Posted by Jonathan J. Miller -Wednesday, May 16, 2012, 5:36 PM
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Tomorrow I’ll be a featured speaker at The Northeast New Jersey Chapter of the Appraisal Institute’s 6th Annual Meadowlands Conference in Teaneck, NJ.
My presentation is called:
The Intersection of Housing and Credit in 2012, How This Cycle Ends.
Always great to hang out with valuation professionals who care about their profession.
Posted by Jonathan J. Miller -Wednesday, May 16, 2012, 3:34 PM
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Crazy?
In the past few days there have been some pretty serious announcements of high end sales in the Manhattan apartment market. First there was the $52M co-op sale at 740 Park Avenue and then there was the $70M condo sale at 50 Central Park South. The former was a record – the highest sales price of a co-op apartment in Manhattan history and the second was a near record sale for a Manhattan condo. One could say this $70M sale was the highest arm’s length condo sale in history since it appears from what I’ve read that the $88M sale at 15 CPW a few months ago was more of a global divorce strategy play.
In appraising we use the “paired sale” technique to extract what certain amenities are worth. One could argue that these 2 recent sales were very similar:
- Both were about 10,000 square feet.
- Both are duplexes (2 levels).
- Both had terraces.
- Both located on well known streets/addresses.
- Both were located in pre-war buildings.
- Both sold at about the same time.
- Both appeal to an affluent buyer who doesn’t require financing.
Simplistically speaking the key differences are the form of ownership (co-op v. condo) and the view. The 50 CPS property has full frontage on Central Park, the most sought-after view in Manhattan. The 740 Park Avenue is located on the 12th and 13th floor has city views that do not clear the roof lines of most buildings in the immediate area.
In our market, the premium for a Central Park view can be about 25% of an apartment’s value. In our co-authored research paper on Manhattan co-op v. condo value with NYU Furman Center, the inherent difference in value between a co-op and condo after controlling for all differences is about 9%.
25% + 9% = 34%
This 34% total is pretty consistent with the 34.6% difference between the $52M co-op and the $70M condo sales prices.
So the numbers aren’t so crazy after all.
- Wynn lands Ritz-Carlton penthouse for $70M [The Real Deal]
- Park Avenue co-op sells for record $52.5 million [CNN/Money]
- Fertilizer King Rybolovlev Sued By Wife For $88 Million 15 CPW Purchase [NYO]
- The Condominium v. Cooperative Puzzle: An Empirical Analysis of Housing in New York City [Miller Samuel]
Posted by Jonathan J. Miller -Wednesday, May 9, 2012, 9:52 AM
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Julie Satow’s New York Times ‘Square Foot’ Column Accuracy of Appraisals Is Spotty, Study Says takes a look at a study that concluded that commercial appraisals were too high when tested against what the property actually sold for. My partner John Cicero in our commercial valuation firm Miller Cicero was referenced in the piece. While he liked the article and agreed with the conclusions, he pointed out the potential flaws in the study.
Of course the report is pointing out what has been an obvious problem for at least the past decade. Banks have transitioned into the view that an appraisal report is a commodity and not a professional consultation. The irony here is the same thinking applies across both commercial and residential valuation assignments for banks but with polar opposite results.
Commercial valuations are seen as “too high” and residential valuations are seen as “too low.” This probably has a lot to do with the fact that commercial real estate, especially class a office space in markets like NYC, Washington DC and San Francisco is probably in the middle of a bubble and there is clearly indirect pressure on the appraiser to make the deal work (no matter what is being said publicly).
Of course residential valuations were way too high during the housing boom so a similarity can be drawn during that period as lenders relied on mortgage brokers to deliver the majority (2/3) of loan volume by the time the market peaked.
The common thread in all this is to understand how the appraiser is engaged by the bank. In residential valuation it has morphed over to the appraisal management company process (B of A’s Landsafe is the poster child for bad appraisals) and in commercial valuation it has become a robotic automated engagement process:
John Cicero, a managing principal of the appraisal firm Miller Cicero, said: “It is a broken profession in a lot of ways. The appraisal industry has become commoditized, where lenders see appraisals as simply a commodity to be purchased by a vendor and where more emphasis is placed on the price of an appraisal than the expertise of the appraiser.”
For example, Mr. Cicero said, in the past lenders would often have long discussions about the project and the appraiser’s qualifications before hiring. Now, it is more common for lenders to use an online bidding system, where they issue a request for proposals from appraisers and often choose the least expensive. “They actually refer to us as vendors submitting a bid, not educated professionals who are providing an important service,” he said.
After a while (and it’s been a while) this becomes a self-fulfilling prophecy and the majority of appraisers used by banks are simply bad at their craft (taking liberties here) because the system attracts that “type” appraiser. As a result many of the good appraisers have either left the business or switched their client base to those who see valuations as more than the equivalent of a “title search.”
