Guest Speaker John Dingeman: Expert Appraisal Discussion

Caeli Ridge hosted this episode on 5/16/2023

Guest Speaker John Dingeman with Class Valuation Appraisers was on the show today discussing with Caeli and the community his expert knowledge of appraising property, and how to overall understand an appraisal as it relates to investment type properties.

John ran us through some scenarios and showed us how to read and interpret the 1004. Open Discussion and Q&A to follow with John and Caeli.

Check out the video with the screen share and the documentation in the Community.

You can join these live each week by following this link to join the call:
https://community.ridgelendinggroup.com/events/live-with-caeli-each-tuesday-beginning-at-430-pm-et/list

As always, give Ridge Lending Group a call if you have any questions at
855-747-4343 or email us at info@RidgeLendingGroup.com

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Pretty

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Karlie Libby: welcome everybody to calling all investors. We have

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Karlie Libby: Caeli Ridge here. We're here every Tuesday, 1 30 Pm. Pacific, or 30 Pm. Eastern standard time. My name is Karlie.

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Karlie Libby: and I would like to welcome John

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Karlie Libby: Dingeman here today as well with us as our guest speaker. So thank you so much for joining us and everyone for being here today. I'm gonna hand it over to Caeli to do more of an introduction of John, and then we'll get started on today's call. So

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Karlie Libby: go for it, Caeli. Thank you so much. Thank you. Thank you. Ms. Karlie. Hey, Gang

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CAELI RIDGE: so good to see you. I know that it's been a couple of weeks. You'll notice that there's a new face here with us the lovely Carly Libby, who is my right and left hand Most days she is going to be taking over the capable shoes of Larry Bailey going forward. So you'll get to know her

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CAELI RIDGE: a little bit more as the weeks go on, she's new to doing all of this. So we're going to give her all kinds of latitude and figuring out her own style. So thank you, Karlie. And then real quickly. Guys a couple of housekeeping things. I know that i'm gonna kind of stall here for a minute, because I know that we usually have

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CAELI RIDGE: people that log on in the first few minutes. So I do want to share with you guys something I've got an announcement, and it's something of kind of a. It's a little bit awkward, some sad news just, but it's important that I I give you this information to set expectations for the coming weeks. We had an unexpected death in the family recently, and as a result, through May.

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CAELI RIDGE: the Tuesdays with me are going to be pre recorded the way they have been the last few weeks. I would love anybody here right now. I will put a blast out, too. If you guys have topics of things that you want to hear about

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CAELI RIDGE: updates on whatever it is. You guys know that this this is the collaborative thing. Please email me directly. C. Ridge at ridge-winning group.com. You can email info@refundinggroupgroup.com You can go to the community. Anything that is pertinent to you. It really doesn't matter if it's if it's lending or not

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CAELI RIDGE: real estate investing centered let me know and i'll do my best to speak on that those pre-recorded

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CAELI RIDGE: videos for the next couple of Tuesdays, or be gonna be what you see through the rest of May I know that was that's kind of awkward guys. Sorry, but anyway, that is what that is, and then we'll be back in in the swing of things in June.

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CAELI RIDGE: Okay, so let's kick this off. We've got our guest speaker here, John Digman, I am so so excited about this, and I I hope I I think we're going to start seeing a lot more. People join us here this this afternoon.

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CAELI RIDGE: This one I'm. Particularly jazzed about because we don't have a lot of guest speakers, or we haven't up until now. But this one, I think, is timely on. We get a lot of questions

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CAELI RIDGE: about appraisal in general. So, Mr. John, I did a little bit of sleuth undercover work, and I found what I believe to be somebody that is going to be super confident and capable of kind of giving us some background, information, kind of back end knowledge.

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CAELI RIDGE: and a look under the hood, as I like to say about the real estate. So let me introduce him properly. I've got a little bio here. I'm going to read for you guys.

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CAELI RIDGE: Mr. John Dig, when he is a chief appraiser. He's responsible for quality controlling compliance. This includes appraisal, escalation, vendor, quality, control, client escalations and mandatory reporting. All of that may or may not mean anything to you. Guys. It's just that his credentials

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CAELI RIDGE: speak for themselves. From my my point of view, he's a certified residential appraiser in 11 states. a registered property tax agent in Arizona, and a qualifying and continuing education instructor for multiple course providers in our industry. John is the past president of the National Association of Crazers and the coalition of a Arizona appraisers.

