Posted by: Russell DeLeon | March 2, 2010

Population and Housing Unit Growth

Population in the following counties has continued to increase since 2000: Los Angeles, Orange, Riverside, San Bernardino, and San Diego County.  The total population for the five counties in 2009 reached approximately 20.8 million.  Los Angeles County has the largest population with 10.5 million and San Bernardino has the lowest at 2 million.  Below is a table that shows population for each county since 2000. 

Year Los Angeles County Orange County Riverside County San Bernardino County San Diego County Total
2000 9,519,330 2,846,289 1,545,387 1,710,139 2,813,833 18,434,978
2001 9,656,585 2,890,473 1,590,122 1,746,874 2,864,539 18,748,593
2002 9,815,369 2,938,731 1,652,808 1,793,009 2,920,806 19,120,723
2003 9,959,447 2,980,547 1,724,329 1,840,628 2,970,899 19,475,850
2004 10,074,844 3,016,874 1,804,117 1,893,861 3,007,285 19,796,281
2005 10,158,409 3,044,980 1,883,735 1,946,312 3,034,388 20,067,824
2006 10,209,201 3,063,159 1,962,014 1,990,390 3,058,413 20,283,177
2007 10,243,764 3,080,383 2,030,315 2,022,710 3,088,891 20,466,063
2008 10,301,658 3,107,500 2,078,601 2,044,895 3,131,552 20,664,206
2009 10,393,185 3,139,017 2,107,653 2,060,950 3,173,407 20,871,212

Although Los Angeles County has the largest population, Riverside County has experienced the greatest increase in population since 2000.  Riverside County’s population has increased 36.38% from 2000 to 2009.  

In addition to the population increase, total housing units for the area has also increased.  Total housing units include single family residences, multi-units, and mobile homes.  From 2000 to 2009, total housing units increased 9.40% compared to the 13.23% population increase.  Below is a line bar graph that shows the increase of population and housing units.The ratio of housing units to population has remain relatively the same each year (0.33 – 0.35).  This data shows that as population increases in the five counties, housing units will be built to – supply and demand. 

However, this data doesn’t answer questions on how population is increasing.  Are more people moving to southern California or has the birth rate increase?  Also, as new housing units are being built, are they being occupied or has the vacancy rate increase? 

Keep in mind this post contains high level metrics, in my upcoming posts I’ll breakdown the information and hopefully answer the questions above.

Housing unit information gathered from www.dof.ca.gov.  Demographic Research, Reports and Research Papers, E-5 City/County Population and Housing Estimates. 
Population growth information gathered from www.dof.ca.gov.  Demographic Research, Reports and Research Papers, E-4 Population Estimates.

 

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Posted by: Russell DeLeon | January 23, 2010

Myths

Some Myths and Realities About Real Estate Appraisals and Appraisers

Myth: Assessed value should equate to market value.

Reality: While most states support the concept that assessed value approximate estimated market value, this often is not the case. Examples include when interior remodeling has occurred and the assessor is unaware of the improvements, or when properties in the vicinity have not been reassessed for an extended period.

Myth: The appraised value of a property will vary, depending upon whether the appraisal is conducted for the buyer or the seller.

Reality: The appraiser has no vested interest in the outcome of the appraisal and should render services with independence, objectivity and impartiality – no matter for whom the appraisal is conducted.

Myth: Market value should approximate replacement cost.

Reality: Market value is based on what a willing buyer likely would pay a willing seller for a particular property, with neither being under pressure to buy or sell. Replacement cost is the dollar amount required to reconstruct a property in-kind.

Myth: Appraisers use a formula, such as a specific price per square foot, to figure out the value of a home.

Reality: Appraisers make a detailed analysis of all factors pertaining to the value of a home including its location, condition, size, proximity to facilities and recent sale prices of comparable properties.

Myth: In a robust economy – when the sales prices of homes in a given area are reported to be rising by a particular percentage – the value of individual properties in the area can be expected to appreciate by that same percentage.

Reality: Value appreciation of a specific property must be determined on an individualized basis, factoring in data on comparable properties and other relevant considerations. This is true in good times as well as bad.

