There is definitely guilt to be laid upon both sides. Typically, when our cyclical market starts to shift, realtors are scrambling to gain listings, and are a bit more accomodating price-wise. It only takes a few languishing listings to quickly correct the over-valuation syndrome, and bring us back to reality.

Rich: How much impact Realtors actually have on the value of homes is worthy of a whole discussion. Certainly it is a potent force when it comes to the value of properties.

I think it is safe to say for this discussion that Realtors have a very strong influence on pricing at the retail level. Appraisers base their valuations on things beyond willing buyer/willing seller, but how much are they influenced by the selling price?

How different would pricing be if all houses were priced before sold but after appraisal?

And then there is the bank....the point or theme of this post is this: if buyers and sellers were given a wholesale/retail perspective, much of the bad feelings would disappear..."Oh, the appraisal from the bank came in low because they are basing it on WHOLESALE." Buyer could feel better and say "Oh, I don't mind paying retail for this house, its worth it!"

Right now both parties just feel injured...one paying too much, one selling too low, both somehow thinking the number the bank came up with is the "value" of the house. Both going on the Internet and asking agent...well....what about this number? It's on the Internet so it must be right!"

Confusion!

Great post Janet.  I like your Retail/Wholesale scenario for the agents knowledge in pricing an educating the Seller & Buyers, but I really don't think most buyers would say "Oh, I don't mind paying the retail for this house, its worth it!"  For the majority, never going to happen.

We as agents/realtors need to educate our Sellers ahead of time if they insist on pricing where it does not look like it will appraise, then they need to be aware of the consequences.  With the market they way it is, it is all about price for the Buyers.  Make the best deal.  The low end homes are selling in copperopolis.  We have twice as many pending as what has sold so far this year.  That is good news.  So comps are low per square footage.  When we get rid of all the foreclosures, etc.  prices will gradually climb.

We also need to encourage our Sellers that even they they are selling low, if they have to purchase something else, they will most likely get a deal on the other end.  Taxes will be lower for everyone which is a good thing, because taxes go on forever.  Let's turn negatives into positives.

Roxanne Schilling, Realtor at Lake Tulloch

By the way, where do you get all your wonderful pictures????

No, no, no, no, no.  Please do not compare market values of automobiles to homes. 

Automobiles have a predictible life span, after which they have little value until they are obsolete.  Automobiles have no value other than the service they can provide to the present owner.  Of course there are exceptions, antique cars, etc., but they don't impact the market.

Homes, on the other hand, have values that generally appreciate based on the local market, improvements, maintenance and demand.  Homes remain functional for hundreds of years and can be remodeled and improved and expanded.  The underlying value of real estate is the land of which there is a finite amount in areas that are marketable. 

I have a total disconnect when comparing the real estate industry to the automobile industry. 

Lenn: I agree that we can never value a piece of real estate the same way we do a hunk of steel that is a machine and will eventually be junked.

BUT: there are connections. The main one being that they are both large assets which most everyone buys and finances.  In terms of value, these are really the only purchases most people in our culture make where there are negotiations on price AND in financing terms. In both cases, the value of the asset determines how much money will be loaned in relationship to the percieved value. These are connections,

I could say a house has no value other than the shelter it provides to the current owners.  I could say a house only has a useful life of so many years. I could say that it would be far easier to value property without improvements.

And while one difference has always been that houses appreciate and cars do not, that is no longer true. Houses have depreciated, creating a lot of confusion about values. By providing a range we also provide a better understanding and comfort level to clients.

Roxanne: You points are very thoughtful and I agree with all of them.

What if you KNOW that your buyer has gotten a good buy on a property. Appraisal comes in low, but seller won't budge. This is the time to explain the bank has a different way of valuing a property, and that buyer is NOT paying too much according to market conditions.

What if buyer won't make an offer on a property priced right because he has seen the Internet says it should be $30k less?

Great point in your last paragraph. I am reminded of the guy at the dealership that wants to buy the new car at wholesale, but insists dealer take his trad at retail. It doesn't work that way!

Rox: I sponsored Copperopolis as a community on Localism. I will soon start blogging there about Copper and may need your help!!!!! Talk to you soon

Boy... I might need to call Lenn to talk about car and home lifespans...  She is an absolute pro, but I think she is looking at that the wrong way. ;^ )

But, on to your post. 

