Houston Real Estate Blog

The more I review appraisals, the more apparent it becomes that many appraisers in Houston are confusing the terms Market and Neighborhood. This creates misleading results in appraisal reports and can lead to an incorrect conclusion of value.

For starters, let’s give some basic definitions for each of these real estate terms:

A Real Estate Market is an area, usually geographically constrained, where buyers and sellers come together to make transactions. These areas usually have some commonalities such as school districts, proximity to local business districts, etc. For instance, the Medical Center market area in Houston is considered a market area. Buyers in this area usually are looking to move here to be closer to their work. A market area usually consists of many neighborhoods. The y can reside within cities or be entire cities themselves. Other examples of market areas would be The Houston Heights, Bellaire, The Woodlands and Galveston Island.

A Neighborhood is a group of homes that share common amenities, construction time periods and overall design. They are often referred to as communities and MAY contain multiple subdivisions. Examples of neighborhoods in the Greater Houston area would be Gleannloch Farms, Cinco Ranch, Sierra Plantation and Fall Creek.

A Subdivision is a smaller group of homes that are more closely related in terms of appeal, construction period and also price range. It is often used interchangeably with the term neighborhood which in some cases is still correct.

As you can see, it can be somewhat confusing to differentiate between these terms. In the next part of this series I will go over how the incorrect use of these terms causes confusion and misleading results in a real estate appraisal report.

I thought this email I received was very funny and spot on. Enjoy!

 

To All My Valued Employees,

There have been some rumblings around the office about the future of this company, and more specifically, your job. As you know, the economy has changed for the worse and presents many challenges. However, the good news is this: The economy doesn't pose a threat to your job. What does threaten your job however, is the changing political landscape in this country.

However, let me tell you some little tidbits of fact which might help you decide what is in your best interests.

First, while it is easy to spew rhetoric that casts employers against employees, you have to understand that for every business owner there is a Back Story. This back story is often neglected and overshadowed by what you see and hear. Sure, you see me park my Mercedes out side. You've seen my big home at last years Christmas party. I'm sure; all these flashy icons of luxury conjure up some idealized thoughts about my life.

However, what you don't see is the BACK STORY:

I started this company 28 years ago. At that time, I lived in a 300 square foot studio apartment for 3 years. My entire living apartment was converted into an office so I could put forth 100% effort into building a company, which by the way, would eventually employ you.

My diet consisted of Ramen Pride noodles because every dollar I spent went back into this company. I drove a rusty Toyota Corolla with a defective transmission. I didn't have time to date. Often times, I stayed home on weekends, while my friends went out drinking and partying. In fact, I was married to my business -- hard work, discipline, and sacrifice.

Meanwhile, my friends got jobs. They worked 40 hours a week and made a modest $50K a year and spent every dime they earned. They drove flashy cars and lived in expensive homes and wore fancy designer clothes. Instead of hitting the Nordstrom's for the latest hot fashion item, I was trolling through the discount store extracting any clothing item that didn't look like it was birthed in the 70's. My friends refinanced their mortgages and lived a life of luxury. I, however, did not. I put my time, my money, and my life into a business with a vision that eventually, some day, I too, will be able to afford these luxuries my friends supposedly had.

So, while you physically arrive at the office at 9am, mentally check in at about noon, and then leave at 5pm, I don't. There is no "off" button for me. When you leave the office, you are done and you have a weekend all to yourself. I unfortunately do not have the freedom. I eat, and breathe this company every minute of the day. There is no rest. There is no weekend. There is no happy hour. Every day this business is attached to my hip like a 1 year old special-needs child. You, of course, only see the fruits of that garden -- the nice house, the Mercedes, the vacations... you never realize the Back Story and the sacrifices I've made.

Now, the economy is falling apart and I, the guy that made all the right decisions and saved his money, have to bail-out all the people who didn't. The people that overspent their paychecks suddenly feel entitled to the same luxuries that I earned and sacrificed a decade of my life for.

Yes, business ownership has is benefits but the price I've paid is steep and not without wounds.

Unfortunately, the cost of running this business, and employing you, is starting to eclipse the threshold of marginal benefit and let me tell you why:

I am being taxed to death and the government thinks I don't pay enough. I have state taxes. Federal taxes. Property taxes. Sales and use taxes . Payroll taxes. Workers compensation taxes. Unemployment taxes. Taxes on taxes. I have to hire a tax man to manage all these taxes and then guess what? I have to pay taxes for employing him. Government mandates and regulations and all the accounting that goes with it, now occupy most of my time. On Oct 15th, I wrote a check to the US Treasury for $288,000 for quarterly taxes. You know what my "stimulus" check was? Zero.. Nada. Zilch.