Myth: You generally can tell what a property is worth simply by looking at the outside.

Reality: Property value is determined by a number of factors, including location, condition, improvements, amenities, and market trends.

Myth: Because consumers pay for appraisals when applying for loans to purchase or refinance real estate, they own their appraisal.

Reality: The appraisal is, in fact, legally owned by the lender – unless the lender “releases its interest” in the document. However, consumers must be given a copy of the appraisal report, upon written request, under the Equal Credit Opportunity Act.

Myth: Consumers need not be concerned with what is in the appraisal document so long as it satisfies the needs of their lending institution.

Reality: Only if consumers read a copy of their appraisal can they double-check its accuracy and question the result. Also, it makes a valuable record for future reference, containing useful and often-revealing information – including the legal and physical description of the property, square footage measurements, list of comparable properties in the neighborhood, neighborhood description and a narrative of current real-estate activity and/or market trends in the vicinity.

Myth: Appraisers are hired only to estimate real estate property values in property sales involving mortgage-lending transactions.

Reality: Depending upon their qualifications and designations, appraisers can and do provide a variety of services, including advice for estate planning, dispute resolution, zoning and tax assessment review and cost/benefit analysis.

Myth: An Appraisal is the same as a home inspection.

Reality: An Appraisal does not serve the same purpose as an inspection. The Appraiser forms an opinion of value in the Appraisal process and resulting report. A home inspector determines the condition of the home and its major components and reports these findings.

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Posted by: Russell DeLeon | January 23, 2010

Appraiser Licensing

Appraiser licensing varies from state to state. To participate in what is called a “federally-related transaction,” which is, for example, a mortgage being underwritten by a national bank, an appraiser must be licensed or certified by his or her state. The license or certification is evidence that the appraiser has performed a certain number of hours as a trainee under the supervision of a practicing appraiser, may have passed an examination, and completes a certain number of hours of Continuing Education Training.

Prior to the Savings and Loan crisis of the 80s, which gave rise to appraiser licensing, appraisers had to market their expertise, service, professionalism and association designations. Many feel that state licensing has diluted the appraisal profession. Many consider licensure a bare minimum of what you should expect from an appraiser.

We have worked hard to establish a reputation for quality and prompt work, performed professionally and ethically, with outstanding customer service. You should never just look for a licensed appraiser; you should be discriminating in choosing your service providers. 

You should always be sure your appraisal service provider is licensed and in good standing. The Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC) maintains a national database of appraisers and their license/certification status.  It is available publicly at this link.

Among other things, this database, which relies on reports from each state appraisal board, will tell you if a service provider you are considering has had his or her license suspended, revoked, or whether the license has lapsed.

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Posted by: Russell DeLeon | January 23, 2010

Appraiser Jargon

Have you heard an appraiser use any of these terms? Did you just hear one of our appraisers use it and you came here to figure out what it meant? We don’t mean to speak a foreign language, but any profession has its jargon. What res ipsa loquitur is to a lawyer and triple witching is to day traders, external obsolescence is to appraisers. Here are some examples of common appraiser jargon and their meanings:

Adjustment.  When comparable properties have been identified, the appraiser makes adjustments to the Sales Price of each of the comparables to bring them into equivalency with the subject property, accounting for differences in location, construction quality, living area, acreage, frontage, amenities and the like.  This is where the professional expertise of an appraiser is most valuable.

Chattel.  Personal property that may be on the subject property but which does not figure into the opinion of value in the appraisal report.

Comparable or “comp”.  Properties like the subject property nearby which have sold recently, used as a basis to determine the fair market value of the subject property. 

Drive-by.  An appraisal that is limited to an exterior-only examination of the Subject to make a determination that the property is actually there and has no obvious defects or damage visible from the outside.  Fannie Mae’s form for this type of appraisal is its 2055, so you may hear a drive-by referred to as a “2055.”

Fair market value.  The appraiser’s opinion of value as written in his or her appraisal report should reflect the fair market value of the property — what a willing buyer would pay a willing seller in an arm’s-length transaction.