I would argue against the wholesale/retail valuation, but you might be able to get it on a retail/loan value target.  But, the thing is that for most situations, unless the banks were going to say that they don't want to be into a property for more than XX% of retail value, retail value would revert to loan value... and then banks would be loaning 100% on the properties again. 

I see where you are with it, but I don't think it is workable on homes.

Actually I liked the comparison to the Kelly Blue Book.  My neighbor understands vehicles and values, but thinks he also knows the housing market and values.  Next time I'll ask him if he always gets what the Kelly Blue Book says.  Each market is different, each community is different.  Work with a real estate professional to find the best suitable home and go from there.

I've always said that houses have three prices.  The market price, the appraised price and the assesed price.  They are never the same and in today's market the winner is the appraised price is where the lender is going to give the buyer the cash to close the deal.

Janet, interesting.... at one point, you indicated that banks can influence appraisals.  I suggest that if that is happening, there can be some financial and legal consequences.  I cannot even talk to anyone in the appraisal department directly anymore.  AJ

AJ Did not intend to say that banks can influence appraisals. Sorry if I confused anyone. Banks  can review the appraisal submitted by lender and reject the value as too high.

 But I have had appraisers in banks do all kinds of crazy research and call random people connected with the property to get opinions of value. They seem to operate completely different from independent appraisers.

Cindy: I always say this too because it helps to explain things to the client. I use alot of car business analogies to explain real estate. Because most people have bought more cars than houses, they seem to get it.

Joyce: There is a reason they call Kelly Blue Book a guide. It is meant to give bench marks. What I like is the range of pricing. Our clients tend to think there is only one value, then get confused when there is more than one.

I just think our pricing models are very confusing to the average person.

This is a very interesting post and extremely thought provoking.  Well done...

Lane: My car business analogies never do work with Lenn (sigh!)

This post is about getting clients happy with a range of pricing.  I agree that houses could not have a blue book value the way cars do.

I thought your analogies were on the mark.Good script to let the sellers place a price on their home

At a figure the buyer can get financed.

Hmmm.. rent vs. buy calculations certainly come into mind here.

Janet....  a lot of what you talk about and in regards to what AJ and you are talking about, is because if you act as a true broker, your appraisals will be scrutinized more. It's a fact, hence why underwriting for many brokers, especially on FHA deals are taking close to two weeks... 10 to 14 days. Hence why I love being a banker... yes, we take more responsibility, which is why we can do more than the average lender... underwrite a FHA manual deal still in 3 days, and approve many more deals... and not attack the appraisals as much. And our investors trust us and still buy our loans from us. And don't get me wrong, we still beat up appraisals at times, but not as much, what is done on the broker level.

In regards to the stance that there are 3 types of values.  I am ... well, that anyone with any lending experience would even put that in a statement to give examples and comparisons. Not sure who said it... I couldn't find the statement....  an assessment should never be brought into this conversation.  The true value is that market of today.... what others are willing to pay for such homes... and the appraiser to support that value, with comps that are a like.  Values can go up or down in a month....  again, this is so different than cars.

You made this statement.... " Let's face the facts : Banks can manipulate how much they want to loan on any given property by adjusting the appraised value of the property (DOWNWARDS) from the selling price. Do they do this? Painfully and often, creating much havoc. "

First off, I think that is a very misleading statement. Often? Maybe finding a different lender or bank then... not trying to sound rude, but if I was a consumer reading this, it would sound like more than 50% of all appraisals.  I have closed over 20 loans in the first half of the year. (Jan. & Feb. - very slow)  I only had one that had value cut by $6,000.  I had a few others that we needed more comps, some pending sales, and a few listings. And we aren't just talking about New Jersey, my market. I do loans myself, in 6 different states, ranging all the way down to Florida... and it's ironic, I just closed my 3 deal in Florida in the last 3 months and have one closing this month, and none of my values were cut. 

In my opinion, it comes down to a good realtor in how they market the property.... it comes down to a good appraiser who understands the market, good comps, and adjustments, and a good underwriter that knows how to read an appraisal and not to underwrite on what others want or how they think... but that they can justify the appraisal.

And I kind of agree with Lenn also... not sure how you compare automobiles values to home values. Okay, the only thing that you have going for you is that many homes have lost values in the last 2 years. But that is not history... in history, home values will still go up. It's an investment...  cars are not much as an investment, unless as mentioned, they are antiques. So, the comparison?  In my opinion, not a good one. And the average car's value is hardly that of the price of what a garage would cost.

