We at the IHB have developed proprietary Property Valuation Reports. Today, I want to show you what information they contain.
Asking Price: $750,000
Address: 27 Canopy Irvine, CA 92603
Lighten up while you still can
Don’t even try to understand
Just find a place to make your stand
and take it easy
Take It Easy — The Eagles
Back in April I announced that we were forming a brokerage to help people buy and sell homes. Some of the comments were less than enthusiastic. Despite the few naysayers, we believe there is a need for the service we provide, so we have been working over the last few months to ready ourselves to take on this task. In September I am going to present a series of introductory posts describing how we will operate.
I chose the song Take it Easy this morning because we want to provide peace-of-mind with the process. Part of making people be at ease is providing accurate information so people can make informed decisions. To that end, we have developed proprietary Property Valuation Reports for the IHB community based on the principles I have been writing about for the last few years. I would like your feedback to make the reports better.
Much of the information presented in the report is freely available on our site, and with our calculator (new and upgraded ones coming) this work can be done by anyone independently. However, many people do not want to do this work themselves, and for those people, we are here to help.
Cover Sheet
The report cover sheet contains summary information; it has some pictures, the address, and a few defining characteristics to identify the property. The first piece of summary data is the asking price, and this is followed by the Comparable Value, the Likely Transaction Price, and the IHB Fundamental Value.
When we prepare a Brokers Opinion of Value, we include what we believe to be the most Likely Transaction Price based on recent comparable sales and the trend of the market. This is our best guess at what the final sales price of this property will be.
The IHB Fundamental Value is based on the rental comps with some subjective adjustment based on a property’s desirability. Since market information is always changing, the report is time sensitive, and it is dated for reference. What follows is our report for today’s featured property.
IHB Brokers Opinion of Value 27 Canopy Irvine.pdf
Cost of Ownership and Acquisition
The second page of the report is full of of data and calculations. It looks daunting at first, but it is arranged to provide six (6) data points critical to understanding a property purchase:
- Monthly Payment
- Monthly Cash Outlays
- Monthly Cost of Ownership
- Monthly Ownership Gain (loss)
- Total Cash Costs
- Total Savings Needed
The first three items on the list look superficially similar, but they all provide slightly different information. The monthly payment is the check you will write each month to your lender; pretty basic. We assume conventional 30-year mortgages in our calculations because it is the stable financing of long-term homeowners.
The monthly cash outlays is the total amount of all checks a homeowner will need to write each month to be current on payments, including property taxes, insurance, HOA fees and other expenses. This amount is often much larger than most people realize. Some will try to reduce their monthly cash outlays by deferring property taxes to a lump sum payment every six months, but the expense is still there, and this total can eat up a significant portion of someone’s take-home pay. I recommend using an impound account to pay property taxes to avoid the last-minute scramble.
The monthly cost of ownership is a more accurate accounting of the true cost of owning property. There are many items which add to or subtract from the actual cost of ownership such as (1) income tax savings, (2) equity hidden in the payment, (3) lost income on the downpayment money, and (4) maintenance and replacement reserves.
Once the full cost of ownership is properly calculated, this figure can be compared to the cost of a comparable rental. Any cost savings or ownership premium is reflected here. As mentioned previously, blue chip properties often carry an ownership premium whereas undesirable properties generally demonstrate significant positive cashflow.
The final area of concern is having the cash available to close the deal. The downpayment is an easy expense to identify, but it is not the only cash a buyer will need to obtain the property. Buyers have to budget moving and furnishing expenses, closing costs and interest points (if any) to accurately assess their cash needs. Also, it is not a good idea to spend all your cash on a house and leave no emergency reserves. The spreadsheet estimates 6 months net salary based on the financing qualifications for the loan amount. The total cash costs plus emergency reserves equal the total amount of liquid savings needed to close the transaction.
Estimates of Value
The third page looks at values and sets the stage for negotiation. It is composed of three sections:
- Comparative Sales Value and Negotiating Range
- Cashflow Value and IHB Fundamental Value
- Asking Price and Value Ranges (chart)
Back in May, I wrote Negotiating for Real Estate, where I outlined the negotiation process and described how the top and bottom of the negotiation range is established. The Comp Range is a measure of the highest and lowest prices of recent comparable sales. The Comparable Sales Value is a blend of the mean and the median of comps used to establish value. By blending the two values, it recognizes outliers without putting too much emphasis on them.
In a stable market, properties may trade at a premium or discount to
rental parity based on their desirability as owner-occupied housing.
The most desirable “blue chip” properties trade at a 10% premium to
rental parity, and transitory rental properties trade as low as 25%
below rental parity. When the IHB prepares a Brokers Opinion of Value,
we subjectively rate the property based on its owner-occupant
desirability, and we adjust the cashflow value of based on our market
experience. The resulting value is a theoretical basis for a property’s
minimum value in the open market. When prices begin to fall, they
generally do not stop until all properties in a market reach their
fundamental value.
The chart showing asking prices and value ranges displays all the numbers in an intuitive format and shows the relationships between the numbers. For instance, in the chart below, the negotiating range and the comp range is significantly above a property’s current cashflow value. A buyer wanting to pay cashflow value will not obtain this property as market comps reflect a large ownership premium. This is currently the case in Irvine and in the beach communities. It is not the case in most other markets.
Comparable Sales, Comparable Rentals and concept notes
Page four of the report has the raw data on comparable sales and comparable rentals used to generate the report. This important raw data eliminates much confusion and debate over current valuations. The sections on Comparable Sales Value and Likely Transaction Price and Cashflow Value and IHB Fundamental Value generates the most questions and confusion, so a more detailed explanation of these concepts is included.