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CAELI RIDGE: He's also served on several boards, including Arizona Board of Manufactured Housing Phoenix Village Planning Committee Homeowners Association and charitable Organization Supporting Foster Children in Arizona called Arizona, Helping hands. Please welcome Mr. John Digman. He is going to be giving us the overview of

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CAELI RIDGE: what is involved in residential real estate appraising, and i'm going to start with asking him a question. I have a few that i'm going to ask. He's got a deck that he's going to go through. But my first question for you, John, as we get started here, and then, Carly, if we turn it over to him, I think that I don't have to do anything because he's co-host he can just share screen. Okay.

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CAELI RIDGE: John, My first question for you and this is one that I am personally interested in.

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CAELI RIDGE: How is it that we could have 3 different appraisers

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CAELI RIDGE: appraising the same property, and come up with 3 different, wildly different or largely different valuation? Right 100,100, 5,000, 200,000whatever it is. How is that possible? How does that work?

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John Dingeman: Yeah, that's a that's a great question. And it can be extremely frustrating if you're a reader of the appraisal or the user of an appraisal right in that regard. So remember, they are an opinion opinion of value, and just because they're disparate doesn't mean that they're incorrect either. So think of it. From this perspective number one

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John Dingeman: individual appraisers are measuring properties. One of the reasons why Fanny May, I announced a a year ago in April that they were adopting the Anzi standard for measurements was so that appraisers would start to use the same number. In other words, if 2 appraisers measure a property differently, we're likely to come up with different numbers.

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John Dingeman: The second is, we see properly properties differently, and Fanny and Freddy, who who designed the Uad format, which included the condition, ratings, c. 1 2 3 4 5, and 6.

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John Dingeman: They have been at conferences speaking to appraisers of the last 4 or 5 years about the

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John Dingeman: lack of uniformity, as it relates to the definitions, so appraisers have for the lack of a bed for shale. They've capitulated to underwriters. They like to use c. 3 as average. That was never the intent. And again, If you have appraisers that are using

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John Dingeman: different condition, ratings see the property differently. Measure the property differently. You're going to come up with different results, and then the larger the the value, I suppose. So if you start thinking multi 1 million dollar properties and and you have a 2 million dollar versus a 2.5 or a 3 million.

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John Dingeman: It doesn't mean one of them is wrong, or both of them are wrong. It it means they're leveraging, likely, and we'll talk about this specific comparables, and that's where they're focusing in their energy and efforts on and developing that opinion of value.

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John Dingeman: What you'd like to see is is some consensus between the 2. So we call that a reconciliation where we go back to the appraisers, and we say, hey.

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John Dingeman: you're missing a fireplace. You're not. You're not including these sales you are, and you start asking them to consider additional information, make corrections.

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John Dingeman: and then and then maybe they come to an agreement and one quick example Taylor would be. I had 2 appraisers that were nearly a 1 million dollars, part in Beverly Hills

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John Dingeman: in the 90210, zip code in California.

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John Dingeman: and the appraisers were using different comps. Now, what had happened is the appraiser that was hit? The lower end had reached out to the buyers agent, who explained everything that was wrong with this property. Think Tom Hanks, Shelley long the money pit right? The

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John Dingeman: other appraiser that was on the high End had spoken to the listing agent, who said, I don't know why you're calling me it's a moving, ready condition. It's perfectly fine, right?

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John Dingeman: So the comps were based on that selection, and the other appraiser use comps that needed repairs and updating. And so, once the appraiser who is at 3 reached out to the buyers agent, and better understood those repairs and the overall condition of the property.

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John Dingeman: Then those other sales comparables that were used, made more sense, and that value came down. Now it didn't come down to 2 million. But it came pretty close.

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CAELI RIDGE: So this brings up a a Follow up question, John, before you get into to your your presentation

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CAELI RIDGE: as the consumer. And maybe this leads into the other question that I have for you as the consumer, what is what is our recourse? How do we reconcile with this? I mean, we've got the option of rebuttal, and and you tell me if I'm jumping ahead and you want to handle this later. But in my personal experience the percentage of times that we have gone in

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CAELI RIDGE: to rebut an and about a value or an appraisal. The likelihood of success, even by a dollar, is extremely low.

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CAELI RIDGE: So as a consumer, what are our recourse when this happens?

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John Dingeman: Well, let's cover the recourse as we go through the Is this the percentage? First of all, the percentage of reconsideration and value, or you'll hear me refer to it as Rob that are submitted is relatively low today. I mean it's in the

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John Dingeman: 2 of all appraisals completed, receive an Rov request. That's not a lot right. What I will tell you, is once in our Ov is submitted.