Overall... this is just my opinion.... but much of what was said here is not factual. Sure, banks my nit pick on some properties, because that program that they are selling is not the best program or safe...  Example, the Pay Option Arm and if anyone remembers, World Savings would pick these apart. But this year alone, the majority of your loans are fixed rate loans. The only risk here is the consumer not making their payment, regardless of what the house appraised for.   just my .02...

Hi Jeff: I was so glad to see your post today. I wondered why you hadn't been around in awhile.

Your comments, as always, are thought provoking. I agree that being a banker does have advantages that I am unable to enjoy...specifically, that a much greater level of trust exists because you are part of the bank. Understandable. Our FHA underwriting is taking about 6-7 working days... getting better all the time.

Jeff...if, in 20 loans you have only had one appraisal cut by $6000 then I would just say we are players in very different markets. It is common to have prices chopped by banks here. I guess Calif. was more inflated than most, and lenders are more fearful of declines. All lenders, not just one, cut appraisals. It is something we stuggle with.

Comparing methods of placing value on cars and houses....not cars to houses, although I stand by my statement that both are major purchases, negotiated pricing, and mostly financed. Sorry, but as long as houses are depreciating, they are not "investments", unless you want to invest in something that will be losing money for who knows how long. They are houses to live in, not to invest in, like you buy a car to drive you places.

I am referring to the risk that exists as a result of the much higher percentage of houses going into foreclosure because borrowers are "upside down". Although rate may be fixed, if client ends up in a house that he owes far more on than the house is worth, the chances of walking away soar.

There must be more than one price of value.  You have already mentioned two.  I suggest that there are even more than two.

If 10 people are to look at the same house you will most likely get as many as 10 different prices of value.  Those prices or values are what those people are most likely to pay to own that house.

What does that tell us about a homes value?  Value or price depends on what the buyer is willing to pay.

Why are you giving Zillow any consideration when they are not a player in the real game?  Sellers are always "expectant, anticipating" a higher value no matter what the market.  There always is wording that agents use - 30 day price - 90 day price - how much time do you want to spend?  It always applied to any market.

Janet... in my opinion, you stating homes aren't an investment when values decrease is way off base. What's your comment or analysis on the stock market then?  It's an investment and over time, you make money. The stock market 99% of the time is not to make a quick buck in one year... just as in real estate....  it tends to be a long term investment. Your comments are caught up in what has happened in the 4 previous years, prior to 2006, when values sky rocketed. You can stand by your statement, but you are using a misleading statement that is designed just for today's market and not history or the average. And yes, real estate is local... because in some parts of the US, prices have gone up. The reason why I am arguing most of your points is because your post is general....  it doesn't clarify areas...  now you tell me your statement is for Cali. properties only. My whole point to this, then make that statement in your blogs.  Don't make them national statements then, unless you know every market.  Just my .02, but it goes back to how the consumer will read this. If I was not in this industry, and yes, I do Cali. deals...  I would have taken your statements to apply to most areas of the US... wouldn't you?  just curious... 

Overall...  you just can't state Cali. properties are looked at differently, when I know many brokers and lenders are having mostly success with their appraisals.... their numbers aren't as good as mine, because of the markets that I am in, but they are still well under 50%.   Numbers speak loudly to me... and I just wanted to bring that up

oh yea....  Lyn made me think of a comment that I forgot to mention....  yes, Zillow.. how can they be used in this topic?  You need an appraiser to physically inspect the property... and to use correct comps in the area... Zillow doesn't do that and they boast that they have it down, that their values are close.  Okay, maybe on some houses,..  but I have found way to many that were over or under prices by Zillow.   I just think that you gave them some credit in this post, that kind of struck me odd, because I don't call them accurate values.

It seems I agree with Lenn and Jeff... but for somewhat different reasons than they have mentioned. Cars do depreciate, and cars are valued by their age, useful life, condition, etc. These things are true... but left at this level, houses would appear similar, except they dont depreciate over the long term, while cars do even over the very short term...

The big difference between cars and houses is the biggest one, and it is enough of a reason to cripple this analogy: Blue book values for cars are possible because for the most part, a Buick Skylark with 100,000 miles on it is basically the same as every other Buick Skylark with that many miles on it, excepting minor factors such as popular colors, and the physical condition of the car... but even condition is taken into account in a standard way with cars... (I grant that some rare cars hold value better, or even appreciate, and I grant that certain models of cars or extras have a big impact on the price (classic cars, cars with electric seats and windows, etc.)