Report notes
In an effort to explain many of the concepts and calculations in the report, we have included a line-by-line series of notes detailing any assumptions.
Ignorance is …
George Orwell in 1984 wrote, “Ignorance is Strength” to describe how power is maintained by the few through the ignorance of the many. Those who are responsible for helping people buy and sell homes have preyed on the ignorance of buyers for generations to maintain their strength. They see little reason to change.
Thomas Gray in “Ode on a Distant Prospect of Eton College” wrote the line, “Ignorance is Bliss” to illustrate that ignorance to a problem creates happiness — while the ignorance lasts. This bliss may be welcome at times when the problem is intractable, but ignorance that prevents people from taking appropriate action does not lead to bliss, it leads to pain.
Ignorance is Pain. Ignorance is paying $889,000 for a property you can’t unload for $360,000; ignorance is paying $1,306,500 for a property worth $750,000; Ignorance to the housing market can lead to foreclosure and bankruptcy. There is nothing noble or romantic about ignorance to the value of real estate. I have no need to exaggerate the importance of getting this decision right.
I used the tools encapsulated in this report to avoid buying during The Great Housing Bubble. I have shared my methodology with you, and now, the IHB set up to work with you to apply these techniques to your personal situation.
Informed Decisions
I want people to make informed decisions. I wrote about the housing bubble because I wanted people to have information, and for a couple of years, all data pointed to renting — in Irvine, it still does. This is changing, and many markets have properties trading at or below the IHB Fundamental Value (IHB_Brokers Opinion_of_Value_14802_Devonshire_Ave_Tustin,_CA_92780.pdf). Based on these reports, some people will wait, some people will look elsewhere, and some people will buy anyway. We do not attempt to persuade; most people are self-motivated when it comes to real estate, and when contemplating such a large purchase, pressure just makes the process stressful.
In time the numbers will say “yes” to Irvine. I will know when the time is right because my analysis will tell me. Now, the same information is available to you.
Asking Price: $750,000
Income Requirement: $187,500
Downpayment Needed: $150,000
Purchase Price: $575,500
Purchase Date: 12/29/2003
Address: 27 Canopy Irvine, CA 92603
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 1,885 |
| $/Sq. Ft.: | $398 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Other |
| Stories: | 2 |
| Floor: | 1 |
| View: | Has View |
| Year Built: | 2003 |
| Community: | Quail Hill |
| County: | Orange |
| MLS#: | S585338 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
Immaculate Turnkey Home located adjacent to the surrounding open spaces
of Shady Canyon. A large open gourmet kitchen features stainless steel
appliances, beautiful countertops, center island, vast counter space,
pantry and upgraded cabinetry. Spacious master suite features ,
accented with french doors, walk in closet and private dual balconies
with panoramic view. Italian travertine found throughout the master
bath and Through-out first floor. Berber Carpeting on second floor.
French Doors, Entertain in your own private patio. Enjoy resort style
amenities. Walk to school, parks, pools, spas, barbecue areas,
amphitheater, fitness center, sport field, basketball courts, tennis
courts, tot lots, shopping & dining. You will love this home and
living in Quail Hill! Quail Hill is minutes away from the beautiful
Laguna Beach as well as Orange County’s entertainment center the Irvine
Spectrum.
With the information provided in the report for this property, there isn’t much more for me to add. Due to the tight supply in our market right now, this seller will probably get an offer near asking. With the artificially low interest rates, fundamental valuations have caught up with this 2003 purchase price; unfortunately, nothing justifies its 2009 asking price — it will sell for that much anyway.
Contact us
If you would like to work with these reports to help you buy or sell a home, please contact our recommended realtor, Shevy Akason. He is using these reports with his clients. You can contact him at 949-769-1599 or shevy.akason@evergreenrealty.net.
Very thorough…
Things to add.
I think you’re going to need to append the usual comp listings with their pictures and details, so buyers can evaluate where exactly the property sits in the heirarchy. I also like having two separate sets of comps, one real comps, i.e. solds, and one current available listings.
Second, I think people’s biggest gulp is going to be your bottom line for cash on hand. In the second property that you claim is now below rental parity, a family needs to have $166k on hnad in cash just in order to purchase a 1960’s 3/2 house. That amount alone is approaching the purchase price for a starter TH or condo in most parts of the country.
So for your particular clients I assume you’ll be writing up these costs with respect to their actual cash on hand. I.e. filling in the PMI, etc, needed to be paid in order to maintain some reasonable cash reserve.
The fact of the matter (as you are well aware) is that the only reason that second property is below rental parity is the current low interest rates. The reason why those interest rates aren’t enough to prop it’s price up further is because buyers of 3/2 1960’s properties don’t have $166k lying around.
>> buyers of 3/2 1960’s properties don’t have $166k lying around.
I disagree. Go look at sales in southeast Huntington.
fine, add the caveat, “in a normal market” which this is not.
The point is some properties are entry-level, and there the typical buyer is not one with >20% to plunk down or have on hand. Thus, a proper evaultion of buying versus renting on these entry-level properties should include the true ownership costs for a typical buyer. This is part of the reason behind why some things trade at a premium to rental parity and others trade under it. Because the rental parity calculation itself changes.
“I recommend using an impound account to pay property taxes to avoid the last-minute scramble.”
Frankly, this is a terrible recommendation. If your financial acumen is so poor that you’re afraid you’ll spend your property tax money before it is due, you shouldn’t be buying a house in the first place. I know of too many examples of mortgage servicers screwing up escrow accounts by collecting to much or too little, not paying the tax in a timely fashion and incurring penalties. And most servicers require a cushion far in excess of the taxes needed, paid as much as 11 months in advance of when the taxes are due. Not to mention, the homeowner could be earning all the interest on that money (which can be sizeable, with Mello-Roos added in), instead of the bank.
