I just returned from the Oregon Solar Energy Conference as a guest speaker/panelist discussing the valuation of residential homes with owned (not leased) solar photovoltaic (PV) systems. It was an honor to share the panel with Ben Hoen, a staff research associate with Lawrence Berkeley National Laboratory who coauthored a study published in the Winter 2016 Appraisal Journal titled, “An Analysis of Solar Home Paired Sales across Six States.” The contributory value of PV in appraisals done for residential lending is a hot topic in the solar industry because the easiest way for owners to finance PV systems is within the mortgage of their home.
During our session we discussed the rapid increase in solar installations across the country, including Portland, and the complexities that such features present to appraisers. Some of the appraisal problems identified by the panel include: finding comparable sales of homes that sold with owned PV systems, difficulties in obtaining performance characteristics about the PV systems on home sales, how to ask for and find appraisers with solar or other green credentials, and the green addendums that can be filled out by homeowners and agents to help appraisers gather information about a property. (Click here for an example of one popular green addendum) The panel also discussed several different ways that appraisers can support adjustments for PV solar systems. A listing of techniques that appraisers can use to estimate and support adjustments for PV systems follows.
If you need more resources, the Appraisal Practices Board recently issued an advisory on “Valuation of Green and High-Performance Property: One- to Four-Unit Residential.” It is a voluntary guidance for appraisers on methods and techniques for valuation that includes green homes, but it also includes a section on PV systems. Solar power systems are here to stay and are becoming increasingly common. Are you ready?
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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When speaking at Portland area real estate offices, I often hear horror stories about appraisals coming in at just one thousand dollars or so below the contract price of a property that is being sold for several hundred thousand dollars. This difference, often less than one percent, is beyond typical appraiser accuracy but it results in a big hassle for all parties involved who now need to decide if they will bring more cash at closing, cancel the contract, renegotiate the contract, ask for a second appraisal, or dispute the appraisal. Here is my take on why this occasionally happens and the top three things a real estate agent can do to help avoid the situation.
Appraisers are highly trained and regulated to be independent and unbiased third parties. Most appraisers around Portland know a colleague who has been disciplined by the state appraisal board and most appraisers are terrified to do anything that might suggest that they are biased. This feeling of fear can, at times, become misguided and cause some appraisers to reconcile an opinion of value that ignores the contract price and the limits of the appraisal accuracy when working with imperfect or incomplete sales data.
A very small percentage of appraisers falsely believe that the appraiser should estimate a value and pretend that the contract does not exist. I once had a reviewer say to me, “You reconciled giving some weight to the contract price. What approach to value is that? I’ve never heard of a contract approach to value.” This logic does not take into account why an appraiser looks at the contract of sale for the subject and how pending sales and active listings relate to the sales comparison approach to value.
In a real estate appraisal for a typically-financed home sale, appraisers will be given a copy of the sales contract to analyze. The contract price is not proof of market value, but it can be an indicator of value. The main purpose of the appraiser’s analysis is to determine to what extent the contract is an indicator of value. Typically, if the contract price was negotiated after a property was exposed to the market and the buyer and seller are unrelated and disinterested parties, then that contract is probably a strong indicator of value for the subject. The appraiser can give this contract price some weight in reconciliation of a final value as long as it is reasonable to do so within the context of the other value indicators.
Here are the top three things a real estate agent can do to help ensure that the appraisals do not come back slightly low.
Following these tips should help eliminate a few frustrating closings, but it is still up to the judgement of the appraiser. Sometimes buyers pay a little too much for a property and it is perfectly acceptable for an appraiser to come in slightly below the contract price after analyzing all of the evidence. The important thing to know is that most appraisers do not want to cause trouble and will work very hard to make sure they are right before sending off an appraisal that is sure to become a lightning rod because it is slightly below the contract price.
I rarely go off topic with my Portland Appraisal Blog. However, I thought this would be a fun exception. One of my hobbies, other than water skiing, is growing giant pumpkins.
This year, our two boys each helped grow their own giant pumpkins. The smaller of the two pumpkins grew to 974 pounds. After the local weigh off, we put it on display at the boys’ school. Once Halloween had passed, we removed the seeds and plan to give them to the school kids for a chance to grow their own. This blog post will serve as simple directions for anyone with those seeds to grow their own giant pumpkin next year.
Get a seed with good genetics. If you have one of my seeds, you've already done that. These seeds' genetics can be traced to the world's first pumpkin to break 2,000 pounds.
