[StBernard] Home Values

[Westley Annis]

Westley,

I can tell you any lender who has a foreclosure property can have it
appraised to get a good idea of its current market value.  I think it's
absurd for a lender to say otherwise because I get hired all the time to
appraise foreclosed properties.

Sure, in a declining or slow market it takes a bit more work on my part, but
an estimate value can always be reached.  Also, keep in mind that just
because your neighbor got foreclosed on does not necessarily mean everyone
else's property values are going to drop.  The leading reason why an owner
gets foreclosed on is because he/she doesn't have the funds to continue
paying the note...yeah, I know that sounds kinda obvious, but often you
don't have to read anymore into then that.  The owner might have lost their
job/income and fell on hard times.  Even in the best of times this can
happen.  And if the market is generally slow and no one is interested in
buying their particular (foreclosed) home doesn't mean another home for sale
in the same neighborhood won't sell.

The biggest problem in selling most foreclosed homes (and why their values
drop) is because the the owner knows what's coming early on and generally
let the home begin to fall apart - or often intentionally damage the home -
yeah, you'd be surprised how often I run into that.

So when people see how reduced some foreclosed properties are in a given
neighborhood, there's a general perception that all the homes in the
neighborhood must be declining as well - which is misleading.  As an
appraiser, I cannot use the sale of a foreclosed property as a "comparable"
- a sale to draw a comparison of value.  This is because foreclosed
properties are not looked up as being a true "arms length transaction" - a
typical sale in a typical market.

The biggest factor (among sales) that drives down property values is when
someone who knows their home is going to be foreclosed on makes a quick sale
(well below typical market value).  This, because it is actually not a
foreclosure sale, appears to be a legitimate sales that indicates property
values are dropping in that particular neighborhood.  But upon a closer
look, appraisers are supposed to avoid using even these sales because they
are considered "quick sales" and also not an arms length tranaction.

The bottom line is properties are only worth what someone is willing to pay
for them.  That's why I felt it better to not bail out Wall Street and let
the true market purge itself of these bad investments.  Within a couple of
years the system (the market) would have worked itself through it and
reliable market values would return.  Now, with this bail out, there is no
certainty what the future real estate market will do.  Even if things
improve, the question needs to be asked at that time.."is it a true market
or an artifical one stimulated by an unnatural act (the bail out)?"

John Scurich


-----Original Message-----
John,

Since your day job is figuring out the value of homes, I'm asking you this
question.

I was reading several different articles on this massive bailout plan. The
number one thing I see mentioned is that "no one knows the value of the
homes being foreclosed" so banks are having a hard time recording it as an
"asset".

In my mind, every home has a minimum book value. Start with the price of the
lot and the foundation then add the square footage of the house multiplied
by the current construction costs for that neighborhood. 

This is probably similar to what assessors do on their four-year
reassessments, but it gives you a base figure.

This is not taking into account any fancy marble tiles, appliances, etc. It
is just a core, basic value for the house.

In theory, a home should never drop below this price. In practice, it could,
but it should only be because of something like a couple getting divorced,
relocating unexpectedly, etc.

Using this theory, my home is worth way more than what it assessed for when
I bought it three years ago (simply because of construction costs), but may
not be the case in someplace like the lower 9th ward.

Why can't banks use this to value these homes that are in foreclosure? Also,
I realize they are not in the "business", but if they can't sell the home at
its floor value, why not try to rent it? In a bad market, rental income
would be better than no income and just boarding the place up.

Westley