The Danger of Zillow and Trulia

September 11, 2011 By Leave a Comment

“What is the Zestimate?” the buyer asked…

This home was an upper end green renovation with an addition that nearly doubled the home's size. There is no comparable sale on which to base value.

Well, we can be sure it is within 10% of the actual value about 65% of the time. I don’t know about you but I am looking for a lot more accuracy than that.

The rise of the AVM (Automated Valuation Model) has brought a new wrinkle to valuing property that has been considered either controversial or accepted (depending on whether it supports your position on the value) and it is not going away. Appraisers and Realtors generally don’t like it because it attempts to estimate property values based on inputs that are questionably accurate. Zillow or Trulia never see the houses that they value nor do they see the houses that they use as comparables but somehow they spew out an estimate of value that the marketplace seems to accept as accurate more often than not.

All 3 of these homes in Hanover now have finished space in their basements that was unfinished when they were completed in 2006 and it is not reflected in the tax assessments. The AVM relies on tax assessments as part of the model.

When do these sites work well?

Zillow and Trulia work fairly well when there are homogenous properties (similar in age, scope and construction method) and a large sample of sales to draw from….but even with a larger sample and similar properties, it is still not without issue. In cases where there have been ample sales in a subdivision of similar homes, then yes, an AVM can predict values with some degree of accuracy. In urban neighborhoods or neighborhoods that have a large degree of diversity in style and size/custom neighborhoods, the AVM’s do not work well at all.

With any method of valuation, make sure you understand what is underpinning the analysis. A computer in Seattle telling me about an modern home with an addition overlooking the James River in Manchester is not going to yield an accurate result. Likewise, a home that had a high degree of similarity with neighboring properties when first built can vary greatly over a short time frame due to upgrades, unfinished space being finished and maintenance differences.

At the end of the day, diligent research about available options and watching what properties go under contract will lead any buyer or seller to a much more accurate decision than any AVM.

Filed Under: Blog, Financing, Market Values Tagged With: , ,

The Case for Tax Abatement

September 4, 2011 By Leave a Comment

The Manchester Pie Factory used both Historic Credits and Tax Abatement to reduce both development cost and ongoing ownership expense

The tax abatement program that was put into place in the City of Richmond in the 1990′s has been another lesson in incentivized urban renewal that has, for the most part, worked quite well.

The abatement program effectively says that improvements made to qualified properties are not taxed for a period of time…usually anywhere from 10-15 years…depending on the property type and use as well as when the property renovation was completed and put into the program.

While there are other facets to the program that govern how the abatement is actually computed, it is best understood as a program that reduces the taxable value of a property by the value of the improvements made.  In other words, the net effect is that the City continues to tax the property as if it has not been improved.  This credit is attached to the property and not the individual who completed the improvement so that if a property is sold prior to the expiration of the abatement, the remaining abatement passes to the new owner.

As an example, if a property was worth $500,000 prior to being improved and worth $800,000 after the renovation or addition, the City would issue an abatement credit of $300,000 making the net taxable real estate amount $500,000.  At the city tax rate of 1.2% and figuring a 10-year abatement, the value of the abatement in actual savings would be $60,000.

That is pretty powerful.

The overall goal is to create a situation where someone is not ‘dis-incentivized’ to improve their property.  By creating lower costs of ownership for residents from a real estate perspective, additional revenues can be generated in sales and meal taxes and higher values of real estate in the aggregate.  This abatement program is especially effective in creating scenarios where vacant buildings were brought to life and are now filled with multiple tenants or owners all eating out, buying groceries and other items and increasing the vibrancy of the revitalized areas.

The Abatement program works hand in hand with the Historic Tax Credit Programs to increase the likelihood that abandoned structures are renovated.

One criticism of the abatement program is that it is only applicable to existing structures and not vacant land.  Between HTC’s and Abatement, the overall cost of new construction compared to heavily incentivized renovation of old structures is arguably prohibitive.  There has been some talk of an abatement program for new construction, but as of now, only existing structures qualify.

Filed Under: Downtown, Financing, Real Estate Taxes Tagged With: , ,

Buying for the VCU Student

September 4, 2011 By Leave a Comment

The TriBeCa Brownstones were built on land close to VCU and many were purchased by a parent for their child as a dorm alternative.

Buying a Dorm

I would like to offer the following debate to the parents of VCU students and their Medical School counterparts who are coming to Richmond this summer (or who have already arrived) and who need to decide whether to buy or rent a home near the VCU or MCV Campus.

You should buy a house or condo.

Now I understand that my position on this is not without bias. I am a Realtor who sells a lot of property in and around both the VCU Campus and the MCV/VCU Health Systems Campus. It benefits me when you buy. It does not really benefit me when you rent. I am now done disclaiming my conflict of interest.

