Mary Cummins, Real Estate Appraiser, Animal Advocates, Los Angeles, California

Mary Cummins, Real Estate Appraiser, Animal Advocates, Los Angeles, California
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Showing posts with label solution. Show all posts
Showing posts with label solution. Show all posts

Thursday, November 11, 2021

Appraisal Gap: What is Appraisal Gap and what causes it? by Mary Cummins Real Estate Appraiser

appraisal gap, definition, what is appraisal gap, what causes appraisal gap, cause, mary cummins, real estate appraiser, real estate appraisal, los angeles, california, licensed, certified, cummins real estate, marycummins.com, blog, gentrification, minorities, bias


appraisal gap, definition, what is appraisal gap, what causes appraisal gap, cause, mary cummins, real estate appraiser, real estate appraisal, los angeles, california, licensed, certified, cummins real estate, marycummins.com, blog, gentrification, minorities, bias

What is "Appraisal Gap?" 

Appraisal gap is the difference between the agreed upon purchase price and the appraised value by the lender's appraiser. 

As an example you make an offer on a home for $100,000 with $5,000 5% down payment and a loan for $95,000 95%. The seller accepts it. You apply for a loan. The bank sends out their real estate appraiser to make sure there is enough equity in the home to pay off the loan in the event you can't make the payments and default. The real estate appraiser must use recent similar sold properties of a similar size with similar number of beds, baths and amenities such as view, pool, upgrades. 

The appraiser finds three very similar recent sales at $90,000, $89,000 and $91,000. There are no sales of similar homes that have recently sold for $100,000 though there are some offered for sale at $100,000. Sold comparables carry more weight than listed or pending sales. Sold comparables set the upper possible limit of value. The appraiser will probably value that home around $90,000. $90,000 is less than the $100,000 purchase price. The bank would probably only loan you a maximum of 95% of the appraised value if you have great credit or $85,500. This is about $10,000 less than you had originally planned. 

You will have to come up with a higher down payment or the seller will have to reduce the price. If it's a hot seller's market like today with multiple over list offers, the seller will not reduce the price. They will go with another offer if you can't perform. You can agree to pay the difference in cash. You would need to put down $10,000 more in cash in order to buy the home. 

You could also decide to go with a loan with a higher loan to value ratio. The higher the loan to value ratio, the more the loan will cost in terms of cost, fees and interest rate. You may also have to pay for mortgage insurance and pay part of your insurance and property taxes monthly with your monthly mortgage.

If there are higher pending sales that are near closing around $100,000, you could negotiate a contract extension and hope that a higher pending or listed comp sells and closes quickly at a higher price. Then you could request another appraisal which should be higher based on the recent similar higher sale. The seller may not agree to this unless you offer them a cash incentive.

What causes "Appraisal Gap?"

There are a few causes of appraisal gap. Most appraisal gaps happen in quickly appreciating markets like today November 2021. The faster and greater the appreciation rate, the more likely there will be a gap. The main issue is legally real estate appraisers must use closed verified sales. These closed sales set the upper limit of value. The bank, underwriter, Appraisal Management Company AMC will not allow an appraisal value higher than the highest closed comp. It's not up to the appraiser.

There is generally a lag of a month or two between the time someone makes an offer on a property, it's accepted, escrow is opened, the loan application is made, the appraiser appraises the property, the report is sent to the lender, the underwriter approves the loan (or not), escrow is finally closed and the deed is recorded in the local county recorder's office. "According to Ellie Mae, a software company that processes more than a third of U.S. mortgage applications, standard mortgages took an average of 47 days to close in 2020. VA loans took 51 days to close, and FHA loans took the longest to close — 52 days on average." 

During that time properties have appreciated in value from the contract price. This means the closed sales the appraiser used today in the appraisal are  based on contract prices that are actually one to two months behind the market. Some properties today are appreciating at 15-20% a year or about 1.25-1.6% per month.  With a $100,000 home that could be $1,660/month or $3,200. In this situation that doesn't explain the entire appraisal gap. Let's explore another reason for the appraisal gap.