Banking’s shortsightedness illustrated
When a bank is considering lending $200M on a commercial office building, they are usually are more concerned about shaving $500 off the appraisal fee than they are contracting with a seasoned local market expert. [Commercial] high-ballers with fast turn times are thriving and their product is very weak. The same goes for a residential mortgage [low-ballers] only with commercial lending, the stakes are much higher because the exposure is so much greater – then ask yourself, who is the party that lacks competency? I’d say it’s systemic.
Posted by Jonathan J. Miller -Sunday, April 15, 2012, 3:58 PM
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I had an interesting conversation stream recently that I thought I’d re-share. I dropped the participants names off (just in case).
My conversation began on Twitter with a question from a friend
Broker/Friend: Why do people hate real estate agents?
Me: Probably for same reason they hate appraisers.
Conversation that moved over to Facebook (my Twitter stream flows through it)
Colleague1: People “hate” what they fear. People mostly fear the unknown. They also hate situations in which they don’t get what they think they want. Real estate valuations and transactions are the vortex for unmet expectations as well as the unknown. From a philosophical perspective many believe hate and fear are synonymous. If that’s true, perhaps the vibe agents and appraisers receive is more fear that just comes across as hate. Information and explanations can diffuse and even disperse some of that. Setting expectations properly and education. Sometimes I think agents and appraisers simply get busy and skip some basic steps that could help. People in every profession get too busy and skip those steps. Of course, you can never satisfy the assholes, but I believe a few simple customer service-oriented tactics could make life easier for everyone involved. Thanks for letting me post on your wall and I hope you have a great weekend.
Me: Well said [redact]. I think also that the bar is so low in both industries that there is a wider range of competence – combine that with a large and significant asset tied to raw emotion and self worth and a whole lot of hate is the byproduct.
Colleague1: That’s a really good point. When people are dealing with what is most often the single largest asset they’ll ever possess, emotions naturally run high and they do let it become very personal.
Friend: In my experience, lying is the #1 problem I’ve had with real estate agents. Reason # 2 would be when they flirt with my husband and act as if I’m not there.
Posted by Jonathan J. Miller -Monday, April 9, 2012, 12:03 PM
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New York Magazine does a really great job taking a visual approach to how I look at value by changes in floor level and views in Manhattan high-rises. I selected 301 West 57th Street (here are some view photos from a random listing in building) for the analysis since it has views of Central Park to the northeast, and it is a typical 1980’s development with (nearly) continuous unit lines from bottom to top. New development in the last decade abandoned that design approach by shifting towards larger units on higher floors.
Love how it turned out. Enjoy!
[Source: New York Magazine]
Posted by Jonathan J. Miller -Thursday, March 15, 2012, 6:00 AM
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The Appraisal Institute sends out a press release today recommending that the U.S. Sentencing Commission require appraisals instead of relying on tax assessment values in mortgage fraud cases.
In other words…
Tax Assessments Should Not Be Relied On For Determining Market Value
Speaking at a hearing in Washington, D.C., the Appraisal Institute today urged a federal judicial agency to require the use of real estate appraisals when calculating loss in mortgage fraud cases.
(The Commission is charged with the ongoing responsibilities of evaluating the effects of the sentencing guidelines on the criminal justice system, recommending to Congress appropriate modifications of substantive criminal law and sentencing procedures.)
Amazingly there are…
proposed amendments to the federal Mortgage Fraud Sentencing Guidelines because the amendments propose using tax assessments, and not real estate appraisals, to determine fair market value when the property in question has not been sold.
While I’m not on board with requiring the use of designated appraiser infused in this release even though they are often more qualified (I have always had a problem with mandating the use of a private organization by a government entity), the very idea of using a tax assessment as a basis for any type of value is a terrible mistake.
Assessment values vary significantly across the country:
- they usually do not include an interior inspection.
- they rely on public records data, which can be inaccurate.
- usually not correlated to market value (just take a look at NYC’s tax assessment method).
- increases can be subject to restrictions and phase-ins.
Simply put, tax assessment values are not usually the same as market value. If value is to be used as a basis for determining value, then the damages to the victim should be fair.
Posted by Jonathan J. Miller -Tuesday, March 13, 2012, 6:30 AM
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A commercial appraiser I know passed along this press release from Bradford Technologies. We liked and used their MacAppraiser software back in the day when they were known as Bradford & Robbins and supported Macs. No disrespect meant to them specifically – I am referring to the state of the broader mortgage lending industry and their use and interaction with appraisers.
How on earth can the mortgage industry, who has successfully pushed the professional appraiser away from valuations through the use of appraisal management companies (who are more about bulk and cheap) than about professional quality, unleash a regression tool on the appraisal masses? Yes they will take a class or two to learn it, but this is way above the average skill set. The appraisal industry is still struggling with the selection of comparable sales.
Here are a few observations on this made by others on an advanced product like this:
This is just what the by-the-book residential appraiser ordered: a statistically supported valuation! A regression analysis that inputs all those hard to define variables like driving distance to a Starbucks, or economic conditions in Uzbekistan. We commercial appraisers have been stuffing reports with this garbage for years and look how much it has done for the reasonableness of our estimates.