Now houses do not compare to each other exactly... even in a development with just 6 models of houses, every one will be different. And that is the reason behind the difficulty in pricing houses accurately. For example, if you have the same model house that I do, in the same development, but mine is right off the main road that passes the development, on a lot that has little privacy, while yours is well away from that road, with a corner large lot that has hedges and trees that add privacy, your property might be worth far more than mine, jsut because of these aspects... never mind that you have recently upgraded your kitchen and bathrooms, while mine remain original from 1988...

So at a very fundametal level, cars and houses are just not comparable.

That said, Zillow has a very limited database as compared to MLS tools, so currently the pricing tools are not as accurate as a CMA... but I would say that as that database grows, over years, and as the software used to do the comparisons is moved into version upgrades over the next 2 to 5 years, the findings of the tool will increase in accuracy.

But right now,  I will stick with the opinion that these numbers from online sources are just not anywhere near as accurate as price comp done by a live human, who has seen the house, who has years of experience, and who has the database of MLS to draw on...

Right now in my market - it's the opposite.  If you want to sell, you must price close to 'wholesale' and, by doing so, you'll get a very strong appraisal closer to 'retail'.

I've always advised clients and prospects with 3 values - 1 is refi value (often higher than market value), 2 is market/sellable value and 3 is assessment value.

Of course we often have price levels for homes for sale too. 

When I consult with agents or brokers for new listings, the variable is usually financing. 

Value range:  $450,000 to $500,000. 

• Cash, no contingencies, price $450,000, 30 day settlement.
• Financed with no contingencies, $475,000, 10 day loan approval, 5 day home inspection.
• Financed with home selling contingency, $500,000.

Range pricing works very well with real estate except that buyers always want the lowest of the range even with contingencies. 

I am not sure about the refi value being higher than the market value... in fact, in our market, we are seeing equity lines being reduced after being in place for years... for example, for a guy with a $150K equity loan, with a primary mortgage of $250K, with the equity loan having been issued when the house was worth $410K, that equity line lender has now reduced that same loan limit to $100K, since the property declined in value...

Not sure I said that very clearly, but the fact is many lenders are reducing the draw limits on equity loans, even when the borrower has already borrowed more than the new reduced limt...

For refinance loans, we see lenders restricting the amounts, and even declining the loans when the appraisal indicates a declining market...

I am hard pressed to see hwo the refi value i sexceding market value in the current lender environment.

Of course automobiles and homes aren't the same type of financial investment, but I like the analogy of Kelly Blue Book because people understand it and you can get your point across in a simple way.  I might not use it on high end buyers/sellers because many of them understand more about finance and pricing, but it could be a good tool to use when negotiation (buyers) and setting price (sellers) comes up. investors do use the terms "wholesale" and "retail" when pricing houses.

As to bank appraisals, watch out for the computer-based ones. They are as bad or worse than Zillow. Sometimes the bank sides with the robot over a human appraisal. Incredible but true. I have have written a couple of posts about it.

Very insightful post, as always Janet. Great job in writing such a stimulating explanation of the challenge in pricing homes for sale in today's market.

Great post.   I am going to use this - it is a much better way of discussing the pricing issue with a seller in any market condition.   You are so smart!

While I may have some issues with the analogy to cars, I do think that managing the seller expectations in this way would make it less painful to the seller... at least at the outset... then of comes the savvy buyer who will never the less offer 10 or 15 % less than the asking price. That will raise the specter of disappointment with the seller again... any ideas on dealing with the psychology of that?

Mandie: I think that pricing is never an exact science. If you feel rock bottom pricing is $500k and after 6 months someone offers $475k, maybe the value of the house was overestimated or more likely, the market has changed for the worse.

I think it is the Realtor's job to explain to client they should never take a low offer personally, or feel insulted....we are so ill prepared to negotiate price in our culture, which is why we NEED real estate agents to guide up through.

Steph: Not smart, but good at analogies for some weird reason. Thank you, and I hope this helps. It has helped me many times.

Vickie: Thank you. Now let's go have coffee and talk blogging.

Sharon: I am going to go read your posts. I had the same experience. Bank rejected loan because computer said property was a manufactured home. There was a full appraisal stating that it was a stick built home, and they refused to believe it. Go Figure!

Lenn: I think what you have presented here is a great way to assign risk based on the financing situation of the loan.

I can understand why buyers want to offer the lowest amount...I think it is hard for the average person to understand the whole concept that RISK to seller is a cost to the seller. While this is a little abstract, they concept of getting the lowest price is always crystal clear.