IR, I admire a lot of what you say, but opting for an escrow account is bad advice. Stay away from escrow accounts at all costs, unless your lender requires it due to a low down payment…which means you’re not ready to buy in any event.
I meant “impound account” where I wrote “escrow account” above.
We will have to agree to disagree on this one. The financial acumen of most people is so poor that they need impound accounts. To think otherwise is to make the same mistake the originators of Option ARMs made — believing that people can manage their housing expenses responsibly. The few pennies you will make arbitraging the interest is not worth it. Plus, making the payment late, or worse yet using a credit card, will eat up any interest savings. Any problems with a servicer are the exception rather than the rule, and the servicer would be required to make you whole if they made a mistake.
The broader point is that this money is being spent each month whether it goes into an impound account or a savings account designated for property taxes, and this expense must be budgeted for.
You may want to search “impound accounts” in your forum to see a few horror stories. This one is particularly egregious:
https://www.irvinehousingblog.com/forums/viewthread/31/P775/#118393
I totally agree with you IR—most people can’t even pay their credit card in time how can they save for the high mello roos and property taxes here in CA. And interest rates are a total joke to think you can make any money right now at rates below .5% even less at the majority of banks. So this poster is total mislead by a few exmaples of poor escrow handeling.
The majority of other states insist on this how California gives you an option is beyond me as most can’t save for this. Not to forget these uncollected taxes hurt the state especially when most folks just decide not to pay.
I agree with IR’s broader point about properly budgeting all expenses, and I also offer this:
If you think you need an impound account, you probably do.
I’m with jumpcut on this. Budgeting for expenses is a must. But if you cant set up an automatic transfer from your bank acct to an online savings account so you can automagically save money for your taxes, you shouldnt be buying a home.
And tlc8386, if one cant pay their CCs on time, why assume the mortgage check will be on time either?
And this is what we have now—thousands of homes across the country going into foreclosure, state coffers empty sending out IOU’s. Interest rates rising on credit cards. Trust the homeowner–really–they are running out on their debt or crying for a modification on their loans.
me too.
If you have the ability to save up $250k, you have the ability to pay your own taxes.
If you are getting your 3.5% FHA downpayment on a lender kickback, well….
If interest rates were higher, the argument against having an impound account would be stronger. But, since interest rates are near zero right now, it’s merely a manner of convenience. Assuming you would have to pay by mail, the cost of the stamps for the extra bills you would have to mail would probably equal the amount of interest you would earn for delaying those payments. I doubt problems with the servicer are all that common, or any more common than paying the bills directly.
Um, I’m making 5.03% interest. Check out high yield / rewards checking accounts.
IMHO, people who can’t budget the money to pay their real estate taxes and _need_ an impound account should not be buying houses, period.
If you handed me that report, one of the questions I would have would be, “On Page 4, what are the dates of the comparable sales?”
Yes, that is a good addition. When we pull comps, the date of the transaction is in our data, so it would be easy to add to the report. Thank you.
In response to Cara above, the pictures of comps is difficult to find because once a transaction closes, the pictures are removed from the MLS. I tried to sort through the available data and include that which is most pertinent.
Ah, okay, different MLS rules. In the DC metro area we can look at the full MLS listing after it’s sold including the sold price and seller subsidy. It’s pretty sweet.
Wow, that is sweet. That may be the only MLS in the country that allows that.
Now, one way to cheat elsewhere is to look at a website such as Zillow.com that doesn’t directly subscribe to a MLS, but gets listings indirectly.
The listing for my house is still on Zillow, even though I closed in May. It has the photo and text from the listing.
Unfortuantly, if IR does pay for full MLS access (if he becomes a Realtor, he doesn’t really have a choice), he won’t be able to cheat in this fashion, at least not in any reports he creates.
around here the MLS is just really stingy about taking down “inactive” listings promptly, but U/C and solds stay like so:
http://franklymls.com/FX7029334
(that’s not the mls directly but you get the idea)
Any comment on the suggestion to have different property info sheets based on the buyer’s cash holdings?
Here’s the thing. First time buyers generally don’t have more than 5% to put down. That’s part of the market reality right now.
So, for entry-level condos and small homes (basically anything that you deem would normally go for less than rental parity) I think the proper valuation should be for the typical buyer of that property, i.e. someone who will be paying PMI and paying interest on 95% of the purchase price.
What is not shown on these sheets is the other “inputs” sheet that we have for variables. If I change the downpayment percentage input from 20% down to 3.5% (FHA), the spreadsheet will change the calculations and automatically add private mortgage insurance costs. This spreadsheet becomes very useful for running comparisons of different financing terms and seeing the outcome. In fact, I am planning a post to show the differences between FHA and conventional financing. As a general rule, FHA financing is more expensive and more limiting than other forms of financing (which is why FHA loans were 2% of the market during the bubble).
We also have online spreadsheets we share with people (similar to the calculator) so they can play with different variables. Soon, we are going to update the calculator with a public spreadsheet anyone can play with. The only limitation or difference is that people cannot save their work on the public one (if we can figure out how to do that, we will).
Fair enough.
Yes, FHA is more expensive than conventional financing. I also think it’s the case that the max loan limits kept FHA buyers out of the market during the bubble. The common-knowledge that you could get 80/15/5’s and I/O loans was more prevalent than that moderate income people with good credit were eligible for FHA.
However, there is a price point at which even under the more expensive FHA loan-route buying can be cheaper than renting.