Some markets like today are out of whack. There is not enough home inventory and many buyers making multiple offers over list for homes. Some people are paying more than market value for homes today. If you want to pay more for a home than it's worth, you can pay cash for it. If you want a loan, it's a different story. The lender is not willing to over lend on the property. They need to make sure they can sell the property for the loan value and all costs, fees if you don't make the payments. As it is the property could go down in value after you buy it and the lender could end up with a loan worth less than the home. In reality most lenders quickly sell the loans they make so they can get money to make new loans. Investors will only buy loans that meet certain criteria. One of those criteria is the loan to value ratio. Lenders will not make a loan with a very high to loan value ratio because they won't be able to sell it.

Below is a chart which shows that the appraisal gap increases as property values rise. The chart is from the article "Appraisal Gap Increases in 'Hot Markets'" from July 2021 (1). Per Corelogic, "Recently, we observed buyers paying prices above listing price and higher than the market data available to appraisers can support. This difference is known as “the appraisal gap,” and in studying it, we see several interesting correlations between home price appreciation, buyers paying more than listing price and buyers paying more than the appraised value." The faster the appreciation, the hotter the market, the lower the housing inventory, the more likely there will be an appraisal gap. (Click to see larger)

appraisal gap, definition, what is appraisal gap, what causes appraisal gap, cause, mary cummins, real estate appraiser, real estate appraisal, los angeles, california, licensed, certified, cummins real estate, marycummins.com, blog, gentrification, minorities, bias
appraisal gap, definition, what is appraisal gap, what causes appraisal gap, cause, mary cummins, real estate appraiser, real estate appraisal, los angeles, california, licensed, certified, cummins real estate, marycummins.com, blog, gentrification, minorities, bias
If you look at the chart above, you can see that the appraised value is about two months behind the sales price. The appraised value is increasing at the same rate as the appraisal gap which shows the appraised value is based on sales.

In the chart above you see March 2020 when the first pandemic lockdowns started. Appreciation the same for March, April 2020. It dips before May because probably fewer were buying homes. May, June 2020 it starts to rise again. Real estate is seasonal. It generally peaks June, July when school is out and it's easier to move. It slows August, September as school is back in session. It dips around Thanksgiving, Christmas and New Year. Then it ticks up in the spring a little. Because of the pandemic the seasonal cycles were off a little. You can still see the seasonal cycles in demand affecting the appreciation rate and appraisal gap. 

Appraisal gaps have existed as long as appraisals have existed. In every single appreciating and especially quickly appreciating market there have been appraisal gaps. In doing research for this article the first newspapers.com mention of appraisal gap was in Canada in 1947, "See Possibility of Larger Housing Loans With Appraisal and Cost Gap Narrowing," May 17, 1947, National Post, Toronto, Canada.

The Los Angeles Times had a very good article from March 12, 1998 titled "The Appraisal Gap. Rising Home Prices Have Outpaced 'Comp' Sales" pg 259. 

"Many people like pushing the limits and breaking new ground. Not real estate appraisers.  A cautious, methodical breed, many appraisers have found themselves in the uncomfortable and risky position of sizing up Southern California homes whose sales prices have ballooned way beyond any recent comparable sale. Pity the poor appraiser then who must prove to a skeptical lender that a house is worth its $225,000 price tag when the most recent and highest comparable sale, or "comp," was only $200,000."

"Getting a fix on current values is never easy. But it is particularly difficult when the real estate market starts to change, as it recently has in Southern California, where many neighborhoods have seen prices rise sharply after years of stagnation and decline. It's a time when appraisers often find themselves pitted against real estate agents and homeowners, who are eager to cash in on higher values." 

"Most lenders like to see an appraisal that's in line with at least three nearby comps that have been recorded with county officials within the last six months. But even the most recent comp may be several weeks out of date because of the lag between the time a sales price is agreed upon usually when escrow opens and when the completed transaction finally appears in county records. As a result, a fresh comp will fail to reflect current values, especially as prices are just beginning to take off."

Keys Properties stated in July 2021 in their article (2) "How to Bridge the Appraisal Gap in Today's Market," "in a rapidly appreciating market, it can be difficult for appraisals to keep pace with rising prices. Low appraisals are not common, but they are more likely to happen in a rapidly appreciating market, like the one we’re experiencing now. That’s because appraisers must use comparable sales (commonly referred to as comps) to determine a property’s value. These could include homes that went under contract weeks or even months ago. With home prices rising so quickly, today’s comps may be lagging behind the market’s current reality. Thus, the appraiser could be basing their assessment on stale data, resulting in a low valuation."

