Tuesday, October 17, 2017

Why First-time Homebuyers Must Start Research at a Top-down Valuation Site

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A Top-down home valuation site is one that allows users to work up the value of a "simulated" home without having to deal with a series of random comps. A good Top-down site generally offers the following features:

1. Sub-markets: All (socio-economically) prominent sub-markets with the market (say, Orlando) are generally supported, allowing users to toggle between sub-markets to evaluate and understand the variations in home values.

2. Home Type and Style: Home types (Detached, Attached, HOA, Townhouse, Condo, etc.) and styles (Ranch, Cape, Colonial, Conventional, Contemporary, Tudor, etc.) are important consideration for home-buyers so a good Top-down site should incorporate them.

3. Location: A good school district would fetch higher value that its counterpart with lesser known schools. Good sites allow users to understand how such qualitative factors contribute to home value.

4. land and Building Sizes: Users are allowed to educate themselves how the changes (increase/decrease) in sizes impact values within a given sub-market. Some sites would allow users to further differentiate between total improved area and heated area, corner lot vs. non-corner, etc. Bath count is also important as it helps understand if the home is optimized or a lifestyle one.

5. Building Age and Condition: Users can quickly learn how age and overall condition (including quality of rehab) impact values in a sub-market. Some sites might combine these two variable into one called effective age. Either way, these are important considerations in pre-owned homes.

6. View: A waterfront home could fetch significantly higher value than a non-waterfront one within the same sub-market. Similarly, a house with other enhancing views (park, bridge, skyline, golf course, etc.) could be pricier.

7. Amenities: Central A/C, In-ground Pool, Upgraded Porch, Tennis/Basketball Court, etc. often add value to homes so a good site would allow users to experiment with such options as well. 

Case Study

Our First-time Home-buyer = John Doe

John must be methodical in his research leading to the home buying. After a pre-qual of $300K, he has decided to focus on two Orlando-area sub-markets: Maitland and Winter Park. 

He finds a Top-down site which allows him to perform his research without having to work up some random comps. He realizes that while Winter Park has beautiful tree-lined streets, he gets more modern and slightly bigger homes in Maitland (a screened-in Pool could be a bonus). He is very happy that the site allows him to evaluate numerous possible combinations including location, type, size, style, amenities and view. He also notices that the site meaningfully curves values as home size increases.

I picked the above graphics from Homeyada.com as I own and operate it, to avoid having to deal with any copyright issues. My Homeyada site is totally self-directed (no modeled values), Mobile-friendly (no separate apps are needed), totally free (no strings), and requires no login or registration whatsoever. It has a built-in non-linear value curve/scale tied to the home size.

Friday, October 13, 2017

A Structured Research Methodology for First-time Homebuyers

A Structured Research Methodology for First-time Homebuyers

First-time Homebuyer = John Doe

1. Pre-qualification – Since qualified salespeople will not work with John without a recent pre-qualification letter, he must start the process with a pre-qual, which, additionally, allows him to understand the price-level to target.

2. Research Design – With a pre-qual in place, he must not run to a brokerage and get caught into their in-house exclusives; instead, he should educate himself (re: price-level, neighborhoods, type of property, sales vs. comps, brokers, etc.) to a point that lets him call the shots (capable of identifying the properties he would like to visit while letting a qualified salesperson arrange the mere showing).

3. Research Step 1 – Considering it’s all about ‘Location, Location, Location’ his research begins by identifying the neighborhoods he might be interested in. There are many websites that offer the soft stats broken down by zip codes, census tracts, towns, neighborhoods, etc.

4. Research Step 2 – Once he selects a handful of neighborhoods, he needs to zero in on the respective price-levels, in line with the pre-qual. In researching the price-levels, he needs to identify and use sites that are top-down (including top-down subject valuation meaning town to neighborhood to subject; fixed location valuation; and neighborhoods that are under or over assessed) – not MLS or private brokerage sites that are inherently bottom-up (comps based). How to Use a Top-down Valuation Site (Future Post).    

5. Research Step 3 – Understanding Comps… John must:
a. Learn to Differentiate between Sales and  Comparable Sales (quantitative adjustments to comps)
b. Choose Least Adjustment in Comps Selection over Distance or Sales Recency
c. Understand Time Adjustment (Three Similar Sales from Three Prior Quarters - Unadjusted for Time of Sale - are not Comps)
d. Demand to See the Comps Spatially, as the comps from the other side of a major artery despite meeting the distance search are not necessarily comps (when presented by the salesperson)
e. Insist on Five Best Comps to Value a Subject (when presented by the salesperson)
f. Verify Salesperson’s Listing Price/Appraiser's Value in Four Easy Steps
g. Validate All Values at a Self-directed Site, rather than at the Broker’s Site
h. (a) through (g) are Future Posts

6. Research Step 4 – John needs to connect with recent homebuyers on social media, to avoid having to reinvent the wheel (will help avoid many trips to the ER, so to say!).

Good Luck!

Quick Review Series (# 8 in the Series)

Tuesday, October 10, 2017

Most Homeowners Do Not Understand the Prevalence of Assessment Inequity

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Sales Ratio (County Market Value to Adjusted Sale Price) is a common method to determine assessment equity, meaning whether the published tax roll is fair and equitable. When presented spatially, the ratio chart aids visualization of the collective data, thus making the incidence of inequity, if any, stand out. 