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John Dingeman: the chance of success depending on whether it's a refinance or a purchase is different, and that range is somewhere between 15 and 2025%

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John Dingeman: of the time they change. Now, the change is usually rather rather small. and I think you're less likely to see changes in reports today because of the amount of scrutiny and number of touches and appraisal sees today. So I think the praise are doing overall a better job of getting that number right.

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John Dingeman: knowing that they have a Qc. Department and an appraisal management company looking at it. They have a processor in a loan originator, maybe some agents and underwriter, and then post close, and so on and so on, along with ultimately Fanny and Freddie. And they know these reports are being submitted to Fanny, Freddy, Fh. etc., through a portal

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John Dingeman: so they can't be taken away either. Right there they exist right. The record is there, and and it it will never go away. Yeah, that's a good point.

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CAELI RIDGE: You know. You touched on something that that triggered. I wanted to mention to all of our listeners here today, dispelling some myth about the lender, appraiser relationship. I meant to get to this earlier guys so real quickly.

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CAELI RIDGE: It's important to recap and a lot of you over the last year and a half have heard me talk about this.

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CAELI RIDGE: based on, you know, 2,008, 2,009, the housing and lending crash, the sweeping, overhaul, sweeping legislation, legislative changes to finance, and in particular, in this case appraisal one of the biggest changes is that the lender me us

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CAELI RIDGE: are not a are not allowed to have any direct contact with the individual appraiser a lot so many times, and and not just, not necessarily about Ridge, but I hear people talk about. You know you can't use that lender or this Lander, because they use bad appraisers. Well, the truth is is that

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CAELI RIDGE: we don't even get to speak to the appraiser, let alone choose who the appraiser is going to be. It's a random selection. There's very specific rules and regs within newspap H back, etc. So just fyi. When we start talking about the appraiser work, the lender

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CAELI RIDGE: has no play, or even say in and what is chosen, and how all of that works. So okay, John, you're up, man. Let's see your stuff.

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John Dingeman: All right. Let's go through it, and just to set the stage for everyone again. Let me. I'm looking at a couple of different screens, but i'm gonna use some of this. I I I apologize if I go through it to quickly. It's meant to be conversational, at least create talking points, Shaley, as we discussed earlier.

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John Dingeman: So let me just cover valuation insights, appraisal. My organization will touch on a couple of different topics, and of course get to the reconsideration of value also.

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John Dingeman: So it's important is, you're looking at a a property understanding what contributes to value. There's an acronym for that. I use dust. I know that others have others, but it's demand, utility, supply, and transferability. In other words, I look at my daughter and my son in law, who started a family. They were in a small house

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John Dingeman: and by themselves one bedroom right? And so, as they start this family, they have pets and so on. Well, gee! We need a house right. We need to get out of this department. So what are they looking for?

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John Dingeman: Well, it also has to meet their utility demands. If, again, if it's a one bedroom house that doesn't help them if it's 2, All right. Well, we're gonna have to start a family. We think we're gonna have at least 2 kids. So let's go with a 3 bedroom house. So 2 bedrooms are off the table.

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John Dingeman: and then, of course, 2, but 3 bedroom homes have to be available to them and through sale. So they really like a house. But it turns out it's in an age restricted community. My wife and I actually just looked at some houses this past weekend, and we said, do you have any other models available? They said, oh, yeah, just across the street, and they said, Wait a minute. Thankfully

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John Dingeman: they said, i'm not sure you qualify. I don't think you're 55, I said. Thank God, you said that I am not 55, not yet, and so so we were not eligible. So it couldn't have been sold to us if we wanted it to right, but understanding those those

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John Dingeman: for instruments that that contribute to value is important.

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John Dingeman: You mentioned about selection of appraiser. It's important. The appraiser, by the way, is independent and partial objective. That is, by definition, Who the appraiser is. It is the complete opposite of the users of appraisal services, an agent, for example, a homeowner. They are

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John Dingeman: the opposite. They are dependent, partial, and they are not objective right. The appraisal is the active act or process of developing an opinion of value on real property, and I highlighted opinion, Jaylee, because that's exactly what it is now. It should be an opinion born out of facts, but nonetheless, that's the case

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John Dingeman: Now you mentioned about communicating with the appraiser.

