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LA Digs - Northeast LA Real Estate Blog

Welcome to LA Digs, the real estate and Northeast Los Angeles community blog written by Realtors Tracy King and Keely Myres.

Here, we share tips, market updates, and local news bits to keep you informed on what's happening in Northeast Los Angeles and the surrounding neighborhoods. Read on to learn about the latest in your neighborhood!

Appraisal Is Art Not Science

I’ve been reflecting on appraisals lately, and I’m not alone— almost everyone who sells real estate is having appraisal issues. Why? Because appraisals are based on closed sales, appraisers are evaluating the present value based on the past value. If we’re in a declining market, appraisals will be close to the price that the buyer and seller agree on. It’s when we are in a fairly normal or increasing market that we have the issues that many of us face today. You might see this as good news since it could be an indication that the market is normalizing or increasing. From the appraiser’s view it just looks like available comparables can’t justify increasing sales prices.

There is general acceptance of the notion (believed by many appraisers) that appraisal is a science, not an art (even though you’ll get as many different valuations as you have appraisers on the same property.) Many buyers believe this as well. But consider this scenario:

There is a 2-bedroom, 1.5-bath house in good condition in a nice neighborhood in a small community within Los Angeles. It has a guest house for which no permit can be found, nor can a permit be found for the half bath. So for appraisal purposes, this is a 2-bedroom, 1-bath house. Because very few properties like this sell in any 3-month period, the only sales comparables that fit this size house are distress sales in poor condition that sold in the range of $350,000 to $450,000. Six months ago, there were a few comparables that sold for $480,000 to $520,000. An appraiser brought in a value of $440,000. Why? Because the “good” comps were too old and the more recent comps were all low, so to his mind that meant that the current value was lower.

Here are some questions for you:
Had this appraiser seen all the properties that he used for his research? No, because in the current appraisal business these appraisers are working all over Southern California. The likelihood that they have ever been inside the comparables they use is slim.

Did he talk to the Realtors who actually did see the properties? Very few appraisers bother to do that.
Did he listen to the listing agent who met him at the property with comparables? No, because he thinks that appraisers know more than Realtors who are just trying to make a sale. He pretty much said that.

Why all of a sudden did we have such low comparables? Did the values drop? Again, very few properties of a given size sell in this zip code. By chance, the only three of that size and configuration that sold in the previous 90 days were short sales and foreclosures. The consequence is that regular sellers who own 2-bedroom 1-bath houses are reluctant to sell because the only comparables that appraisers are willing to use are so low. It’s a vicious cycle. One almost feels that that is what some of these appraisers and lenders want to see happen, because it is less risky for prices to be low.

When prices drop, regular sellers either don’t need or want to sell or can’t because they now owe more than the property is worth. They can’t refinance into a lower interest rate for the same reason. In 2005-2007, if you lost your job you might be able to use your equity line of credit to get by for a month or two. Or you could sell for a profit, move to a less expensive home and rent for awhile until you got on your feet. Today more people are stuck with too much debt and nowhere to turn. For many of these people, it is the same debt they were totally fine with in 2006, but their circumstances have changed. Now their only option is either foreclosure or short sale. And there you have more lower prices.

But let’s go back to the pure appraisal question. How do you evaluate a property? Wikipedia says: Real estate appraisal, property valuation or land valuation is the practice of developing an opinion of the value of real property, usually its Market Value The need for appraisals arises from the heterogeneous nature of property as an investment class: no two properties are identical, and all properties differ from each other in their location - which is one of the most important determinants of their value.

In residential real estate, market value is usually defined as the price that a willing buyer and a willing seller agree upon subject to appraisal if a loan is necessary. If everyone paid cash for property, the situation in real estate today would be much different. We wouldn’t have had the bubble and the resulting crash, for one thing, since they were both caused by unsafe and unsound lending practices.

Market value is a concept distinct from market price, which is “the price at which one can transact”, while market value is “the true underlying value” according to theoretical standards. The concept is most commonly invoked in inefficient markets or disequilibrium situations where prevailing market prices are not reflective of true underlying market value.
This is the crux of the matter: the prevailing market prices are not reflective of true underlying market value.
In San Marino, prices have not dropped. Why? Because most homes there are owned outright. The same is true in parts of Arcadia. Distress sales drive prices down. If no one is in distress, the price doesn’t go down. Why not, when the entire country has been in a housing depression? Because if you aren’t in distress and you can’t get the price you want, you just don’t sell.

