When I confer with a client who is facing the prospect of bankruptcy to protect their home, I have many important questions. One of them is “what is the value of your home?” The answers are usually varied, and in most recent situations, clients have only old or not useful information. Regardless of the source however, determining the value of the home is a necessary step in any pre-bankruptcy analysis I need to do. And unfortunately, getting that accurate information is not always easy, and it is not always grounded in reality.
“It was appraised last year at this amount”
When I ask the question “how much is your home worth?”, rarely does a client have in-hand accurate and trustworthy documentation that supports the value of the home. They will give me an answer which will lead to my next question: “what do you base that on?” If the response is “last year’s appraisal”, I consider the number unreliable. If the response is even an appraisal that was done 6 months ago, chances are, that number has changed.
The assessed value of the property does not help me at all. It never did. Whatever magic formula local municipalities use to form the basis for valuing real estate for taxation purposes does not help me understand what the sales or liquidation value of the real estate is on the day I meet with a client (or at any other time). Show me a housing market where the homes sell for their assessed value, and I’ll gladly point that out here. Until then, assessments don’t help.
There are online sites such as Zillow. I am no advocate for Zillow and I have no problem admitting that it is usually a place that I will start when trying to determine the value of the real estate. I also have no problem admitting that it has been my experience that the values I find on Zillow are unrealistically high, a fact which some of my clients can confirm. But it is cool to see aerial photos of my clients’ homes.
Generally, I like to use a comparative market analysis – or a “comp.” A local real estate broker or experienced sales agent will estimate the value of homes based on the sales or the listing prices of other homes in the area. But this process is also flawed.
My own experiences
Lately, my curiosity and my desire to find an excuse not to go to the gym while still doing something constructive on a Sunday afternoon has found me hitting some open houses. I have no intention of buying any time soon. As I live in the city, I have been looking at condominiums are various pricing levels, and it is my personal opinion that many homes on the market are over-priced.
Last week I had the pleasure of going up to a third floor walk up. The kitchen and the bathroom brought back memories of my grandmother’s house. In other words, they were form the 50s. The previously owners did not put a dime into updating either. The windows on the entire building should have been replaced years ago. The floors were also so squeaky that I thought to myself “I’d get tired of this real fast.” I’m not sure if I mentioned this, it was a third floor walk-up. None of this stopped the owners from asking more than $600K for it.
I saw a 2 bedroom duplex a few weeks back. The real estate agent who was hosting this event only had half-baked answers to legitimate questions. For example, “does this fireplace work?” The response: “by law, I cannot say. But yes.” That explains the Duraflame logs that were perched inside without a screen. The kitchen was nice. The bathroom too. The unit was also being marketed as a “garden” apartment, even though the “garden” was a concrete slab that was at base of the fire escape that serviced the entire building. Also, the “garden” level had the noticeable smell of Glade Plug-ins…which I am allergic too, which is why I know they were there. My guess: covering up the smell of mildew or mold, often found in basement apartments in older buildings. That was going for more than $600K.
If the third floor walk-up wasn’t enough exercise (who needs the gym when there are open houses!), the only bright side of a 5th floor walk up was that I would undoubtedly be in the best shape of my life if I lived there for 6 months, assuming of course that I wouldn’t suffer a massive coronary event in the meantime. The kitchen had not been redone in some time, the one bedroom was big enough for a only bed, and the window in the bathroom shower overlooked the roof deck of the building next door. If I had to get the kitchen re-done, how much extra would the contractor charge for a 5th floor walk-up? How much more would movers charge for a 5th floor walk-up? This did not stop the owner from asking more than $365K.
In addition to the units themselves, dingy and dank common areas suggest a lackadaisical condo-association. If the carpeting in the common areas is torn, or the railing on the stairs appears to be held together with gum and bailing wire, how is the roof holding up? How about the wiring? In one place, the entry way was so bad that another Open House visitor sarcastically said to me as he was descending the stairs to the unit: “this oughta be good!” He was right. But I don’t want to talk about that unit. It puts me in a bad place.