As someone who has now saved up a full 20% down, 4% closing, moving costs (based on our last move 1 year ago), improvement costs, a maintanence fund, and 3 months living expenses, I can highly recommend this method of delaying gratification, but simply being priced out of the market for a good chunk of the time we were saving made the goal of waiting a lot less daunting.
IR, for saving work, you can use a bit of javascript and the anchor marker # (much like redfin does). then ‘saving’ the spreadsheet is basically saving the link.
Just pop the variables in after the # and the page wont refresh on every submit.
Let me know what you are using, I can help.
Very nice buyer’s report.
One point, though – Photos [b]are[/b] still available after closing via our SoCalMLS and might be a good add, along with the closing dates as Cara has indicated.
One question – why not use an independent appraisal report for ~ $150? Wouldn’t this be simpler and come across as more unbiased to a potential seller? Any report that comes from the other side of a transaction, I would guess, would be held with a great deal of skepticism.
What keeps the price above rental parity is the adherence to potential appreciation. A $875 ‘loss’ per month is $10.5k/yr. It would only take 1.4% appreciation to ‘make that up’.
Two dangers embedded in that ‘appreciation’ short-term are higher interest rates and the phase-out of the mortgage interest deduction. Rates @ 6.5% – which are historically low – push the TCO up $500/mo, and then the value of the interest deduction is nearly $1000/mo.
Bubble appreciation is unsustainable and a buyer counting on it to justify are price are taking a huge gamble. Actually, I don’t think it’s a gamble, a gamble you’ve got some chance of coming out ahead. Odds on appreciation in 5y (from that 750k) are virtually 0.
You have identified one of the main reasons I do not look at projections into the future; it is too easy to manipulate the numbers. I have created and used spreadsheets with projections into the future and small changes in the rate of inflation or appreciation have a huge impact on values.
Spreadsheets with future projections are a great way to find unwarranted justification for nearly any real estate purchase because your fantasies of appreciation can run wild. Projections like that are most often run by people who have already made up their minds, and they feel the need to run some numbers to make themselves feel better about the decision they already made.
Besides the hope of appreciation, I think that people are willing to buy above rental parity because most peoples’ perception of value has fundamentally changed with this bubble. I think its more than just that prices are “sticky” and that homeowners have unreasonable estimates of the worth of their houses.
I think that SoCal has gone through a significant and probably permanent change. People who live here throw around large numbers with greater ease and really believe that homes, cars, meals, etc. are worth more. I see this in a lot of friends. Heck, I see it in myself and I’m a numbers guy.
When my wife and I moved out of SoCal 6 years ago, the thought of spending $ 400 K on a house was crazy (we bought a 3/2 on an acre on a coastal island in Georgia for $ 112 K). Now, I look at a similar house for $ 600 K and think, not bad, if the numbers come together. But is it really worth 50 % more in 6 years? No, not really. But now that prices have risen so dramatically, my perception is altered. I think most other peoples’ are too.
Our perception of value may go back to pre-bubble levels but I doubt it. I think the bar has been reset a bit higher on what people think is value, irregardless of the numbers.
Since rent is the basis of your property valuation system, it would be interesting to see if rents have changed in relation to income.
FH
As a numbers guy, you do recognize, though, that ultimately it doesn’t matter what people perceive is a value. Absent infinitely expanding credit, costs will have to deflate to line up with wage increases. I think we’ll see zero price growth in discrentionary items in the next few years until wage growth catches up.
FH: An acre on an island in Ga 6 yrs ago for $112K! Where is this place and what are 3/2 homes like yours selling for now? 🙂
Thrifty,
The island was in Savannah and had a mix of old time families and recent arrivals (i.e. yankees who bought the waterfront properties). Most of the houses on our street were valued at under $ 100 / sq. ft (and had been for years) but there were homes on the Inter-Coastal Waterway a block away at $ 400 / sq. ft. The median price in Savannah at the time was about $ 240 K. We were told that we had just missed the best deals on properties. When we listed the place 3 years later at $ 245 K, our neighbors thought we were nuts. Let’s just say we set the new comps and brought the housing boom to the island. As far as I know, the median is still above $ 100 / sq. ft.
Also, if you’re going to move there, bring bug spray and an air conditioner.
Gman,
I’ve been thinking the same way you are until recently. I’m not sure if they’re putting a higher percentage of income towards housing and other purchases or if there are other sources of income proping them up but I see lots of cases where people in SoCal are willing to pay a higher amount for what they want then a few years ago. It very well may come back in line with income but I think that many people are more willing to “buy” something more expensive now because they see value in it.
Here’s an example – We paid $ 1600 a month for rent in 2000-2002. That was a lot for us but we loved the place and knew we’d only be in it for a couple of years max. The place currently rents for around $ 2800. Did it almost double in value in 6 or so years? No way. But there are people willing to pay it. My only guess is that they think its worth it (I haven’t seen it on the market and I know its still a rental and lived in). Maybe with time the rent has to decline because no one can afford it. But if people keep paying it, then it won’t. And given that we use rent as a basis to value real estate, the value of the surrounding neighbor has just gone up.
Only time will tell …
FH
Even with prices having come down, there’s still fear of being forever priced out of the market.
I know, because I wrestle with this regularly. With my current rental payment versus the dramatically higher TCO if I bought a similar property, I can’t possibly justify buying right now.
And I’m not going to.
But even so, I worry that I’m going to be stuck, forever unable to afford to buy anything if I don’t get in before the next 300% jump. Not necessarily a rational fear, but its there.
From my family experiences in SoFL, the rise was seen, but so has the fall. Homes are selling for less than they did newly built in 02 or 03 in neighborhoods that are good enough for pro athletes & olympians. Many people have gotten burned, even if they weren’t actively speculating, and those memories will linger.