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John Dingeman: And so, when you look at the appraiser independence requirements that are outlined in in the Federal registry, this can look pretty daunting and really at the end of the day, what it's telling you is you can't do things

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John Dingeman: to influence the appraiser right. You can't threaten the appraiser that you're gonna send them to the board, or you're not gonna pay him, or they need to get this value or or else right. And that's really what the appraiser independence. Requirements are about

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John Dingeman: it. Doesn't restrict you entirely from asking the appraiser to do a few things, and that same statute that's in code says, Look a person. And, by the way, look at the entities in the top paragraph, Jaylee.

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John Dingeman: It is the lender, the broker, the banker, the real estate broker, the Amc. And employee of the Anc. The consumer.

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John Dingeman: or any other person with an interest in that real estate transaction can do these things right. That's a lot of people and entities, in my opinion.

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John Dingeman: and real quickly, John am. C. For those of you that Aren't, familiar with that it's Appraisal Management Company, and that is the third party in between us as the lender and the actual actual appraiser that takes the order. So just Fyi: Sorry, John.

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John Dingeman: No, and that's perfect, and that's where I come from. Class valuation is an appraisal management company. So the things that you can ask for consider additional and appropriate property information

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John Dingeman: provide further detail or support for the decisions that the appraiser made. For example, Chailey. Why did they make an adjustment to at this extent, and is their support for it, and then I believe the first step is actually the third, and that is to correct errors in the appraisal report. If in an Rov reconsideration value you present some possible errors. So, in other words, you miss the fireplace

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John Dingeman: as an appraiser. I've got to admit, then to myself that I might have missed something else, and and so that really starts the the tone appropriately.

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John Dingeman: So I've mentioned reconciliation of reconsideration of value, or Rov is the acronym for that i'm going to praise, or I live in a world of acronym. So I apologize. But

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John Dingeman: that should be a name that's familiar to you. The administration currently and the paved task force that was appointed by the administration is looking at ways to make the reconsideration of value process easier for users of appraisal service, particularly consumers.

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John Dingeman: and and then that they have access to this.

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John Dingeman: I look prefer when I'm sending data over for appraisers to consider that I refer to them as sales, not comparables, and they should be settled sales, so they should be closed. Not something that's active or pending.

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I wouldn't send the Mls. Print out for each of the the requested sales, not for the appraiser necessarily to consider. They should have access to them. But do point out that

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John Dingeman: maybe the Mls. Number that will help them find it easier and faster. A concise narrative, explaining why you believe that the sales that are presented are are better options for the appraiser, and also any information that you believe is incorrect.

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John Dingeman: Now, Jayley, I said, I would give you a couple of examples of things, but the first thing that I want to want everybody's attention on is just understand the tools that are front in front of you, which I think are good tools if you use them, and you really filter through them. But things like Zillow Redfin. Truly, at Realtor Com they all offer a their own

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John Dingeman: opinion, a value for the lack of better word. They're an estimate right. The red fin estimate is estimate whatever.

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John Dingeman: I'm gonna take you through 2 scenarios, but this is an easy one is a tract home and a subdivision, and you can see here, depending on which one of those free services you pull up.

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John Dingeman: You have a range between 3, 45 and 375 right? And so, Chile, I think that's a disparate number that you would even have

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John Dingeman: take exception to, and certainly as a consumer. If I was looking at selling this house, I'm. Going with the agent who said, 3, 75, not the 3, 45, and if it's somewhere in between.

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John Dingeman: that property is either going to sit on 2 too long on the market, or i'm going to sell it for less than market value, right?

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John Dingeman: And so that is an easy one, because there's a lot of market data in a subdivision in in a metro area like Phoenix. But now consider a more rural Stockholm, and in this one is outside of Mobile, Kentucky. Now

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John Dingeman: this has a much larger variance at almost 32, and you're looking at 296 versus 391 just in between Zillow and Redvin. Now

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John Dingeman: I suspect that all of them are wrong, because they don't know a lot about this property. You might be surprised to know that this has 2 bedrooms in a bath on the upper level.

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John Dingeman: There's dormers on the back side of this property there is a walk out fully finished basement, and then to the left of it, which is not pictured here, and not captured by the local assessor is a

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John Dingeman: permitted for car garage with the workshop in an accessory dwelling unit above it. and I believe all of those probably contribute to value. So all of those estimates of value are probably considerably low.

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John Dingeman: And again, you're looking for an appraiser to help you along. But if you're relying solely on these. It can be a bit of a challenge.

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John Dingeman: So

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John Dingeman: i'm gonna walk you through. I know that you're not in Arizona, but I'm going to use this as an example, and this is a typical appraisal that we would see the subject. Property is a pretty standard 3 bedroom to Bath house at 2165 square feet, and then from the appraiser we would typically see these kinds of sales. Now.