The party really is over
The sub-prime lending scandal (and yes, it’s a scandal) has unsurfaced several nefarious practices and unsavory characters in the real estate sales, appraising and lending business. Some characters are out of business. Others have fled the state. But there are others who are still out there throwing lipstick on a pig, and still trying to shake out a high dollar amount in a local condo market where financing money is drying up, people are tapped out, and the future is far from certain. In other words, there are some in the real estate business who have not heard that the party is over. I recognize that people need to earn a living, and I understand that people may want to get a return on their investment when they are selling their home. But the market has changed. Times are changing. And values are not what many people think, or in most cases hope they are.
This point is buttressed by a column appearing in today’s Boston Herald by nationally syndicated columnist Kenneth R. Harvey. He observes:
Lenders are demanding that appraisers assessing home values only use the freshest comps: ideally home sales that closed within the previous 90 days.
Banks are also requiring more-extensive data on local pending sales, list prices and selling price before agreeing to fund mortgages.
In a volatile market, this would seem like a sound practice. But even this is not without its flaws:
…[A] homeowner with an unsold, overpriced house might pull it off of the market, then put it back on later as a “new” listing – at the same price.
As long as the home is listed at least three months later, it will be counted as a “new” offering – and its high asking price might affect nearby homes’ appraisals.
Putting aside these shenanigans, I want to stress to folks facing foreclosure and looking at the value of their homes that there needs to be realism. And realism is not a bad thing. I’ve blogged on how second mortgages can be stripped-stripped off if the value of the real estate does not secure the note. A low value might actually have some benefit for a debtor in bankruptcy. But getting to that realistic – and likely lower than hoped value of the property is not just fueled by the market. History proves that it can be fueled by something else: denial.
Fundamentally, the property is worth what the market will bear. Financing is drying up and the pool of buyers is dwindling. There is a cloud of uncertainty that everyone feels and everyone sees in some degree that also is giving even qualified buyers pause. The more unrealistic the prices and the longer the properties stay on the market (or as the case may be come on and go off, and then come back on the market) only suggest that there is an element of denial that may be fueling these comps. And that helps no one.
Related posts:
- House Broke
- So You Think It’s a Good Time to Buy a House?
- House Passes Bill, Filing Fees Increasing
- 20/5 Redux: Thoughts on When to “Walk Away”
- Is Boston’s Housing Bubble Deflating?
Tags: Bankruptcy, Commentary, Homes, homesteads and real estate, Housing News, Mortgages and Foreclosures, Yep. We're in trouble.
This entry was posted
on Sunday, November 9th, 2008 at 8:30 pm and is filed under Bankruptcy.
You can follow any responses to this entry through the RSS 2.0 comment feed.
You can leave a response, or trackback from your own site.
What’s Your House Worth?
When I confer with a client who is facing the prospect of bankruptcy to protect their home, I have many important questions. One of them is “what is the value of your home?” The answers are usually varied, and in most recent situations, clients have only old or not useful information. Regardless of the source however, determining the value of the home is a necessary step in any pre-bankruptcy analysis I need to do. And unfortunately, getting that accurate information is not always easy, and it is not always grounded in reality.
“It was appraised last year at this amount”
When I ask the question “how much is your home worth?”, rarely does a client have in-hand accurate and trustworthy documentation that supports the value of the home. They will give me an answer which will lead to my next question: “what do you base that on?” If the response is “last year’s appraisal”, I consider the number unreliable. If the response is even an appraisal that was done 6 months ago, chances are, that number has changed.
The assessed value of the property does not help me at all. It never did. Whatever magic formula local municipalities use to form the basis for valuing real estate for taxation purposes does not help me understand what the sales or liquidation value of the real estate is on the day I meet with a client (or at any other time). Show me a housing market where the homes sell for their assessed value, and I’ll gladly point that out here. Until then, assessments don’t help.
There are online sites such as Zillow. I am no advocate for Zillow and I have no problem admitting that it is usually a place that I will start when trying to determine the value of the real estate. I also have no problem admitting that it has been my experience that the values I find on Zillow are unrealistically high, a fact which some of my clients can confirm. But it is cool to see aerial photos of my clients’ homes.
Generally, I like to use a comparative market analysis – or a “comp.” A local real estate broker or experienced sales agent will estimate the value of homes based on the sales or the listing prices of other homes in the area. But this process is also flawed.
My own experiences
Lately, my curiosity and my desire to find an excuse not to go to the gym while still doing something constructive on a Sunday afternoon has found me hitting some open houses. I have no intention of buying any time soon. As I live in the city, I have been looking at condominiums are various pricing levels, and it is my personal opinion that many homes on the market are over-priced.
