questions, emails, etc.?” “Is that agent honest?” One of the lines crossed by some agents (sadly) is prevarication “on behalf” of their clients. In short, they don’t tell the truth, the whole truth, and nothing but the truth. They sometimes delay reporting bad news, they sugarcoat it, or they omit certain details.  Some agents turn negotiating into a personal power trip, where the intent is to crush the other side.  Sadly, the only ones they really impress are themselves.  I’ve actually seen clients tell their agents to back off, because, as the client has to remind the agent, they really want to complete the purchase, not argue with the other side.  And as far as future business from the other side of that transaction, as they say in Brooklyn: “Forgetta bout it!” It isn’t just agents I’m talking about; each real estate professional who touches a real estate transaction, whether as a lender, appraiser, home inspector, title company, attorney, stager, mover or whatever has one chance to make a good impression on both sides.

The Appraisal Institute, quoting the National Association of REALTORS®, noted that agents are also upset over the ongoing requests from underwriters and lenders for “more comparables”.  The story can be read here: http://www.appraisalinstitute.org/ano/newsletter/DisplayNwsLtrArticle.aspx?volume=13&numbr=19/20&id=18892

Their frustration is shared by appraisers.  Most appraisers have read and understand the limiting conditions that are a part of the “boilerplate” in the Fannie Mae Appraisal forms limiting conditions section. #7 of those states that the appraiser has used comparables which are locationally, physically, and functionally the most similar to the subject property.”

What sets the appraisers off is that the request to either provide more comparables, or to use a specific comparable or comparables, comes from an underwriter, who in most cases, has “discovered” the “comparable” by using an AVM (automated valuation model).  First of all, the appraiser, in most cases knows about this sale—and has rejected it—either because the sale was not arm’s length (and an arm’s length sale is appropriate for the assignment), or the property was dissimilar to the subject.

The pressure to use non-arm’s length sales, or not use them (opposite sides of the same coin) asks an appraiser to violate USPAP (Uniform Standards of Professional Appraisal Practice).  USPAP says: “Standards Rule 1-4 “In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary to credible assignment results.

(a)                                        When a sales comparison approach is necessary for credible assignment results, an appraiser must analyze such comparable sales data as are available  (emphasis added) to indicate a value conclusion.” [USPAP, 2012-2013, lines 560-563]”

In other words, it is the appraiser who looks at all of the data, and decides which data is appropriate—not the lender, not the underwriter, not the buyer, not the seller, not the agents. At the end of the day, it is the appraiser who is signing the certification page and putting his or her license on the line.

This is symptomatic of the climate of fear and trepidation that lenders appear to be working in post housing bubble and Dodd-Frank.  The attitude appears to be: “we cannot have too many comps”. Instead, it should be: “let’s have the best comps”.  And, make no mistake about it, pressuring appraisers to use a particular comparable over one the appraiser has already selected, is pressure—the kind appraisers are not supposed to be subjected to any more.