"The one weakness of our system is that everything is historical and it takes awhile for us to get that new data," said Joseph Baldino, president of the Los Angeles chapter of the National Assn. of Independent Fee Appraisers Real Estate Appraisers." 

19% of purchase transactions had a contract price above the appraisal valuation in 2021. In 2020 it was 7%, "Hot Housing Market Widens Appraisal Gaps," (3). The chance of having an appraisal gap is high today. Below is a chart from Corelogic from January 2020 to May 2021 showing the increasing appraisal gap. The chart below is the same as the one above which is for the same time period. 

appraisal gap, definition, what is appraisal gap, what causes appraisal gap, cause, mary cummins, real estate appraiser, real estate appraisal, los angeles, california, licensed, certified, cummins real estate, marycummins.com, blog, gentrification, minorities, bias
appraisal gap, definition, what is appraisal gap, what causes appraisal gap, cause, mary cummins, real estate appraiser, real estate appraisal, los angeles, california, licensed, certified, cummins real estate, marycummins.com, blog, gentrification, minorities, bias



The Appraisal Gap Widens in Areas That Are More Quickly Appreciating

In areas with quickly appreciating markets the appraisal gap can be wider. Some areas are in the revitalization cycle of real estate or what some call "gentrification." Home prices are appreciating very quickly in areas in the early stages of gentrification (6). I've seen 30-40% appreciation in a year in some areas in California like Oakland, South Los Angeles, East Los Angeles. In fact Pamela Perry of FreddieMac who just released research September 2021 on appraisal gap stated July 15, 2021 in a webinar titled "Property Valuation Appraisal Bias and Black Homeownership" "A few white folk move in (to a black area) and suddenly value spikes." The spikes cause appraisal gaps. 

The main cause of revitalization is people being pushed out of nearby more expensive areas into less expensive areas (4). Generally these areas are in the first time buyer range which has a high demand causing an even larger appraisal gap. As newer residents with more money buy into these areas, investors invest in and improve the areas and property values increase. This also happens in second time home buyer price ranges. A good recent example is West Adams in Los Angeles, California. Lots of larger older homes that were in decline have been bought and refurbished. Flippers and others have been selling these homes in minority areas in the $700,000 to $1,000,000 range. 

Many of these areas have mainly minority residents because home prices and rents were lower and more affordable when the area was in decline. Research has shown that there is a correlation between minorities, lower income and lower resulting net worth (5). People with less money and income buy and rent homes in less expensive areas. This means there is a higher chance of having an appraisal gap in a mainly minority area that is appreciating. "The demand has driven up home prices in a region where rates of homeownership have historically been low due to redlining, and where the population, which is predominately black and Latino, earns about 60 cents to every $1 earned by the average LA County resident" (7).

Home prices have been appreciating since about 2010 after the great recession of 2008. If one is looking at appraisal gaps in mainly minority areas from 2015 to 2020 one would see a greater gap in these areas than the US overall. 

As home prices in general increase in value, home prices in early revitalizing areas increase at a much faster pace as investors are attracted to the area. This causes the appraisal gaps to be more common and wider than the overall rate.  Some minority homeowners in these areas or other people misinterpret the appraisal gaps as "appraiser bias" against minorities. Things could not be further from the truth. 

UPDATE 11/2021: FHFA released appreciation rates for the US. Look at the cities with the  highest appreciation rates. The ones in California are minority areas, i.e. Oakland, Anaheim, Riverside, Long Beach, Folsom, Stockton, Fresno, Sunnyvale, Chula Vista. In other states it's Tucson, AZ, Jacksonville, FL... 20% to 37% per year, 300% to 600% in five years. These are minority areas that are gentrifying/revitalizing as people are pushed out of more expensive areas. Notice this is where most of the appraisal gap media articles have originated. Owners claimed the difference in appraisal value was caused by racism and white washing. It was caused by appreciation.


Appraising real estate is a combination of math and science. Many have made valuation software or Automated Valuation Models (AVMs) such as Zillow, RedFn, Trulia which estimate property values based on the location, size, age, number of bedrooms/baths and recent sales alone. The software uses the sales in the areas to define a value for each bedroom, bath, lot size, building size... The software doesn't see the people or even the home yet it derives a value based on numbers, data and math. 