People had been saving less, and savings rates were on like a 20 year decline until their recent bottoming below 0, and recent increase. People viewed payments towards housing they didn’t really need as ‘saving’. Homes are productive investments to the degree they either offset or can produce rent. I have a hard time seeing granite counters or new kitchen cabinets as an ‘investment’.
Savings rates are rising and will need to keep rising and stay high (>0) for many years. That reduction in consumption will come from lower consumer spending, but also lower spending towards housing.
Some areas have had real changes, but the boomingest markets will see all the bubble gains erased, if they haven’t already.
Amen! I’m not a numbers person, but even after being here 2 years feel ripped off every time I go to the grocery store or a restaurant, and every time I write the rent check. When I talk about it, people say “That’s what it costs to live here.” It doesn’t have to, though. Albertson’s recently dropped their regular prices a significant amount on many, many items they sell. I’m willing to bet they’re still making a profit on those items, but I’m not as willing to bet that many Southern Californians who shop there realize just how much they were being ripped off before. They still are, even at the reduced prices. Why it costs twice as much here as elsewhere for an avocado that is grown 10 miles from the store is beyond comprehension to the frugal and rational mind.
And yet… if you travel outside the State in the winter you find out that tomatoes at Albertson’s in December are a steal compared with what you’ll pay for them in Nevada, Washington, etc….
Of course, you should be shopping at one of the many ethnic places (Irvine super, Marukai, Frezia, etc..) or at Trader Joe’s/Costco.
Then only use Albertson’s for only a very few things when they go on sale.
Don’t get me going on Ralph’s…
In any event, you better get a Club Card.
Knowing THIS is the type of honest information you plan to offer, I think it would be a great/transparent RE service. (I was not so nice back in April.) I may even be a future client when the time comes. Remember I said I “tried” to be this type of honest Realtor back in 2003. But the market wasn’t ready for it, and I failed. However, market psycology has changed, and you might do very well!
As for escrow/impound accounts… The VAST MAJORITY need them, so this is another good honest recommendation. Congrats to Jumpcut for being so fiscally responsible, but he’s in the minority. For most people, the tiny return on this money (IF it was indeed left in a savings account), is not worth it.
Forgot to mention: I too would like to see a little more info on the comps (date sold, proximity – maybe even map them). A similar sale on the same street/same neighborhood would mean more to me than a sale by the train tracks, or freeway, or one with a hilltop view…
I love the take on that OBNOXIOUS commercial for home buying. I hated it then in a massive way. This commercial has two subtle messages…for women (the nesting sort), “If you get real b*tchy you’ll get that house you really want, and let someone else determine if you can afford it – like your realtor.” For men the message is, “Better buy that house or your wife will become a total b*tch. Don’t even try the argument that you can’t afford it.”
Fantastic information that everyone needs so they know exactly what they need financially. This is one of the biggest problems we face here in CA. Had most people looked at this instead of the forseen gains they might not have gotten caught buying property they could not afford.
6 month for cash on hand is crazy for some people. Personnaly, I do not fear loosing my job and I don’t believe any of my colleagues are. Some industries are cyclical and others are not. Also, if you don’t have a job, I’m sure you can cut off some expenses and get unemployment benefits. Not sure how likely it is that I would wait to 1/3 of a home price to buy it with a 20% down.
6 months cash is a good conservative goal, but realistically, a lot of people don’t have savings anywhere near that.
Roo agreed, 6 months is unrealistic for most people. But don’t count on unemployment. 2 of my unemployed friends have been waiting 3 months for their benefits, and they already were on subsistence life styles. Not much you can do there except blow threw your hopefully considerable savings. Or offer to live on my couch.
This is such a thorough and informative report. I love it!
IR: regarding comps, it is my understanding that an appraiser and the lending entity donot accept appraisals more than 90 days old. Two questions:
1. is this assumption correct?
2. is the acceptable period, whatever it is, a documented requirement imposed on the appraiser by the state or their professional association or some other legal entity?
tx.
I don’t believe there is any legal requirement concerning the useful life of an appraisal. Lenders likely each establish their own requirements and change them depending on the market and market conditions.
You use 4% for lost income interest for a downpayment, I think that is really high and should be lowered. A high yielding CD or savings is currently at 2% (if your lucky).
Since you brought it up, I’ll use your thread to pitch my comment to “4% lost income for a downpayment”:
That X% lost is valid if you’re saving for that – likely on a starter home/condo. $750k is not a starter home. They already saved their down and spent it on their current place. This is a move up (or down) place, and the down payment is coming from equity (or inheritance or mommy&daddy;).
Are there exceptions to that, of course. The VAST majority of buyers with that kind of down arent first timers w/20% of their own saved cash.
This discussion could be an entire post…
Four percent is above current savings account yields; however, since we are at historic lows, and since savings yields will almost certainly be higher during the full term of home ownership, a higher rate is warranted.
Look at this from the perspective of a competing investment class. Many people with more than $100K sitting around have it invested in other asset classes that may (should) be yielding better than 4%. Stocks and bonds are very liquid, and they represent better investment vehicles for larger savings reserves than commercial banks. To believe that you will only get a 4% return in other investment strategies is probably true today, but that is way outside of historic norms.
Because the yield on liquid investment savings over the long term must be considered, the loss of income on the downpayment should be at a conservative long-term rate. One could argue that 4% is too low. Anyone selling mutual funds would be telling you 12%-18% is the norm; of course, many of those people saw 40% losses last year….