GLA.  “Gross Living Area,” the sum of all above grade floor space, including stairways and closet space.  GLA is often determined using exterior wall measurements.

Latent defects.  A defect on the property that is not readily apparent but which impact the fair market value.  Structural damage or termite infestation might be examples.

MLS.  A Multiple Listing Service is a proprietary listing of all properties on the market in a given area and their listing prices, as well as a record of all recent closed sales and their sales prices.  Created by and used primary by real estate agents, many appraisers pay for access to these databases to aid in comparable selection and adjustment research.

Obsolescence.  The value of assets diminishes as their capabilities degrade or more desirable alternatives are developed.  Functional obsolescence is the presence or absence of a feature which renders the property undesirable.  Obsolescence can also occur because the surrounding area changes, making a feature of the property less desirable.

Subject.  Short for the property being appraised — the “subject property.”

Useful life.  The time during which a property can provide benefits to its owner.

URAR.  Short for Uniform Residential Appraisal Report, Fannie Mae form 1004, it is the form most lenders require if they need a full appraisal (that is, with walk-through inspection).

USPAP.  Short for Uniform Standards of Professional Appraisal Practice, USPAP promotes standards and professionalism in appraisal practice, and is often enacted into law in a state.  It is promulgated by the Appraisal Foundation, a non-governmental entity chartered by Congress to, among other things, maintain appraisal standards. 

Walk-through.  An inspection that includes a visit to each part of the interior of the house used in estimating value.  

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Posted by: Russell DeLeon | January 23, 2010

Appraiser Ethics

Appraisal is a profession, and appraisers are professionals. In our field as with any profession we are bound by ethical considerations. 

An appraiser’s primary responsibility is to his or her client.  Normally, in residential practice, the appraiser’s client is the lender ordering the appraisal to decide whether to make the mortgage loan.  Appraisers have certain duties of confidentiality to their clients — as a homeowner, if you want a copy of an appraisal report, you normally have to request it through your lender — obligations of numerical accuracy depending on the assignment parameters, an obligation to attain and maintain a certain level of competency and education, and must generally conduct him or herself as a professional.  Here, we take
these ethical responsibilities very seriously.

Appraisers may also have fiduciary obligations to third parties, such as homeowners, both buyers and sellers, or others.  Those third parties normally are spelled out in the appraisal assignment itself. An appraiser’s fiduciary duty is limited to those third parties who the appraiser knows, based on the scope of work or other written parameters of the assignment.There are ethical rules that have nothing to do with clients and others.  Appraisers must keep their work files for a minimum of five years. 

 

We only perform to the highest ethical standards possible.  We don’t do assignments on contingency fees.  That is, we don’t agree to do an appraisal report and get paid only if the loan closes.  We don’t do assignments on percentage fees.  That is probably the appraisal profession’s biggest no-no, because it would tend to make appraisers inflate the value of homes or properties to increase their paycheck.  We don’t do that.  Other unethical practices may be defined by state law or professional societies to which an appraiser belongs.

The Uniform Standards of Professional Appraisal Practice (USPAP) also defines as unethical the acceptance of an assignment that is contingent on “the reporting of a pre-determined result (e.g., opinion of value),” “a direction in assignment results that favors the cause of the client,” “the amount of a value opinion,” and other things.  This means you can be assured we are working to objectively determine the home or property value.

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Posted by: Russell DeLeon | January 23, 2010

Appraisal Reviews

The Federal Reserve has recently reiterated that “financial institutions must have an effective, independent real estate appraisal and evaluation program,” and that appraisers performing reviews should “have the knowledge and expertise to assess compliance with the Federal Reserves appraisal regulations and guidelines.” Here at RNS Appraising, we provide appraisal review services that are independent, qualified, professional and square with the Federal Reserve’s guidelines.