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John Dingeman: we have a general tendency. Those of us in the industry, reading the report. We're looking at the sales price which you see across the top line there at 4, 84, 75, 5, 65 and 505.

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John Dingeman: Remember the appraiser unlike an Avm. So Red Fin and Zillow, and truly a team, they're really taking the square footage.

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John Dingeman: and they're multiplying against a cma. The Median price per square foot.

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John Dingeman: as you can see here in a sales comparable grid for an appraisal. There's about 21 different characteristics that the appraiser is measuring market behavior with

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John Dingeman: and and adjusting for, and so remember that sales price of 480 might be different after adjustment. So always look to the bottom line, which is your gross, adjusted sales price. So

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John Dingeman: I know what we would typically here is. I don't know how it came in around the 525. Mark it, it, You know we have the sale at 565. That would be one.

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John Dingeman: What we can see here is after adjustments. We have a range that's pretty tight. In fact, we have a model match to the subject that's sold for 480, but based on market conditions at that time, and the fact that it didn't have a pool etc. it adjusted upwards to about 5 22

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John Dingeman: now chilling team. This is the location map. I would always look at these trying to figure out where they're located at in comparison to the subject property. That would be pretty typical, and they certainly, to the naked eye they look like they're all reasonable substitutions for the subject property.

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John Dingeman: But what we would see in an Rov. And just keep this in mind. It's not all, but typically what we would see is there's deployment because the sales that were considered were these sales considered for pricing.

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John Dingeman: You have a sales price at 6, 24, 6, 34, and 6, 85 so again.

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John Dingeman: How can we be so disparate from the 522525 mark.

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John Dingeman: Well, we can see, after adjustments based on these properties, that they also adjust to that 5, 22 to 5, 27 range. So, chile. This is a great example of one appraiser could come in at the 5, 25 range, and if somebody else use these sales. They probably be in the 6 40 range

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John Dingeman: right, and that's a big difference for that price point.

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John Dingeman: Now, what we can see is an appraiser for performing our due diligence is, you see, the blue sales where the original, the 3 sales for those considered in the Ro there is a dotted line that marks a separation between builders.

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John Dingeman: and while it's all in the same master Plan community, they are different models, and in properties altogether. In fact, the Median square footage of the homes south of that dotted line are 700 square feet larger than those above it.

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John Dingeman: and the Median sales price is a 100 5,000 49,000greater south of that line. So when you look at those we know, then there's a location, difference. And so we would have to capture that.

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John Dingeman: I hope that makes a little bit of sense for folks. When you are evaluating data, take a closer look, look for those model matches to the subject. See if those are meaningful. How recent were they sold? And then I've always, I can tell you.

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John Dingeman: I click on the links to go through the photographs. Sometimes it's easier to tell what a property is not worth than it is to see what it is worth, and what I mean by that is, if I look through the photographs, and I look through the features of the subject property

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John Dingeman: and let's just say, for example, I don't see a pool.

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John Dingeman: But then I go into each of the listings, and they all have pools. Well, I know we don't have one, so it should be something less than if I start looking at properties that are bigger, larger, and square footage, with more room counts and back counts, and they sold for higher. I would expect to be something less than and vice versa. If that makes sense.

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CAELI RIDGE: Yeah, I got a quick follow up question there. So you know, as the layman on this side of things we know, and what what i'm taking away. A lot of what you've said is that we can't just take the price per square foot. If we do that more often than not, we're gonna we're gonna be either very disappointed or grossly surprised. Right? This quite the price per square foot really is not the appropriate way

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CAELI RIDGE: to value any, any any property. The baseline i'm. Obviously the closer the better the newer the better. But is there kind of an easier checklist, and I know you're kind of going through it here. But for them to take notes and say, here are some of the primary things that we want to be looking for like the age

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CAELI RIDGE: I know square footage plays a role, but my understanding is more than anything. It's got to be like kind.

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CAELI RIDGE: right i'll i'll I'll use an example of something that came up recently with a daylight ranch, and there weren't any daylight ranch Comp. Anywhere.

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CAELI RIDGE: So the valuation of that property, the the homeowner and everybody always think they live in the mansion. Right, you guys get that. I see it every day. More often than not. You think you're going to get a higher valuation. You end up getting. But the like kind piece

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CAELI RIDGE: is something that really is what they need to be paying most attention to. Would that be accurate?