Last week I had the pleasure of going up to a third floor walk up. The kitchen and the bathroom brought back memories of my grandmother’s house. In other words, they were form the 50s. The previously owners did not put a dime into updating either. The windows on the entire building should have been replaced years ago. The floors were also so squeaky that I thought to myself “I’d get tired of this real fast.” I’m not sure if I mentioned this, it was a third floor walk-up. None of this stopped the owners from asking more than $600K for it.
I saw a 2 bedroom duplex a few weeks back. The real estate agent who was hosting this event only had half-baked answers to legitimate questions. For example, “does this fireplace work?” The response: “by law, I cannot say. But yes.” That explains the Duraflame logs that were perched inside without a screen. The kitchen was nice. The bathroom too. The unit was also being marketed as a “garden” apartment, even though the “garden” was a concrete slab that was at base of the fire escape that serviced the entire building. Also, the “garden” level had the noticeable smell of Glade Plug-ins…which I am allergic too, which is why I know they were there. My guess: covering up the smell of mildew or mold, often found in basement apartments in older buildings. That was going for more than $600K.
If the third floor walk-up wasn’t enough exercise (who needs the gym when there are open houses!), the only bright side of a 5th floor walk up was that I would undoubtedly be in the best shape of my life if I lived there for 6 months, assuming of course that I wouldn’t suffer a massive coronary event in the meantime. The kitchen had not been redone in some time, the one bedroom was big enough for a only bed, and the window in the bathroom shower overlooked the roof deck of the building next door. If I had to get the kitchen re-done, how much extra would the contractor charge for a 5th floor walk-up? How much more would movers charge for a 5th floor walk-up? This did not stop the owner from asking more than $365K.
In addition to the units themselves, dingy and dank common areas suggest a lackadaisical condo-association. If the carpeting in the common areas is torn, or the railing on the stairs appears to be held together with gum and bailing wire, how is the roof holding up? How about the wiring? In one place, the entry way was so bad that another Open House visitor sarcastically said to me as he was descending the stairs to the unit: “this oughta be good!” He was right. But I don’t want to talk about that unit. It puts me in a bad place.
The party really is over
The sub-prime lending scandal (and yes, it’s a scandal) has unsurfaced several nefarious practices and unsavory characters in the real estate sales, appraising and lending business. Some characters are out of business. Others have fled the state. But there are others who are still out there throwing lipstick on a pig, and still trying to shake out a high dollar amount in a local condo market where financing money is drying up, people are tapped out, and the future is far from certain. In other words, there are some in the real estate business who have not heard that the party is over. I recognize that people need to earn a living, and I understand that people may want to get a return on their investment when they are selling their home. But the market has changed. Times are changing. And values are not what many people think, or in most cases hope they are.
This point is buttressed by a column appearing in today’s Boston Herald by nationally syndicated columnist Kenneth R. Harvey. He observes:
In a volatile market, this would seem like a sound practice. But even this is not without its flaws:
Putting aside these shenanigans, I want to stress to folks facing foreclosure and looking at the value of their homes that there needs to be realism. And realism is not a bad thing. I’ve blogged on how second mortgages can be stripped-stripped off if the value of the real estate does not secure the note. A low value might actually have some benefit for a debtor in bankruptcy. But getting to that realistic – and likely lower than hoped value of the property is not just fueled by the market. History proves that it can be fueled by something else: denial.
Fundamentally, the property is worth what the market will bear. Financing is drying up and the pool of buyers is dwindling. There is a cloud of uncertainty that everyone feels and everyone sees in some degree that also is giving even qualified buyers pause. The more unrealistic the prices and the longer the properties stay on the market (or as the case may be come on and go off, and then come back on the market) only suggest that there is an element of denial that may be fueling these comps. And that helps no one.
Related posts:
Tags: Bankruptcy, Commentary, Homes, homesteads and real estate, Housing News, Mortgages and Foreclosures, Yep. We're in trouble.
This entry was posted on Sunday, November 9th, 2008 at 8:30 pm and is filed under Bankruptcy. You can follow any responses to this entry through the RSS 2.0 comment feed.
You can leave a response, or trackback from your own site.