Appraisers base their appraisal on the same exact features with important added information. Appraisers actually inspect the property and can note the condition, upgrades, repairs needed, additions... The Appraiser sees the neighborhood, access to public transportation and supporting facilities. The appraiser uses regression analysis to define a value for adjustments in the number of bedrooms, baths, lot size ... just like the AVMs. For these reasons the Appraiser's valuation will be far more accurate than any AVM. 

Appraisal gaps will always exist based on the current appraisal model and federal regulations. If you are buying a home in a quickly appreciating market, talk to your agent about the possibility of an appraisal gap. You may want to include an appraisal or appraisal gap clause if you don't want to lose the deal. You should definitely consider backup plans. If you do end up with an appraisal gap, please, understand the cause of the gap and your options. Don't attack the appraiser and falsely accuse them of personal bias. Appraisers don't set values. We merely report values based on data, numbers and math. 

References

1. Corelogic - "Appraisal Gap Increases in 'Hot Markets'" July 2021
https://www.corelogic.com/intelligence/appraisal-gap-increases-in-hot-markets/

2. Key Properties - "How to Bridge The Appraisal Gap," July 2021
https://www.keysproperties.com/blog/how-to-bridge-the-appraisal-gap-in-todays-real-estate-market/

3. Hot Housing Market Widens Appraisal Gaps, 19% of purchase transactions had a contract price above the appraisal valuation in 2021.    
https://nationalmortgageprofessional.com/news/hot-housing-market-widens-appraisal-gaps

4. ENDOGENOUS GENTRIFICATION AND HOUSING PRICE DYNAMICS
https://www.nber.org/system/files/working_papers/w16237/w16237.pdf

5. Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances, September 2020.
https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm

6. Housing appreciation patterns in low-income neighborhoods: Exploring gentrification in Chicago. https://www.sciencedirect.com/science/article/abs/pii/S1051137717301547

7. In 10 years, home prices grew the most in these LA neighborhoods.
  https://la.curbed.com/2019/12/23/21031672/los-angeles-home-prices-highland-park

Los Angeles Times - Archives for older articles or use newspapers.com 
http://www.latimes.com 

Mary Cummins of Cummins Real Estate is a certified residential licensed appraiser in Los Angeles, California. Mary Cummins is licensed by the California Bureau of Real Estate appraisers and has over 35 years of experience.


Mary Cummins, Mary K. Cummins, Mary Katherine Cummins, Mary, Cummins, #marycummins #animaladvocates #losangeles #california #wildlife #wildliferehabilitation #wildliferehabilitator #realestate #realestateappraiser #realestateappraisal #lawsuit real estate, appraiser, appraisal, instructor, teacher, Los Angeles, Santa Monica, Beverly Hills, Pasadena, Brentwood, Bel Air, California, licensed, permitted, certified, single family, condo, condominium, pud, hud, fannie mae, freddie mac, fha, uspap, certified, residential, certified resident, apartment building, multi-family, commercial, industrial, expert witness, civil, criminal, orea, dre, brea insurance, bonded, experienced, bilingual, spanish, english, form, 1004, 2055, 1073, land, raw, acreage, vacant, insurance, cost, income approach, market analysis, comparative, theory, appraisal theory, cost approach, sales, matched pairs, plot, plat, map, diagram, photo, photographs, photography, rear, front, street, subject, comparable, sold, listed, active, pending, expired, cancelled, listing, mls, multiple listing service, claw, themls, historical appraisal, facebook, linkedin

Tuesday, June 18, 2019

Here is the real cause of increase in homelessness in Los Angeles 2019 - by Mary Cummins

cause of homeless increase in los angeles california is the recovery from the real estate recession, mary cummins, real estate appraiser, appraisal, mayor eric garcetti,
There has been a significant increase in the number of homeless people in Los Angeles and the entire state of California. One of the biggest causes besides stagnant wages and 30 years of not building enough units is the recovery from the real estate recession that began in late 2007. If you look at the chart there is a direct correlation between the rising price of homes, 2-4 units and apartment buildings and homelessness.

I've been a real estate broker, appraiser in Los Angeles since 1983. My specialty is apartment buildings. I have gone through three boom and bust real estate cycles in Los Angeles as a broker, appraiser. While I've always been concerned about the homeless I've never lived in an area with homeless people previously. I'd only see them doing appraisals in South LA or downtown. I now live in an area with homeless people.