I think it’s funny how you can project into the future on investments as long as they’re not real estate. You’re fighting an uphill battle to convince the rest of the world that real estate doesn’t increase in value over time. The failure to acknowledge this sentiment in the general public leaves your clients at a significant disadvantage, because it doesn’t recognize reality.
I never said real estate does not go up in value. As a straw-man argument, that is not a particularly good one. I am not projecting into the future as much as I am recognizing a long-term opportunity cost of having money tied up in a non-cashflow generating investment which owner-occupied real estate is. As for the returns on real estate, I have covered that elsewhere.
There is no shortage of real estate agents who will tell you that real estate only goes up and 15% per year appreciation is “normal,” if that is what you are looking for. Many of the people who listened to that advice from 2004 on are now underwater and facing foreclosure and bankruptcy. Failure to acknowledge this reality plaguing the general the public leaves those broker’s clients at a significant disadvantage because it doesn’t recognize reality.
I guess you don’t know what a strawman argument is, but I digress. Your argument that your economic theory is correct because you can cite an example of it being correct is lame. Your valuations are a set of checks and balances, the centerpiece of which is rental parity. To say your valuation based upon cost of ownership should not include the obvious value of housing as an inflation hedge is redundant because you may very well be starting at or near rental parity to begin with and appreciation would be a fait accompli. So, if that is the case, not only is it completely unreasonable to exclude appreciation, but it is suicidal to think that the rest of the participants in the market will do likewise. That is where your clients will find themselves at a serious disadvantage. They will be waiting and waiting for a signal that never comes and the first year their bet is wrong will be very costly.
“To say your valuation based upon cost of ownership should not include the obvious value of housing as an inflation hedge is redundant because you may very well be starting at or near rental parity to begin with and appreciation would be a fait accompli.”
Not in a deflationary enviroment with declining incomes.
What did home prices do between 91-96?
What was the inflation rate between 91-96?
Housing is not an inflation hedge. It is shelter. Anyone who says it is a hedge against inflation has never actually looked at the stats that prove it is a myth. This is the ignorance that IR is talking about in this post.
Sorry, one short term example doesn’t cut it as a time-tested principal. Your tone certainly doesn’t add to your credibility either, despite what you may think.
One short term example seems better than none at all and a “It is so because I say it is” attitude, in my book.
Credibility needs to be earned both sides here.
In addition to sold comps…it’d be nice to see any price reductions and dates of reductions. It might give some better ideas of where the market is heading, and how fast or slow. Just something I like to keep watch of personally.
some of the report claims the home has been going up for past few month now
These are really pretty nice, all the basic calculations that I want to see in one place without having to do any work myself. I agree with the person who said you should add dates, but i think the reduction history (although I also like watching it) is less important on this report as it doesn’t necessarily mesh with the overall feeling I get from the report, which is that the report is trying to convey hard data on comps, rental parity, etc. Reduction history is used by people to get an idea of what kind of negotiability the price has from this particular seller, which may still be valuable but doesn’t really make any difference to the fundamental prices, costs, and other numbers in there.
IR,
This is a splendid service. I hope folks will take advantage of this. Clearly, there are a lot of people who need this kind of advice! Offering a public calculator is also very generous.
fundemental value: 590K
rent: 2600/month (and falling)
I am not sure if the calculation is correct.
The rent I used in the report is $2,700, but your point is well taken. With the low interest rate, rental parity is 209 which is substantially higher than the 160 I have been using. It is what it is. That GRM is as stable as 5.25% interest rates. If rates go back up, the GRM — and the properties fundamental value — will fall.
I think for the less knowledgeable client (ie those that don’t read IHB regularly) you may need to get more in depth on what some of the definitions mean. perhaps in an appendix. For example everyone on this blog knows what you mean by rental parity, though I think if you showed the description in the report to someone who never reads the IHB not sure they will get it intuitively. I’m not saying the average buyer is not intelligent just that they don’t have the same expertise and knowledge base as something that is obvious to even casual IHB readers.
I see above you commented that the calculator will enable you to customize assumptions which is good but I think in some cases some of the data to input can be a bit more complicated. For example while I think a 25% tax savings is probably good as an average each buyers situation is different and can get complicated and this is a key input. Figuring out the tax saving for a two income couple, with one partners’ income highly volatile, that may hit AMT hurdles, is complicated though I appreciate you don’t need to figure it out to 4 decimal points either.
Last comment is that there is value in the ‘inflation hedge’ ie if I own my P&I is fixed but if I rent my rent probably goes up by CPIat least in normal markets in normal times. This hedge is worth something but not sure I see it valued in the calculator above. I dont think IHB can predict inflation but seems like you could run a scenario with say 2% and 4% (or whatever) inflation assumptions.
Above really are nits I think it is great and blows away anything I’ve ever seen or heard from a realtor.
Scott, I’m with you on the care that people will need to take in estimating the tax impacts, especially with that diabolical AMT smacking so many of us married couples in California. Also need to take into consideration that itemizing mortgage interest and taxes requires the filer to forgo the standard deduction (about $14k if I remember from last year) so really the first $14k of interest really doesn’t add marginal tax benefit.
The report format is great, and I think your desire to launch an honest real estate brokerage is admirable. If the residential real estate sales business was an actual profession with real fiduciary duties to clients this would be industry standard. But it’s not. How many sales are you going to close if you tell prospective buyers they need 1/3 of the asking price in cash to buy a house? The smart ones will realize you’re right and keep renting. The dumb/emotional ones will likely show your report to the next broker who will happily cross out a few of your expense lines, show your prospective buyers that they really can afford that house after all, and help them write up an offer for the very same house.