The question I have is this: Who is stimulating the economy? Me, the guy who has provided people good paying jobs and serves over 10,000 clients a year with a flourishing business? Or, the single mother sitting at home pregnant with her fourth child waiting for her next welfare check? Obviously, government feels the latter is the economic stimulus of this country.

The fact is, if I deducted (Read: Stole) 50% of your paycheck you'd quit and you wouldn't work here. I mean, why should you? That's nuts. Who wants to get rewarded only 50% of their hard work? Well, I agree which is why your job is in jeopardy.

Here is what many of you don't understand ... to stimulate the economy you need to stimulate what runs the economy. Had suddenly government mandated to me that I didn't need to pay taxes, guess what? Instead of depositing that $288,000 into the Washington black-hole, I would have spent it, hired more employees, and generated substantial economic growth. My employees would have enjoyed the wealth of that tax cut in the form of promotions and better salaries. But you can forget it now.

When you have a comatose man on the verge of death, you don't defibrillate and shock his thumb thinking that will bring him back to life, do you? Or, do you defibrillate his heart? Business is at the heart of America and always has been. To restart it, you must stimulate it, not kill it. Suddenly, the power brokers in Washington believe the poor of America are the essential drivers of the American economic engine. Nothing could be further from the truth and this is the type of change you can keep.

So where am I going with all this?

It's quite simple.

If any new taxes are levied on me, or my company, my reaction will be swift and simple. I'll fire you. I'll fire your co-workers. You can then plead with the government to pay for your mortgage, your SUV, and your child's future. Frankly, it isn't my problem any more.

Then, I will close this company down, move to another country, and retire. You see, I'm done. I'm done with a country that penalizes the productive and gives to the unproductive. My motivation to work and to provide jobs will be destroyed, and with it, will be my citizenship.

So, if you lose your job, it won't be at the hands of the economy; it will be at the hands of a political hurricane that swept through this country, steamrolled the constitution, and will have changed its landscape forever. If that happens, you can find me sitting on a beach, retired, and with no employees to worry about....

Signed,

THE BOSS

Once the HVCC, Home Valuation Code of Conduct, is enacted the majority of lender and mortgage appraisal requests will be diverted through Appraisal Management Companies (AMCs). Although this may curb the evils of "lender pressure" on us appraisers, it will also take up to 50% of our fee!! For those of you who aren't familiar with how AMCs work, they are basically a middle-man that routes all appraisal assignments and communications between the ordering party and a randomly selected appraiser. For their role they take a healthy 30%-40% cut off the appraisal fee. For instance, if they charge the lender $350 for the appraisal they will pay the appraiser $210. Oh yea, AND the appraiser will have to wait 30 - 60 days to get their money. There are many faults with the HVCC but this is a major one; do they really think that lenders will receive better quality appraisals by paying appraisers a drastically reduced fee?

This will result in one of two things: Many appraisers who survive solely on lender work will leave the industry, possibly getting their Real Estate license and once again flooding the market with Realtors. Alternatively, the "Good" appraisers will move on to non-lender work, which will still pay them full fee. This will result in the majority of the AMC work left to be completed by trainees, new appraisers and those who simply aren't experienced enough to move into another niche. And a final, 3rd option that we can all foresee is that appraisers will begin to look for ways to perform appraisals faster. After all, less money per assignment means we'll need more volume to make the same amount of money. With that mentality many appraisers will start to cut corners and leave out excess research resulting in sloppy, possibly inaccurate real estate valuations.

Now picture this: A lender orders an appraisal through an AMC. Appraisal is completed by means of "fast-tracking" by the appraisal company to make up for the lower fee. The Lender has several issues with the appraisal and sends it back to the AMC for corrections. AMC contacts appraiser ... can you see where I'm going with this? Now you have appraisals that are costing the borrower more, are possibly of lower quality AND are taking longer to receive.

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FHA Appraisal Tips

The following are excerpts from HUD Mortgagee Letter 2005-ML-48 regarding repair and inspection requirements.  