Select a spot in the yard or garden. The larger the area (to a point) with the more sun, the bigger the pumpkin will grow. A 25x25x25 triangle is ideal, but I’ve grown big pumpkins in areas that are smaller than 10x10.
Tip: Mix compost into your garden in the fall or early spring. Big pumpkins like lots of well-aged compost and crumbly soil that drains well. I add loads of mushroom compost to fix most soil problems.
Tip: Think about how you’re going to train the vine when selecting a spot (see #4 below).
Around April 15th, plant the seed pointy side down, just below the surface (less than one inch), in a mound of soil near one edge of the patch. Do not compact the soil. I start my seeds indoors under a grow light and transplant the seedlings to the mound (covered by a cold frame) a couple weeks later; but some of my biggest pumpkins have grown without the protection of a cold frame.
Tip: Soak your seed in water overnight before planting.
Tip: Protect your baby seedling from wind, frost, or early heat.
Train the vine to grow in the shape of a Christmas tree that is laying on its side. Imagine that the main vine is the trunk of the Christmas tree and the secondary vines sprout out of the main vine and grow to the sides. Any vines that sprout off the secondary vine are called tertiary (third) and should be removed. Tertiary vines will only drain energy from your plant. I use small barbeque skewers as stakes to hold the vine in the direction that I want it to grow.
Tip: Only train the vines (using extreme caution) in the afternoon when the plant is warm. Bending the vine can cause breaking or cracking. If the main vine becomes damaged, that could be the end of hopes for a large pumpkin. The vine can be trained with constant pressure by moving the vine a little each day rather than in one bend or motion.
Tip: As the plant grows, gently cover all the vines with garden soil to encourage secondary root production.
When the regular rain stops, you will need to water your pumpkin every day. Big pumpkins require plenty of water, but do not flood the plant. A giant pumpkin takes roughly the same amount of water as it takes to keep a patch of lawn green — and a giant pumpkin growing in your yard is far more exciting than just a patch of green grass.
The female flowers (with bulbs on the bottom) will become pumpkins if pollinated. They can be hand pollinated using the longer stemmed male flowers, or merely let the bees do the work. If you’re on pace for a big pumpkin, pollination will happen in early June and the flower will soon start to develop into a pumpkin.
Once you have a couple of pumpkins about the size of a basketball on the plant, select the fastest growing pumpkin and remove all the others. If you keep two pumpkins, the plant will be splitting its energy between both pumpkins.
Tip: The biggest pumpkins will usually grow on the main vine about ten feet from the stump, but big pumpkins can be grown on secondary vines. Our pumpkin grew on a secondary after the pumpkin on the main vine stopped growing (luckily, I had not yet removed the other pumpkins).
Tip: Don’t let the vine sprout roots into the ground within several feet of either side of the pumpkin. As the pumpkin grows, the vine needs to be free to raise off the ground and not break.
Tip: Don’t try to move the pumpkin. Small pumpkins are fragile like a tomato and damage to early skin can make them crack open when they get larger. Even the scratchy underside of pumpkin leafs rubbing on the baby pumpkin can damage its skin.
Tip: Protect your pumpkin from the sun. Some growers use a shade. I cover my pumpkins with a sheet.
Follow these steps and with a little luck, you will have a big pumpkin next fall. Parents are free to contact me if they have questions, want to show pictures (I would love to see them), need more seeds, or need advice on transporting your harvest.
On July 1st, recreational marijuana became legal in Oregon. Homeowners can now lawfully have up to four plants in their home, not just for “medicinal uses”. I am not a marijuana user, but this issue has implications for appraisers who do refinance or other lender type appraisal work in Oregon.
The problem is that although possession of marijuana is legal here in Oregon, it remains highly illegal in the eyes of federal government. Since banks are federally regulated, and most residential loans are federally backed, banks can be subject to fines related to lending when there are illegal activities. If you grow marijuana in your home, you may not be able to refinance your home loan.
The following is a quote from an email that A Quality Appraisal received from one bank regarding Oregon’s marijuana law. (The name of the bank has been removed from the quote.)
“If you encounter a property with an active marijuana grow operation, please take at least one descriptive photo, complete your inspection of the property then cease work on the file and immediately contact your Appraisal Coordinator. Please do not attempt to quote our lending policy. We will take care of that and you will, of course, be compensated for the time you’ve already invested in the appraisal.”
This bank asks appraisers to record something that many homeowners may feel is extremely personal. I think that this could be so personal that some homeowners might become violent if a photograph is taken and not explained. Just imagine if the homeowner works for a company that would fire them if they are found growing marijuana. An appraiser taking a photo could be in particular danger if the appraiser cannot tell the homeowner the truth about why the photo is being taken.