Appraisal reviews “should determine whether the appraisal or evaluation is appropriate for the transaction, the risk of the transaction, and whether the process by which the collateral valuation is obtained ensures independence and quality,” the Fed says.  They “should also indicate whether the appraisal or evaluation report is consistent with the engagement letter, which sets forth the scope of the appraisal assignment.”  The Fed also notes that “some banks supplement routine reviews with post-funding evaluations of appraisal quality for some of their higher-risk or greater-value transactions as a control to assist in detecting valuation problems.”

In addition to conforming our work to the forms and guidelines of our review clients, there are four Fannie Mae forms that are generally used for review services, and we can prepare an appraisal review on any of them. They include an appraisal “desk” review, a “field” review, a “short” form and a “narrative” form. Here at RNS Appraising, we are experienced in all types of appraisal reviews, review procedures and the responsibilities of review appraisers.

We understand what makes a quality appraisal and what the most common deficiencies are, especially in our home market. At the same time, we are professional enough to recognize that our competitors in our market are capable of doing a good job! The Uniform Standards of Professional Appraisal Practice (USPAP) govern appraisal reviews as well as appraisal reports, and you can count on us to ethically evaluate appraisal reports performed by others. Those others may be reviewing our work, too!

In short, here at RNS Appraising, you can rely on our independent judgment, because we offer professional, objective, ethical appraisal review services for our clients.

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Posted by: Russell DeLeon | January 23, 2010

Uses of Appraisals

Typical Uses of Appraisals

Transfer of Ownership

  • To help prospective buyers set offering prices
  • To help prospective sellers determine acceptable selling prices
  • To establish a basis for real property exchanges
  • To establish a basis for reorganizing or merging the ownership of multiple properties
  • To determine the terms of a sale price for a proposed transaction

Financing and Credit

  • To develop an opinion of the value of the security offered for a proposed mortgage loan
  • To provide an investor with a sound basis for deciding whether to purchase real estate mortgages, bonds, or other types of securities
  • To establish a basis for a decision to insure or underwrite a loan on real property

Litigation

Eminent domain proceedings

  • To develop an opinion of the market value of a property as a whole-i.e., before a taking
  • To develop an opinion of the market value of the remainder after a taking
  • To estimate the damages to a property created by a taking

Property divisions

  • To develop an opinion of the market value of a property in contract disputes
  • To develop an opinion of the market value of real estate as part of a portfolio
  • To develop an opinion of the market value of partnership interests or the assets and liabilities owned by a partnership

Environmental litigation

  • To estimate damages created by violations of environmental laws
  • To estimate damages created by environmental accidents

Tax matters

  • To develop an opinion of assessed value
  • To separate assets into depreciable (or capital recapture) items such as buildings and nondepreciable items such as land, and to estimate applicable depreciation (or capital recapture) rates
  • To develop an opinion of the value of the real estate component of an estate place that represents the foundation for future capital gains and inheritance taxes
  • To determine gift or inheritance taxes

Investment counseling, decision making, and accounting

  • To set rent schedules and lease provisions
  • To determine the feasibility of a construction or renovation program
  • To help corporations or third parties purchase homes for transferred employees
  • To serve the needs of insurers, adjusters, and policyholders
  • To facilitate corporate mergers, the issuance of stock, or the revision of book value
  • To develop an opinion of liquidation value for forced sale or auction proceedings
  • To counsel clients by considering their investment goals, alternatives, resources, and constraints and the timing of their activities
  • To advise zoning boards, courts, and planners, among others, on the probable effects of proposed actions
  • To assist in arbitrating valuation issues
  • To analyze supply and demand trends in a market
  • To ascertain the status of real estate markets
  • To value fixed assets and assist in asset value allocations

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Posted by: Russell DeLeon | January 23, 2010

What is an appraisal?

View our tutorial video.
View a sample appraisal 

 
A home purchase is the largest, single investment most people will ever make. Whether it’s a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.

Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.

So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.

This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay – or a seller receives – for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.

The Inspection
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser’s duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features – or defects – that would affect the value of the house.

Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.

Cost Approach
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.

Sales Comparison
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ”comparable” to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.

Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.

In the case of income producing properties – rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.

Reconciliation
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ”bidding wars” that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don’t want to loan a buyer more money than the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions. 

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