Christina: I am not aware of any situation in our market where refi value would be higher than a sale value.

Assessment value has no meaning at all in Calif.

When you lease a car you are offered gap insurance and a guaranteed buyout or walkaway at the end of the term. Hard to believe that would now be atrractive to housing! Your analogy is well thought out, although cars vs homes is depreciating vs appreciating. I would mention that an appraisal is not very negotiable but an auto dealer can negotiate the loan value for a vehicle. Can you pay too much? Yep.

Jeff B: I have said before that I admire your passion and your conviction. Your 2 cents are always welcome... pro or con.... on any post I write.  But Jeff...please just argue the points in the post, not the way the post is written.

I am writing from a (coastal) California point of view...my point of view...from my desk. and I shouldn't have to make a disclaimer to the rest of the country about this, imho. This is what makes AR so interesting, that we can get opinions from across the country.

 Real estate is local. Is it wrong of me to make the assumption that most readers would understand this is the way I see things, with obvious influence from my very own LOCATION in the San Francisco Bay Area, and that it could differ substatially from another LOCATION?

 I used the word "often" in terms of appraisals coming in low. I know you are a numbers guy, but you are not going to see me applying actual numbers to every statement I make.

 Being a numbers guy in our profession is a huge asset, and part of why you have enjoyed so much success, I am sure. Somewhere deep down inside of me, there is a numbers person waiting to break out (sister: math teacher, brothers and father: all engineers, me: misfit in a family of number geeks)

 For now, however, it takes all of my numbers savvy just to think through numbers for mortgages. When I write, I call on the other side of my brain, and confess, it flows more smoothly and with less effort than the opposite side (that must deal with numbers).

Thank goodness thinking though real estate financing scenarios is more than JUST numbers.

Get a home: An appraisal is not negotiable when it comes to financing a house. The blue book price is not negotiable when it comes to financing a car.

I leased cars for 20 years. I often said, much to the shock of everyone, that if real estate could be leased the way cars are....no one would buy a house. Maybe I will blog about this. Thank you for the idea and the thoughts.

Sorry Janet, blue book value is negotiable. Just not to the general public. I have a friend who is a finance and insurace saleman at a dealership. The banks will negotiate, that is how they finance autos for well more than they are worth (better the credit, the higher they will go)....

Get a Home: I disagree. Auto lenders have guidelines just like mortgage lenders. It is true that good credit, good income, etc will result in a higher loan to value on cars or real estate. The VALUE is the amount of the appraisal (for real estate), or the way the car books (for cars)

It is the LOAN that is negotiable, not the VALUE.

  You could get a loan at 110% of bluebook for good credit, or 80% of blue book for bad credit. But the bluebook number is not negotiable.

You could negotiate a higher loan for your bad credit guy by asking for 95% of blue book (for example). But you could not say "Pretty please, just for this guy, can the value be $22,000 and not the $19,500 number in the bluebook?

I guess we are kinda splitting hairs, truth is for autos, there is a choice of books for value, blue, black, NADA, etc. diferent banks use diferent references. Point taken value vs loan. But, you said, blue book price is not negotiable when it comes to financing a car. We are both right or wrong Lol.

If you only knew how many cars I have financed! I always hated the car business, but with family owning a leasing company, I got stuck. I found this little niche that allowed me to simply do the financing (mainly leasing), and was able to operate in my own little world. I finally broke free and got into mortgages several years ago.

It took me forever to stop saying repo when I meant foreclosure! LOL

OK Janet, you leveled with me, so I will too. I used to be a closer in the auto industry (for quite a while). Yes, the buzz words were tough to break! Bogue, upside down, walk the trade, yikes, a no no in real estate Lol, Good Luck!

Janet......just let me know when.

Roxanne Schilling, Realtor at Lake Tulloch

I think prices are more along the lines of the stock market --Bid and ask. Bid is what someone can and is willing to pay,; Ask is what the seller is willing to sell for. the actual number is someplace in between those. 

The appraisal is for cya for the lender. How often does an appraisal take place before a listing or an offer, very rarely. Secondly, appraisal are very subjective. Apraisers tend to favor the view of who is paying them, finding comps that supports their clients viewpoint not the actual market.

Thirdly, current prices are lower, because those that can buy have a good credit rating and the money for the larger down payment. They didn't get these things by paying "retail" or absolutely "needing" that step house in a hot market. They wait for the deals.