The above sales ratio distribution graphic demonstrates some serious (countywide) assessment inequity. While North (blue) and South (green) are fairly assessed (between 25th and 75th Percentile), East and West (red and yellow) show some significant under-and-over assessments (below 25th and above 75th Percentile). 

This anomaly often stems from the poorly-developed Automated Valuation Models (when separate AVMs are developed at the sub-market level, without any roll-wise equalization at the back-end). In an event like this, a Benchmark AVM is in order, ironing out such inequity from the tax roll.

I picked the above spatial graphic from TownAnalyst.com as I own and operate it, to avoid having to deal with any copyright issues. My TownAnalyst site is totally free (no strings) and requires no login or registration whatsoever...

Most Homebuyers Do Not Understand How Location Impacts Home Values

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Housing market is primarily about "location, location, location." Most homebuyers do not understand the impact of location on home values; instead, they tend to get carried away by size, age and condition, ignoring the biggest contributor to the value, i.e., location.

In the first graphic above, all others factors remaining constant, a $4.425M home in inland Santa Monica (Zip 90403) becomes $850K in LA South (Zip 90047).

Similarly, in the second graphic, if a house is moved from Zip 32789 to 32810 - across the I-4 freeway - its value goes down from $200K to $82K due to change in location.

I picked the above graphic from LocValu.com as I own and operate it, to avoid having to deal with any copyright issues. My LocValu site is totally self-directed (no modeled values), totally free (no strings), and requires no login or registration whatsoever.

Thursday, October 5, 2017

Are These Growth Rates in Housing Market Sustainable?

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Save New York, other markets have been experiencing double digit annual growth.

Traders - Time to book some profit, as you would in other financial markets?

Homeowners - Ignore the hoopla. Enjoy your home, but while fighting YOUR Assessment/Taxes, pick a set of arms-length comps with longer holding periods (home comps), rejecting all with <=2 years (trading/investor comps, which should not impact your valuation).

Data Source: Case-Shiller Index as of 09-26-2017

Quick Review Series (#5 in the Series)

Wednesday, October 4, 2017

West Coast Housing Continues to Outperform Composite-10

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While all five West Coast housing markets have outperformed the Composite-10 (Major Average), Seattle market has been the standout year-over-year winner (Too Hot?).

Data Source: Case-Shiller Housing Index as of 09-26-2017

Quick Review Series (#4 in the Series)

Tuesday, October 3, 2017

How to Make Existing Property Assessment Fair and Equitable – Truly

How to Make Existing Property Assessment Fair and Equitable – Truly

1. Short-term Sales: When the holding period of the property is <=2 years, those sale prices must be anchored as market values, thus forcing the potential gamers (institutions, flippers, etc.) to pay higher taxes. The point is, the rapid institutionalization of the housing market needs to be evaluated separately, to avoid having to redistribute their share (of the burden) on to the rest. Assessors must therefore aggressively lobby to remove the application of any state/charter restrictions (e.g., annual growth capped at 5%, etc.) from short-term sales so they stand on their own at the market level, without any pseudo protection. Exclusion: non-arms length sales (inter company, distressed, etc.).

2. AVM Application: Since Automated Valuation Modeling (AVM is a top-down econometric solution encompassing the vast majority of properties on the roll) is inherently more equitable, it must be applied on to the rest of the roll, including the non-arms length from #1. Exclusion: Unique properties.

3. Unique Properties: AVM is not meant for this group (trophies, large waterfronts, tiny oceanfront bungalows, etc.) so they must be hand-worked by the assessing staff. Obviously, the sale of unique or vastly atypical properties must not enter the modeling (AVM) sales sample, either.

4. Outsource AVM: It’s much cheaper to outsource residential AVMs to an economic consulting/research firm (not appraisal) than maintaining a dedicated group in-house modelers. It’s also more effective because they would be judged by an important metric: appeals %.

5. 2-to-4 Family Properties: Considering these are income-producing properties, they must not co-share the SFR roll. They must be modeled, valued and taxed as a separate group or sub-group (small cap) under multifamily.

6. Manpower Planning: Larger jurisdictions must learn from the private (FedEx, UPS, Amazon, etc.) how to use the seasonal help. For example, the seasonal help could be used to process exemptions, appeals applications, income/expense statements, etc. They can be used to perform field inspections too. Alternatively, counties may maintain a “Central Pool” agency to cater to different agencies based on their seasonal requirements. 

7. Practice Assessment: Instead of having autonomous appeals/review department, it's better to have it under the Assessment umbrella. Having a separate government agency or department is inherently political and is not necessarily in the best interest of the taxpayers. Often, the focus of the autonomous appeals/review is to hire appraisers, rather than assessors, which does not promote equity of the roll. 

8. Commercial Assessment: In order to promote equity of the commercial roll, departments must practice assessment, not appraisal. It's therefore prudent to collect a sizeable Income/Expense (I/E) sample to develop meaningful metrics for commercial properties. In fact, I/Es could be used to develop Use-based AVMs to process the homogeneous properties, generally one sigma under the bell curve.  Commercial Assessors must also be groomed internally.  

9. Enforce Flood Zone Insurance: Homeowners in designated flood zones must carry flood zone insurance. Should the situation arise, insurance companies would be on the hooks, not the other taxpayers. A credit could be offered to offset a minimum policy deductible.  

Again, having an all-encompassing residential AVM does not make the roll fair and equitable; it must be properly targeted. Similarly, use-based Income AVMs could promote equity across commercial properties.