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John Dingeman: Yeah, I mean, you really, wanna you know, there's a good exercise. I go through jail as an appraiser. I called the real estate agents, and when i'm looking at a specific subdivision in this case, in this subdivision here in the Peoria Era area. I would actually go into the Mls. I'd. I'd notice that

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John Dingeman: the agents that farm the market right? So those are the market participants. I'm most interested in.

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John Dingeman: They're gonna tell you what's driving value right? And so if i'm trying to figure out, hey, this is so weird it's a golf course community, and it doesn't look like there's a price difference between golf course lots and those that are not on a golf course right? Well, if I call the market participants, and they go

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John Dingeman: in response to a question. They say that's absolutely true. We never see it. Buyers could care last. Well, then, that makes sense to me. There's no adjustment warranted, but they're gonna tell me what a particular buyer a typical buyer for that property is going to look for. So what is important to them?

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John Dingeman: What you're talking about is we want the least amount of adjustments. Obviously, if you have a complete model match sold at the same time Period didn't require any adjustments. That is our best sale to compare to right. The more adjustments you see through these adjustment columns.

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John Dingeman: That just means they're more dissimilar to the subject property, and and so less likely a comparable right. And you see that in this third comp on seventieth, drive

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John Dingeman: now from a price per square footage.

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John Dingeman: I'd like to go through this exercise when I go to a real estate broker's office. We're usually in a bullpin jail, and so i'll say something like, Does anybody have a cma on your desk? And I I don't want somebody to go produce one. I want them to go pull one that's on sitting on their desk. Now they hand it to me, and I start reading through the price for square floods.

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John Dingeman: and when you have 221218277260.

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John Dingeman: If those works more similar, and the price for square foot method worked.

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John Dingeman: then that number would be closer. And so it just starts to sound, or at least people start reading them and understanding just how different they are. The typical buyer Doesn't. Just consider square footage to your point.

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John Dingeman: They're considering other things. Gee, what is it that I need? I don't care if it's 4 or 3 bedrooms, for example, if they're the same room, count one as a family room that I can convert right or a den?

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John Dingeman: Do I need a pool, or do I want to pull. Do I need a third car, garage or not. And and so these things all influence the typical buyer, and that is what the appraiser is trying to measure is the behavior of the typical buyer for that market.

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CAELI RIDGE: How does any of that change when? Because you know that the the group that we're talking to. We are investors.

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CAELI RIDGE: So those comments there. How does that change when the buyer is an investor and they're looking at? I guess, in similar ways who they're going to be renting to who their tenants is going to be, but that doesn't change things from your point of view until we get into more of the rehab

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CAELI RIDGE: part of the conversation. Right?

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John Dingeman: Yeah, I mean I I I think i'm going to investment properties next. and and I know we're running short on time. But for investment properties, Remember, the buyer is, is

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John Dingeman: is behaving differently right? The If it's an investment property they're looking for a return on their investment. They're looking for the maximum amount of rent that they can collect on on a monthly basis, etc., and then obviously resell, is important, depending on when they're going to ultimately sell that property, if at all

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John Dingeman: right versus a buyer is looking for.

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John Dingeman: I need a property that I can invest in. I don't want it to go down in value, but I need to live in it. There is a value in use in that regard, so you have to measure behavior differently. So if i'm looking at a a an investment property, and you're looking to buy one, it's a duplex, a 3 plex, a fourplex whatever it is.

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John Dingeman: then i'm looking for properties that are being purchased for the same reason, and you can use a single family like that, too. Right? So if Jayle, you're buying a single family home to rent it out.

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John Dingeman: and i'm buying to live in it.

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John Dingeman: I'm. Probably if i'm doing an appraisal on your property. I want to look at more properties that have been recently sold and ultimately rented, and that is where that rent schedule comes in that you asked or provided me a a a version of it. And so the same principle applies. Here

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John Dingeman: you're looking for the most recent leases. You're looking for an adjusted monthly rent, and then ultimately the indicated monthly market rent. After adjustments.

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John Dingeman: And for investors They're less focused on things like.

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John Dingeman: I mean, they might be focused on condition and things of that nature, but less less considerate of things like lot, size, etc. They may be more focused on what's the root Count right, particularly if you think like a a duplex right? Well, Gee! If

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John Dingeman: if I have a 3 bedroom and a 2 bedroom duplex.