I really hope you succeed. But telling the truth does not seem to be a great sales strategy in general. I worry that it will be even less successful in a business where you get paid at closing, and there’s financing available to close almost any deal (even for buyers that can’t really afford it), and you’re competing with thousands of less scrupulous realtors who are only too happy to tell the buyers that they CAN afford it, they deserve it, they’ll be able to sell it for more in three years, etc. I hope I’m wrong. I know I and many of your readers will call on you when prices return to sanity and we’re ready to buy. I hope you can make it work until then.
Some smart realtors will copy your valuation reports, after seeing it here they can’t ignore it plus the fact that is in a public site, and hopefully they will use it, and the more realtor that use this in their day-to-day operations should raise the bar for the rest, that will be a step forward in the right direction for the RE market evolution, (crossing fingers)
IR
I like what you’ve done here. I think it’s informative, and I’m confident that your real estate venture will succeed.
I do want to say this. Most of the factors (income, rents, jobs, desirability, interest rates) that we now use to develop real estate values will be tweaked in the future. This is certain to happen. The truth of the matter is we’ve been living in a credit bubble for about 25 years. The fundamentals of this unsustainable American Way were shaken last fall. The govt looks like it’s managed a way to kick the can down the road for a short period of time. When the inevitable happens, it will change our way of life … starting with more Americans will live below their means. People will have to make different choices, and one of those choices will be less money paid for a roof over your head.
I guess what I’m saying is real estate values are eventually gonna be valuated more on a 1980’s model than a 21st century model. I think this new (or old) paradigm will impact places like The OC much more than fly over country. Let’s face it, the primary reason why our real estate values are 4-5 times the cost of Texas, is because the banks have allowed our consumers to lever up more in California. The lending industry has dictated this, NOT the average Joe’s income, or even his ability to repay the note. With that said, I understand the premium factor of living in The OC, I just think it’s currently way too high, and unsustainable. It’ll look a lot more like it did in the early 80’s when this debacle is complete.
That’s JMO … but I think I’m right.
Lee: I agree completely. Earned income and interest rates will not support current home prices. A couple of prognostications:
1- Annual income x 3-3.5 = reasonable purchase price for your home
2- debt ratio of 28/36 will be rediscovered.
As is being shown, anything more than that is. as you say, unsustainable.
I’d like to call it ‘living within their means’ or ‘saving for retirement’, but ‘below their means’ works fine.
Did the premium for living in the OC change from 2002-2006? Wasn’t the premium there before the bubble?
The reason why I said “living below their means” is because I think we’re gonna become a much more saving society in the future. Much like one of my favorite books outlines, The Millionaire Next Door.
Of course the premium for OC real estate existed prior to 2002-2006, however it was a smaller factor. In the early 80’s I believe the typical OC home sold at about 1.6 times the national average. Today it’s 3 to 5 times the national average. Yet our incomes do not have that type of multiple, AND a lot more of our income is sucked up by higher taxes, higher fees, higher insurance and higher cost of living. We can’t have a sustainable economic model with more than half of our income servicing housing (mortgage payments, rents, insurance, fees, utilities), and the other half used to pay inflated taxes and a high cost of living. It simply doesn’t work.
It’s all unsustainable. We’re grinding our way back.
“We can’t have a sustainable economic model with more than half of our income servicing housing (mortgage payments, rents, insurance, fees, utilities)…”
The pain of servicing huge amount of debt has not set in for many who are living on piles of debt but their ARM loans are yet to recast. Some people I know who recently managed to refi their option ARM loans into 30-year fixed at sub 5% rate still saw their monthly payment double. In a few years there will be far more people spending over half of their income servicing their debt. Saving will no longer be an option but a necessity for survival.
Yes, we have another nasty wave of resets and recast loans to experience. These are gonna impact Orange County in a major way.
Our biggest problem, and the reason why Orange County is unique is the lack of attainable, government subsidized financing. Try to get a jumbo loan right now … try to buy a million dollar home right now. Sure, you can pull it off, but you’ll likely have to put 20% to 50% down, make north of $200,000 in documented income, and sport a 720+ fico score. A million buck will currently buy you a semi-mcmansion in Coto. A millions bucks simply doesn’t buy you much in the nice parts of OC. AND, there simply are not enough buyers who can qualify to support these prices. The typical 2,700+ sq foot Irvine home has a massive magnet attached to it … it’s called “government subsidized financing”.
Back in 2006 (last time I saw household income
stats in OC)Irvine median household income was
$92K. With the great recession I would guess the number is lower today. There are some large cash buyers (mainly savers who did not participate in the bubble consumption binge, and FCBs) who are proping up the market temproarily, but you are right in 1-2 years (or even earlier)there just won’t be enough qualified buyers to support current price. You see all these bottom callers out there, but have you ever heard any one talk about where the end demand is going to come from?
Here’s a picture of Irvine income during this bubble.
Notice the decline after the last bubble (Tech & Stocks) went kaput. Also, notice the rise after sub-prime financing became popular (we should have expected this considering Irvine was the chief distributor of sub-prime financing & sub-prime jobs).