What I am seeing with all the HVCC (Home Valuation Code of Conduct) and other strange rules pretending to establish reasonable rules for evaluating properties is that appraisers are all looking at market prices and defining them as value. If a buyer believes that a house is worth, say, $500,000, because it has all the amenities he feels he should find in a house at that price, why should an appraiser be able to declare that the actual value is only $350,000 because that is what a house of similar size sold for down the street?

So what does a good appraiser do?
What does a good Realtor do?
What is the relationship like between a good appraiser and a good Realtor?
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Value, Price and the Real Estate Market

If last week the highest sale in, say, the 90041 zip code was $695,000 and this week the highest sale is $748,000—does that mean that the value of my house just went up $40,000?
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Properties seen on Realtors' Caravan, January 14, 2010

Lots of cool properties were to be seen on caravan the other day. Considering the prices ranged from $699,000 to $2 million, the fact that these homes were staged to the max makes sense. Notice the cup of tea on the desk? Staging! I love it!

 


Can you believe this kitchen is in a townhome that's listed for $1,600,000? One of 12 limited edition residences at 633 South Lake Avenue.

 

 

The home above is also a townhome on South Lake, listed for $899,000. Looks substantially like a house, doesn't it?

 

 

This midcentury at 2174 Midlothian Dr is in Altadena and is listed for $1,099,000. The lot is almost 30,000 square feet and the 4-bedroom house is 3200 square feet.

 

 

1610 Poppy Peak, $974,900. A 70's property with a bathroom so stylish for the time that it's almost retro.

 

 These last two photos are from 309 Grand, South Pasadena. This very special Spanish estate is on a half acre and is listed for $1,995,000.

 

Disclosure: These homes are all listed with various other Realtors, not my listings. For more information, you can consult the MLS or your Realtor, or you can call me.

 

Posted via email from tracyslarealestate's posterous

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Just Slap a Coat of Paint On It

It’s amazing what a well-chosen new paint color scheme can do for the exterior of your home. It’s the least expensive major upgrade you can invest in and actually expect to make money on when you sell your home.

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Good news, Bad news, Lots of News (Especially for Entry-level Buyers)

The good news is the Housing and Recovery Act of 2008, signed into law by President Bush last week. This bill permanently increases FHA, Fannie Mae, and Freddie Mac loan limits in high-cost areas (that's us) to $625,500. There is another provision that offers a first-time buyer tax credit of up to $7,500 that is actually an interest-free loan with a 15-year repayment plan. This is available to a person who has not owned a home in the three previous years. This credit is only in effect for buyers who purchase between April 9, 2008, and June 30, 2009. The purchase has to be for your primary residence, and there are a few more qualifying rules. For detailed information, you can go to the Federal Housing Tax Credit site.

The bad news is that Freddie Mac, the big mortgage finance company, posted a large quarterly loss. This resulted in opinions from various sectors predicting further home price declines and the possibility of mortgage interest rates rising.

So how does this affect the current market in OUR neck of the woods, Northeast Los Angeles and the San Gabriel Valley? Those of you who are in the under $500,000 price range know that outside of short sales (which aren't sales) and foreclosures (largely junk with the occasional deal that you better be able to pay cash or put 50% down and move really really fast on), there isn't much that is any good and those few are going in multiple offers. This price range was largely non-existent for the years 2004-2006 and is really the buying opportunity of the day.

I know you think "oh, she's just a Realtor trying to make us feel like we have to buy now and everyone else says prices are still going to come down."  Go ahead, take the chance that something you like that is out there now at a price you can afford will be cheaper in a few months or next year. It might happen, but how much are you willing to bet that mortgage rates will stay the same as today? They have already crept up to 6.5% for most 30-year fixed loans and experts are predicting a rise to 7%. What will that do to your falling prices? Make it a wash, that's what. Your buying power drops dramatically when interest rates rise. For every $100,000 mortgage, the cost goes up $67 for a 1% rise in interest rate from 6.5% to 7.5%, meaning your buying power is actually almost $10,000 less. To put it simply, for every 1% increase in mortgage rate, you have a 10% decrease in buying power.

I know some people predict the market will go down another 10-20%, but once the foreclosures and shortsales work themselves out thanks to the Fed, what seller will put their house on the market? Only the few who really must. There you have the supply and demand dynamic, with fewer homes on the market, the demand goes up and so can prices.

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