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John Dingeman: will those rent for more than if I have a duplex. That's 2 studios. And if I believe that's the case, then that's going to be my

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John Dingeman: my target property, and that's something that i'm going to be looking for. But you can see the same kinds of things. Here again

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John Dingeman: I mentioned those in investment property. This is a single family. It's not a duplex or a triplex, but but it's there

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John Dingeman: and then you have the whole other discussion around investment properties that are short term rentals. That is also a very different market. There is.

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John Dingeman: That is what we would call

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John Dingeman: business income. I i'm not suggesting it's a commercial property by any stretch, but it is different than passive income which the Irs says pass. Some income would be related to at least least would be 10 in occupancy of 30 days or more

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John Dingeman: an Airbnb or the Rbo, something of that nature short to rental to, or would not fall under that category, and then they would be considered business income. So we would. We'd be looking at a very different spreadsheet for those properties.

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CAELI RIDGE: And so when so, I I think there's probably a lot of interest in that, and maybe just it, for if if we have a few more minutes maybe get into that just a little bit, maybe we can take a few of the questions, if that's okay, John.

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CAELI RIDGE: But the short-term rental income in terms of how you guys are going to value what the monthly average income is, can. Is that what this is? You're going to touch on that?

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John Dingeman: Yeah, I I just got a couple. So

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John Dingeman: so there is some policy changes that were introduced by the Gsts in 2,018, and what they allowed was the income to be used for qualification, purposes, right? And so for many lenders. They looked at it as oh, well, then, that has to show up on a 1007 of the 1007 being this form.

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John Dingeman: Well, the 1007 was never designed for short-term rentals. It is to develop an opinion of market rent which is different than short term rental income, and it's based on leases not not something less than so. When you really dig deeper. The short term rental income

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John Dingeman: can be supported by things like

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John Dingeman: tax history through a 1004 schedule E, for example, on their personal tax returns it. It could be the result of

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John Dingeman: a rental history over the last year or 2, and it could be off of other reports like an air DNA rentalizer, or something like that. But so, John, you i'm so sorry to interrupt. I want to make sure I'm clear on this, so you will take as an appraiser. Let's say it's a refinance, for example, and this property has been used as a short term rental.

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CAELI RIDGE: you will allow us to submit. Last year's filed Schedule E:

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John Dingeman: No. You would use that for qualification purposes. The appraiser really is stuck. Most appraisers are not equipped to

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John Dingeman: to develop an opinion of of a going concern value, or or better, I guess phrase they wouldn't report on short term rental income.

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John Dingeman: They don't have the

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John Dingeman: the knowledge base to do it, and they don't have access to the data. There's so much going on with the short term rental jay you think of like if you're a super host and a 4 star versus a 3 star.

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John Dingeman: and then that daily rate changes so wildly. You just take Peoria. Go back to the house that I shared with you

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John Dingeman: and Peoria. The rental market is around 2,200 for a specific time period. But if I went and found, according to air DNA, the short term rentals, they were 3,500.

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John Dingeman: Now there was a 40%. They can see rate when they were short-term rentals versus somewhere around a a 5% vacancy rate for leases, right? So

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John Dingeman: all of those things factor in. So the best thing you can do is come prepared.

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John Dingeman: If you are looking for search and rental and looking for qualification is for as much documentation to support the income that they're generating through that property

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CAELI RIDGE: right? Because I I've seen them there. There are some i'm, we we do get pushback. Sometimes we're ordering an appraiser appraisal for short term rental, and we need that income statement

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CAELI RIDGE: there a lot of times. The appraisers will say No, i'm not doing that. I'm not. I don't have the the either the skill set or the information, or whatever. But then there's others that are accepting those orders, and they are producing. So can you talk to that.

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John Dingeman: So I a again remember going back to 2,018 right. That's the changes. And so for many appraisers. They just thought, this is easy. The market the market rent right. The market is short-term rentals Therefore i'm just gonna find the other short term rentals.

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John Dingeman: I'm going to take that number multiply by 30. There's my monthly rent right. That is not an accurate way to to calculate that, but it was easy the path of least resistance. That's what they're asking for. That's what i'll do.

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John Dingeman: What you see today? Is some awareness around short-term rentals. You're finding Frasers are getting themselves in trouble with their State regulators being disciplined by their states. Their you know providers can't defend them, but they don't have the expertise so the competency to do what's being asked.

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John Dingeman: And then they're really writing what we would call a misleading report. Remember, market rent is based on leases. And so if you're reporting the Sdr. Income, i'll give you an example an appraiser. I just saw it.

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John Dingeman: He gave a $14,000 a month market rent for a property in Wisconsin.