Per Melissa, who gets their info from the government:
Irvine 92602
$99,400 ~ 2000
$87,362 ~ 2001
$84,535 ~ 2002
$84,668 ~ 2003
$87,537 ~ 2004
$91,823 ~ 2005
$98,138 ~ 2006
$95,577 ~ 2007
Irvine 92604
$66,231 ~ 2000
$62,932 ~ 2001
$59,670 ~ 2002
$70,190 ~ 2003
$66,366 ~ 2004
$69,472 ~ 2005
$74,502 ~ 2006
$72,230 ~ 2007
Irvine 92606
$76,592 ~ 2000
$67,077 ~ 2001
$65,668 ~ 2002
$71,131 ~ 2003
$70,225 ~ 2004
$72,982 ~ 2005
$83,471 ~ 2006
$83,444 ~ 2007
Irvine 92612
$92,476 ~ 2000
$78,053 ~ 2001
$77,059 ~ 2002
$74,303 ~ 2003
$72,752 ~ 2004
$78,076 ~ 2005
$85,456 ~ 2006
$89,382 ~ 2007
Irvine 92614
$78,028 ~ 2000
$70,044 ~ 2001
$68,815 ~ 2002
$73,622 ~ 2003
$78,714 ~ 2004
$109,429 ~ 2005
$107,063 ~ 2006
$102,499 ~ 2007
Irvine 92618
$87,125 ~ 2000
$75,322 ~ 2001
$75,861 ~ 2002
$71,771 ~ 2003
$103,214 ~ 2004
$108,654 ~ 2005
$100,824 ~ 2006
$110,583 ~ 2007
Irvine 92620
$84,573 ~ 2000
$75,050 ~ 2001
$74,879 ~ 2002
$77,501 ~ 2003
$82,459 ~ 2004
$93,768 ~ 2005
$99,015 ~ 2006
$100,436 ~ 2007
Thanks for sharing. The post 2000 decline in income should be indicative of where we will be at in the next few years, only worse given the fact that this recession is far more broad based.
Wow, if you’re right about housing values dropping to what they were in the mid 80’s, then holy shit, are we in for a trainwreck!!
John DeFlumeri Jr
No, No, No … I didn’t say~
“housing values dropping to what they were in the mid 80’s”
What I did say was basic fundamental factors to determine real estate values will be changing to reflect an economy that will be forced to rely less on the ability to borrow, and more on the ability to repay. That’s the way it was in the early to mid 80’s, and I think it’s coming back.
I’m more convinced than any time before that our (the OC) real estate prices (still) have little to do with the ability to repay, and more with the ability to borrow. This is simply an unsustainable model … and it’s in the process of imploding.
I really like the report format/info presented.
I would add comp dates, too.
Also, I would include a full transaction history for the property, including past sales and the financing of the current seller, as well as the listing price history.
This is all relevant information for the buyer to make an informed decision on bid prices.
IIRC he intends this to be the same valuation that is given to both the buyer and the seller as a basis to start negotiations.
No seller would want that included. And it may cause buyers to inaccurately prejudge. Just because you put no money down and bought in 2005 doesn’t mean you don’t have other money elsewhere you can’t bring to the table.
But I agree, as a buyer, one wants to know this. I always pull at least the tax records.
IR,
This report is excellent! Good information is power to the people! The general consensus of disgust toward Realtors (now similar to used car salesmen) will work in your favor. Do you charge for the valuations? If you don’t I think you should, since most homes are still overpriced.
IR,
Great report. It provides a good framework with comprehensive data to support the evaluation. This should set a standard for all realtors out there. Like other readers I also would like to point out that this report shows a snapshot of a property’s value relative to rental parity. Two variables that directly affect the calculation – rents and interest rate, could constantly change the rental parity outcome over the time. But as you said projecting highly volatile factors such future mortgage rate is a dicey business. I am sure we all have different take on that. As long as there are complementary tools allowing users to run their own sensitivity analysis based on their own assumptions of these variables, the report should be a success.
A 1684 square foot single?family detached home has 1684 feet.
You don’t want some blogger calling you out over English grammar, do you? 😉
Yes, I will need to change that. When it reads as a bare fact, the word “feet” is appropriate, but when read in context (the report assembles the facts as different data fields) it does not read correctly, and it should be “foot.” Nice catch. 😉
I was more taken aback by this at the very top of the post:
“Today, I want to show how what information they contain.”
Curious if the report, or a portion thereof, has ever been sent along with an offer to purchase. A seller might be greedy – as we all are in some respect – but they may also be swayed by the data points therein. Perhaps an “A” version for buyers and a “B” version for sellers, printed on coffee scented paper so they can wake up, of course.
My .02c
Soylent Green Is People.
I would really like to stay away from an “A” and “B” version to try to remain impartial. Someone could use this report to cherry pick comps and make a case for a larger or smaller value. I don’t want to do that. My intent is to remain as neutral as possible with respect to value and let the parties negotiate around the same figures. Maybe it will work, or maybe it will not. I don’t think the process needs to be adversarial; others will disagree.
Egads! A 1,885 sq ft condo in Irvine is $750,000? I better get a straw for that KoolAid.
IR, this service you are providing is fantastic. That’s just the kind of information people should know when buying a house. I would definitely recommend you to all of my friends. Keep up the good work.
Sorry that I do not have time to give this the attention it deserves. But obviously, appraisals are faulty, and your methodology might be an appropriate and timely solution. Good luck with your venture, and I hope it fills a desperate niche. But the fact that you came so close to the asking price give me pause. That is one, kool aid infested crib!
Very cool service for your target customers.
I noticed a few typos in your sample report. Presumably you’re going to have someone properly proofread your template before you start having people pay for this document (not sure if I happened to see all of them).
“a properties minimum value” -> “a property’s minimum value”
“a impound” -> “an impound”
“savings typical run” -> “savings typically run”
“paid buy” -> “paid by”
One thing I can’t help but notice from the report:
It shows an expected 68,000$ saved for emergency expensive for six months, which translates to 140,000$/ year net, or 200,000$ gross income.
So effectively this report matches a 750,000$ to a 200,000$ income buyer – aka price of house about 4 times gross income.
The average income being around 100k$ in Irvine, that simple valuation would match that market at 400,000$ overall… which is quite far below.
Am I missing something?
No, you are not missing anything. In fact, you see the very reason prices must continue to fall.