This leaves appraisers in a very difficult position. Are we being turned into government watchdogs? Does the right to privacy end if homeowners are engaged in a (locally) legal marijuana grow in (or on) private property? Does this policy only apply to growing marijuana plants? What about possession of legal amounts of dried buds or commercial products made from the active ingredient of marijuana, THC?
In pondering all of the above, I have decided that perhaps the best course for the appraiser (aside from just not accepting work from such lenders) is to be very up front with homeowners. When scheduling the inspection with a homeowner, a quick word about the implications of visible grows may just be the stich that saves nine.
Have you dealt with this in the past? What do you think is the best way to handle these issues? Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
A good client called me recently in need of an appraisal just outside of my Portland service area. I had a little extra time that day, so I said I would check around and see if I could find someone to help them. Even after calling five or six different appraisers, I was unable to find anyone willing to take the rural appraisal assignment. Most of the appraisers that I called are booked up for two to three weeks and are only servicing their best clients or are cherry picking the easier or higher-paying assignments. This anecdote suggests a shortage of appraisers.
The number of appraisers has been declining since the 2007 real estate market collapse. According to the Appraisal Institute Research Department, the number of active appraisers in the United States dropped by roughly three percent each year from 2008 through 2014. The decrease was smaller in 2015, but it is noteworthy that 62% of appraisers are over the age of 50. Of the total number of appraisers, a mere 1% are under the age 25.
I researched Oregon appraiser statistics back to 2010. The total of active Oregon appraisers mimics the national trend, falling from 1,601 in year 2010 to 1,377 by year 2015. The number of Certified Residential Appraisers has remained nearly constant since 2010 (losing only 15), but the total of Licensed Appraisers has plummeted more than 50% in that time. There are currently only 69 Registered Appraiser Assistants training to become an appraiser.
I believe there are several factors creating a shortage of appraisers.
There is strong demand for appraisers due to an active real estate market that is bolstered by an improved economy and continued low interest rates.
Appraisal fees have not kept pace with inflation. Ten years ago, the typical appraisal fee in the Portland area for a standard lender appraisal was $400 to $450. I no longer accept assignments at these fees, but this remains the payment offered by the majority of lender and AMC clients.
You would think that supply and demand would increase prices and balance the market. However, such market forces have not worked in favor of appraisers because by receiving assignments from only a few larger appraisal management companies, appraisers have less power to negotiate higher fees. Additionally, appraisers are often required to accept a client’s (management company’s) fee structure prior to being able to receive assignments from them. The result is that appraisers accept lower fees but often turn down more difficult jobs.
Appraisal report requirements and oversight have increased since the last real estate market collapse. Appraisals that I do today take at least twice as long as the same report would have taken prior to 2007. This is despite advancements in technology and is caused mostly as a result of having to show and explain everything that in the past might have only remained in the work file or would not have been an issue.
Appraisal liability has escalated since the 2007 real estate market collapse. Appraisers have increasingly become the target for lawsuits when a homeowner fails to pay their mortgage.
It is more difficult to become an appraiser. If you want to make money as an appraiser, you must be at least Certified Residential. The Certified Residential Appraiser now requires a bachelor’s degree and 2,500 hours of experience over a minimum of two years. Working for two years as a low paid Appraiser’s Assistant after paying for college is the most difficult hurdle for many.
Not many appraisers will train assistants. Only about 5% of appraisers in Oregon have an assistant and not all assistants will survive to become appraisers. Some of the reasons that appraisers tend to be unwilling to accept assistants are listed here.
Assistants are employees. I am not an employment tax expert, but it is my understanding that an appraiser assistant is an employee and cannot be an independent contractor because the supervising appraiser has too much control over their schedule and work. Most appraisers are home businesses without the infrastructure to handle employees.
Liability is increased when training an assistant because if the assistant make a mistake, the supervising appraiser is fully accountable.
Assistants are very limited in what they can do to assist in the appraisal process. Lenders will typically not accept an appraisal where the assistant was the only one who viewed the subject property and the comparable sales. This means that even if the appraiser is paying the assistant a small wage, the gain in productivity might not be commensurate.
The problem of few appraisers is complex and likely will continue in the next year. However, I believe that there is promising technology on the horizon that will make individual appraisers much more efficient and permit them to handle larger volumes of work with fewer people. Additionally, any increase in interest rates will likely reduce the number of homeowners refinancing and relieve some of load on appraisers.