…you can cut your overhead and staff…and sleep well at night-no doubt this is geared to the banking industry that will repeat all the mistakes of the past once the new generation of lending mavens is ensconced and they settle into their quota of what they have to lend for their P&L bonus pool (that’s the real regression analysis)
I have likened it to giving an appraiser a loaded gun.
Ok, got it?
BRADFORD TECHNOLOGIES BRINGS REGRESSION ANALYSIS TO RESIDENTIAL APPRAISALS [Working RE]
Posted by Jonathan J. Miller -Monday, March 5, 2012, 1:58 PM
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My friend Noah Rosenblatt over at Urban Digs has been pestering me to share some thoughts on what a “comparable sale” actually is. He and I often complain about how loosely the term is thrown around in the real estate community. This is being presented in the context of a single residential unit and I deliberately avoided using dry dictionary and textbook definitions.
The use of comparable sales are the basic ingredient for real estate appraisers and agents to vet out market value – so the similarity of it to the subject property (the property being valued) is paramount.
As an appraiser, I see the term “comparable sale” often abused. Some of it can be chalked up to inexperience and some of it to fraud. An illustrated deterioration of the slippery slope goes something like this:
Comparable Sale -> Sale -> Data -> Information -> Misinformation -> Fraud
A practical definition
A “comparable sale” is a sale that would be considered an alternative choice to a buyer that might purchase the subject property.
The sale should have a similar set of amenities (ie, size, condition, location, views, configuration, etc.) to be considered as an alternative choice for the buyer. However it gets tricky when the subject property is unique and there are few “comps” to use. Unfortunately it is often the case where there are no “comps” but that will be for another post.
And don’t forget to factor in concessions that might have been part of the “comp” sale. In most cases, the concession should be deducted right from the sales price since the “net” is what the buyer actually thought it was worth. Again there is a lot more too this but I think you get the idea.
One “comp”
One important thing to keep in mind: One “comp” does not make a market. In other words, a market is defined by a general pattern, not one sale. The sale could be an outlier and not reasonable if it is out of sync with everything else.
Not always a “comp”
From practical experience, I have observed that a sale is not always a “comp” just because:
- it was given to you by a real estate professional (i.e. appraiser/agent)
- it was used in a report
- it was close in proximity and recently occurred but would attract a different buyer
- the “comp” provider was familiar with it (i.e. appraised it, sold it) but otherwise not similar
In real estate appraising, comparable sales are presented in the report and adjusted for their differences with the subject property (the one you are appraising). The more adjustments that are needed to be made, the less “comparable” the sale is. A reader who may or may not be familiar with the market the property is located within can should be able to use them to make a more informed personal/business decision on the asset (house) being valued.
In real estate brokerage, agents use “comps” to establish the market value of the potential listing and use the value to develop a pricing strategy (ie listings are not “comps” without considering some sort of listing discount).
Closed?
Comparable sales are nearly always a closed transaction but don’t get hung up on that. They can be pending sales and listings as well.
Appraisers, especially AMC appraisers often without local market knowledge claim they are mandated to only consider “closed” sales as “comps”. Wrong. Total cop out. Lazy. Incompetent.
Like snowflakes?
I like to use the word reasonable when looking at a sale being considered as a “comp” to the property being valued. While housing sales are not like snowflakes (ie no two are the same), remember to ask yourself whether a theoretical buyer for the property being valued would consider the “comp” as an alternative to purchase.
Then catch it on the tip of your tongue.
Posted by Jonathan J. Miller -Friday, March 2, 2012, 5:48 PM
6 Comments
[click to open Business Insider post]
Joe Weisenthal at BI posts a subtle headline: This Is The Trend That Could Asphyxiate The Housing Recovery based on a NAR/Nomura chart that shows that about 1/3 of all real estate professionals are experiencing blown deals. Of the 1/3:
- Low appraisal ±5% – It’s good to see my profession not responsible for all the world’s problems and the least of the “blown deal” phenomenon.
- Tight credit ±10% – Surprised it’s not higher although this accounts for people who applied for a mortgage. One of the big issues today is potential buyers staying on sidelines because they don’t think they would qualify. In other words tight credit is a much large issue than illustrated.
- “Other” ±20% – The largest category by far, the dreaded “other” is the bane of our economic existence. My mother always told me to look both ways when crossing the street or “Other” might clip you in a large sedan. I’ve got to think that the lion’s share of “Other” is made up of buyer cold feet and some sort of appraisal/credit combo.
Posted by Jonathan J. Miller -Friday, February 24, 2012, 12:40 PM
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The following was shared by an appraiser colleague in the Midwest as told to him by a loan officer:
“You want to talk welcome to America. I am doing a loan for [redact] and they [the borrowers] are not US citizens. He did not work all of last year and she made approx. $21,000. And, their tax refund is $9200!!! ….”
“….How is that even possible? I knew you would enjoy this as much as I did, except I had them in front of me and my head was going only in America!“
So the appraiser imparted his wisdom…
Advice to all: keep working
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