That being said, it does not mean that I am wrong.

I am not going to give you the rent vs. buy calculator argument because we can all tweak the numbers until we can get it to show what we want it to. Depending on inflation and appreciation and tax effects, I can get one of those things to spew out some amazing numbers. Those are interesting tools and they have their place. This is not a debate for the rent vs. buy calculator.

My argument is more macro in nature and relates to the following set of circumstances:

  • Prices are down 20-30% depending on your market and asset type
  • Interest rates are being held down (somewhat artificially) by the Fed and are still hovering around 5%.
  • College tuition and college room and board is going up despite the rest of the economic world moving the other direction.

Renting a property for roughly $1.30 per SF per month (which translates to about $1,200-1,400/mo for the typical 2-bedroom apartment in City of Richmond in or around the VCU campus) or buying a property for about $190-210 per square foot yields about the same monthly cash payment at the end of the day.

Which one gives you some upside? It is pretty obvious that buying has the promise of upside.

I know that the counter argument is simply that many are not sure that the pricing declines behind us.

The facts are as follows:

  • On January 1 2009 there were over 400 condos for sale in Richmond, VA
  • On January 1 2010 there were less than 200 condos for sale in Richmond, VA
  • On January 1 2011 there were still roughly 200 condos on the market in Richmond, VA.
  • There is no new projects in the pipeline that offer “for sale” product coming on-line in 2010 or 2011 that would skew those numbers

Life, at least financial life is about managing/pricing/understanding risk. Betting large sums of money on risky endeavors with no upside is not smart. Betting medium sums of money with a low cost-of-capital in a market that has balanced itself with no competition coming on line sounds like a pretty decent bet to me.

Don’t let the national media scare you off. While extremism and negativity sells, I have yet to see report on the college-driven housing market on 60 Minutes. As a matter of a fact, the student housing market is one of the healthiest housing sectors in the market and owning a home that is underpinned by a rental option to students is a way to remove a great deal of risk from the equation.

Filed Under: Condos, Financing, Market Values, Student Housing Tagged With: ,

Condo Finance — Let’s Play Fair

September 4, 2011 By Leave a Comment

Here is an article I wrote a while back talking about how the current state of condo finance was really hurting urban housing.  It is still a huge issue and until it is addressed, we really are influencing decision making about housing in a negative way.  It also got me an audience with Eric Cantor (well sort of, see the RTD article here….)

Sitting in Traffic with Fannie and Freddie

As development and housing reel from the lack of credit available right now, the fallout is all around us. We know about foreclosure. We know about short sales. We know about property values re-adjusting severely and people being trapped in their homes. This is a problem, for sure, but it can and will be solved by a balancing of supply and demand. It is already getting better….marginally….but better.

Where we go from here is the issue that is more important. The new world of lending is pretty much DIRECTLY AT ODDS with the things that will set us free from the larger mess we are in.

Do tell…..

IF we are trying to be greener AND we are trying to reduce out dependence on foreign oil AND we are trying to reduce our carbon footprints AND we are trying to retool out transportation systems THEN WHY ARE WE PUNISHING URBAN DEVELOPMENT?

There is no way to build with any density other than to build vertically. Period.

Take, for example, any multi-family building of 3-5 stories (or any height, for that matter) built in any urban area. The building can be an apartment building with no problem. But if there is to ownership, we got a problem.

The only way that any vertical structure can have individual ownership is condominium ownership. There is no other way (and do not say co-op, it is even more convoluted.)

Right now, there condominium lending environment is ridiculous. The requirements put onto condo lending call for unrealistic “pre-sold” requirements, interest rate add-ons, lower loan-to-values, a maximum number of investor owned units AND condominium dues are counted against qualifying ratios. Bottom line, is you need to make more money, have more cash to put down and only purchase in condo projects that have a large portion of units already sold.

I could MAYBE stomach these requirements if the same set of rules were applied to single family housing, but they are not. There is not a pre-sold requirement in any single family neighborhood. There is not a check of investor owned homes in any single family neighborhood. There is not an “add-on” to the interest rate and the maximum loan to value is 5% greater than condominiums.

This is the kicker…condo dues typically contain some utility costs and a repair reserve in the budget. This is not accounted for in single family loan underwriting.

It is akin to saying that single family homes do not require repairs and the owners have the option of using or not using water and sewer.

It is not fair. And it is just plain wrong.

If someone chooses to live in their downtown OR wishes to have a space that does not have a yard to maintain, then they should be able to choose to live in that environment without penalty. The current rules say otherwise.

Fannie Mae and Freddy Mac have spoken and they would prefer you live in the suburbs.

See you in traffic.

Article Source: http://EzineArticles.com/3519249

Filed Under: Condos, Downtown, Financing, Market Values Tagged With: , ,