FHA Repair Requirements:   Below are examples of minor property conditions that no longer require automatic repair for existing properties include, but are not limited to:  

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I was recently sent a request to perform an appraisal on a property in the Shady Acres subdivision of Houston. At first glance, the appraisal assignment seemed easy enough, a simple purchase transaction in a well established area of the Heights. A quick search of previous sales in Shady Acres over the past 6 months confirmed that the sales price was reasonable and that everything looked kosher. However, this area of the Houston Heights abuts the White Oak Bayou waterway that runs along T.C. Jester and I knew the area along the Bayou was prone to flooding. With this is mind I decided to do a bit more research on our property. I headed over to the FEMA site to look at the flood maps for this area. Sure enough our property was directly in an "AE", or 100 year flood plain. I knew that I now must include at least 2 sales that shared this same "negative factor" or else the lender would not accept the appraisal. (It is always considered "good practice" to include sales that have similar factors, this confirms and supports your conclusion on whether the factors affect value or not.)

Here is where things started getting sticky. I performed a search on MLS for homes in Shady Acres that were inside the flood plain like our subject. Over the last seven months there wasn't ONE sale; this threw up a huge red flag for me. With my curiosity piqued I Googled a few queries and stumbled upon something called the "White Oaks Bayou Flood Control Project" and the City of Houston Ordinance 19-43. In a nutshell, the documents revealed to me that the City of Houston passed an ordinance in early 2007 that heavily limited the future use of all property along the White Oak Bayou due to the flooding. This had in turn SEVERLY affected all property values within this area. I found a story on Chron.com about how one such property went from a value of $131,000 to $9,300 in a matter of a month. You can read the article here.

This was a great, although tragic example of how outside factors can affect value. This was also a prime example of WHY real estate appraisers are needed within the industry. Although both real estate agents involved in the transaction are seasoned professionals, neither were aware of the outside circumstances. After speaking with them and explaining all the details they were both very grateful of my research on the matter. It's nice to feel like something other than the enemy from time to time =)

What does this mean for values in the White Oak Bayou area? Well, currently there are several proposed amendments for Ordinance 19-43, how long it takes for homeowners and the City of Houston to hash out all the issues is a matter for the courts.

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As real estate appraisers we rely heavily on our data sources to assist us in performing our research. On of these sources are Realtors and their entries in our local MLS systems. I find it interesting that so many MLS on HAR.com listings are missing not only key information about the home or property, but good PHOTOS! These pictures act not only as your tools for showing off the property online to potential buyers but they also assist us in grading the interior quality of the home along with any amenities that can not be seen from the road.

As a Realtor what should you definitely photograph? A photo of the street, preferably both directions is one very helpful picture to homebuyers. Understandably if your property has a negative external factor that is within site you may not want to use that photo. A photo of the rear of the home should ALWAYS be included. Most of the time we are not able to access the rear section of properties when looking at our comparables, having a photograph of this is a tremendous help. And lastly, post photographs of ANY amenities. If it was worth bringing up in your MLS description, it is worth taking a picture and displaying it. These things include interior upgrades, covered patios, pools and spas, wood decks and gazebos, storage buildings, etc.

So here's a run down of a few items that Houston Area Realtors should always photograph and place in a MLS listing:

• Subject's Street (Both directions preferably)
• Rear of the Home
• Any Amenities the Home Has

Like any industry, Realtors and appraisers in the Houston area that primarily utilize HAR.com for all their MLS data are somewhat limited to how they can view this data. Until now, Internet Explorer was the only web browser that would properly navigate the MLS system. Having an IT background, I'm not a fan of IE at ALL. It has always been a huge target for hackers, crackers and other nefarious individuals that just love to wreak havoc onto anything Microsoft.

I prefer the web browser known as Firefox; an open source program. To those of you with no clue what I'm talking about, open source means that software developers are free to disassemble the software to view the "nuts and blots" of how it works. This allows developers to create plug-ins for the browser that add numerous functions and utility to the browser itself. Firefox is also a much more stable browser and more impervious to spyware, viruses and other malware.

So how does a Realtor or Real Estate Appraiser use it? Well, by utilizing one of these handy plug-ins, or add-ons as they are properly referred to, you can view ANY "IE only" website using Firefox. Simply head to https://addons.mozilla.org/en-US/firefox/addon/1419 and download the latest version of IE Tab. Once installed, all you do is simply click the little button it places in the bottom right hand corner to switch the rendering from Firefox to Internet Explorer. IE TAB is a very handy tool for any of us in the Houston real estate market.