The great recession started in the fall of 2007. By 2009 some properties had dropped 35%. Some new DTLA lofts dropped by 50%. HOA were going bankrupt. Entire loft buildings were in foreclosure. During this time people who could afford to hold their property held and rented it out. By 2010 prices started to rise a little. By 2014, 2015 some values were almost close to what they were fall 2007. Some people started to sell in the bull market while prices continued to rise. Prices continued to rise until fall 2018. We are now in the beginning of a real estate recession though apartment buildings are still doing well because of lack of sufficient units.

By 2016, 2017, 2018 people started selling their properties. They sold homes and 2-4 units, apartment buildings. Most of the homeless came from 2-4 units and apartment buildings though some may have come from homes which were group rented. As these properties sold the tenants were evicted for many legal reasons. You can pass through major renovations to tenants. As most landlords were not properly maintaining their units during the recession these properties needed work. They were class C buildings. Class A buildings are luxury new. Class B buildings are renovated and rented for market. The tenants were not able to pay the increase in rents. They became homeless. They couldn't afford to move or store their possessions so they left most of them. Landlords, contractors dumped the items on the street or maybe dumped it a few blocks away. This is where a lot of the trash comes from. You can tell it's eviction trash when it includes mattress, clothing, household items... Construction trash and business trash looks very different.

The best way to make money as a real estate investor in Los Angeles is to buy run down units with below market rents. Get rid of the tenants, renovate the building and re-rent for market rent. This provides the best return on investment. It's just a business deal like buying a car for $5,000, fixing it up for $1,000 and selling it for $7,500. Investors aren't trying to make people homeless. Homelessness is just collateral damage.

I will now focus on an area of which I'm very familiar, the area around USC. Rents around colleges and universities are generally higher than the rest of the city. From 2015 to today I'd say at least four run down apartment buildings per block have been sold, renovated and re-rented for market rent. The rate of sale of these buildings increased drastically since 2013 and mainly 2015. Some of these properties were old large homes converted to units with and without permits back in the 1980's when the area was very run down.

The poor tenants and their poor friends who stayed with them were all evicted. With some of these properties people were living in garages, carports and patios. In some apartments every room was turned into a bedroom including the living room, dining room, pantry. Some rooms were divided with a hanging sheet into two bedrooms. The tenants appeared to be Latino, some black, a few white day laborers, maids, restaurant workers, construction workers... low wage people. They were not Section 8 tenants.

The rebound of the real estate market happened in Los Angeles alongside the revitalization cycle of real estate of some poorer parts of the city. Some call it gentrification. This causes an increase in renovation and new developments which bring money, tax income, jobs, businesses which help the community, city and state at the cost of an increase in number of homeless. Here is one property which I watched as poor tenants were evicted, their possessions were dumped on the street, property was renovated and they're now trying to rent it. I can give you many more addresses where the same exact thing happened. Most were just poor working people who were evicted.

http://mary--cummins.blogspot.com/2019/06/flop-houses-in-shitty-areas-sold.html

The other causes of the rise in homeless is stagnant wages. Even if you made $15/hr, you still couldn't rent a one bedroom in Los Angeles with your take home pay. You need two people making $15/hr to rent a cheap one bedroom.

The most significant cause of homelessness and the housing crisis in LA is lack of development of housing units over the last 30 years. The cause is/was rise in cost of land, cost of construction, development red tape and NIMBYs. Here are a few ideas from others and some of my own about how to deal with the housing crisis.

http://mary--cummins.blogspot.com/2019/04/ideas-to-help-solve-housing-crisis-here.html

FTR Mayor Eric Garcetti did not cause this problem. He inherited this problem. The rise in homelessness is caused by the rebound from the housing recession, developer red tape, stagnant wages, insufficient development of new units and NIMBYs. Garcetti is doing what he can to try to fix the problem. Instead of trying to house the homeless as a way out of this mess we need to look at the causes. In domestic animal rescue we state you can't adopt your way out of pet over population. You have to work on the causes of pet over population. The same applies here. LA can't afford to build housing for all the homeless. We need to keep people from becoming homeless in the first place. We need to get the homeless back into productive jobs so they can pay for housing on their own.

Mary Cummins of Animal Advocates is a wildlife rehabilitator licensed by the
Mary Cummins of Animal Advocates is a wildlife rehabilitator licensed by the California Department of Fish and Game and the USDA. Mary Cummins is also a licensed real estate appraiser in Los Angeles, California.


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