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John Dingeman: and when we called the appraiser he said, Well, it's rented out weekly.

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John Dingeman: and it's rented out pretty much from Memorial Day to Labor Day

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John Dingeman: with a couple of days in the fall for hunting season and a couple of weekends in the winter for ice fishing. and I said, but you just gave it $14,000 of income per month. That was the market rent.

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John Dingeman: Well, if you, if you multiply the weekly rate times 4, and multiply that by 12, and then divide by or whatever right that's the

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John Dingeman: That's not an accurate representation of the income that that property draws right. They certainly on their tax returns. We're not generating

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John Dingeman: a $160,000 in income.

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CAELI RIDGE: Okay. So is there any final thought on the short term rental? Because it's, you know a a lot of investors are are making sure that they've got balanced portfolios, and that includes one or 2 or more short term

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CAELI RIDGE: rental properties, and as it relates to qualifying with some of that income, is there any kind of

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CAELI RIDGE: over reaching?

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John Dingeman: I would just make sure you have, you know, if they have proof of income. If you, if and see what the lender is willing to accept to prove income, we have some lenders that say, we just need. We need the 1007 to reflect leases and market rent, and then we need an air. DNA, Rentalizer report, for example, to Jet, to demonstrate marker rent, or we can use the last year of tax returns or 2 years.

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John Dingeman: or some bank statements that show the income that's being generated from that that str Remember, the strs are really a business ownership right? Because they don't generally transfer with the property.

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John Dingeman: and they don't always stay with the property. It's got a friend who is debating. He has an str in Nashville. He is the first owner he can operate. It is Str. If he sells it.

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John Dingeman: The buyer can apply for a permit, and they can operate as an str if they ever sell it, it can never be operated as an str again.

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John Dingeman: and those are the rules in that city or county.

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John Dingeman: That buyer is going to have to buy it. Taylor. Right? I think we all would all agree on this call for the long haul.

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John Dingeman: So what I would share with you guys, when we're talking about short term rental income, and what I tell most of of our clients about that, If the need for the income is necessary for them to qualify in the debt to income ratio, space is

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CAELI RIDGE: first and foremost. Let's just start by baselining what a long-term

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CAELI RIDGE: rental income would look like on the appraisal, and if 75% of that number is enough.

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CAELI RIDGE: let's just call it that's more than enough for good. We don't need to mess with it. Otherwise we can start digging into what options we have, because John's right. We are noticing a lot more that the investors that we're selling our mortgage back securities to are allowing us more opportunities to provide certain documentation that will justify

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CAELI RIDGE: short term rental income, you know. He mentioned several of them a second ago. So but to start with, you guys for for your purposes, make sure that if you're buying a short term rental, and you know that your Dti is going to need at least some kind of income to offset the new mortgage payment.

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CAELI RIDGE: Get the long term estimated rental income from whatever sources that you're using now, and and we can use that as our baseline prior to getting the appraisal, of course, and if we think it's closer enough, then we're good to go and and we don't have to have too much brain damage over it. Okay. So if it's okay, John, if we have a few more minutes, your time, how we doing?

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CAELI RIDGE: I I'm: Good. I'm You guys. Okay. So let's let's go into Guys start asking your questions. Here, please let's go into a couple of questions. Here. I'm going to read Jag.

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CAELI RIDGE: Let's see. Here I was told by a lender that the value would come in. Okay, even though Rehab was still on coing, since they were sharing the expected purchase price with the appraising company, and did, even though the turnkey was not ready.

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CAELI RIDGE: Does that resonate with you? I'm not sure. I'm understanding the question. Maybe i'll have Jag unmute and ask directly, do you know what

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John Dingeman: I I i'm not tracking? I'm: Sorry. Okay, let me it. J. If you want to ask your question, let me unmute you.

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CAELI RIDGE: and you can answer. You can ask it directly, and and we'll see if we can get you an answer. Where are you, Jag?

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Jag Chadha: Hello! Thank you so much. So actually it was more of a comment. It's a it's a turnkey that I've had.

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Jag Chadha: It's been my Phd. In real estate. But when I was purchasing it I was closing at 1031,

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Jag Chadha: and the Linda said, Don't, worry the even though the rehab is

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Jag Chadha: only half a there.

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I'm pretty sure notch notch winkling. It will all come in.

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Jag Chadha: We don't know we. We generally use certain, you know.

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Jag Chadha: 2 or 3 different appraisal companies, but the

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Jag Chadha: purchase prices shared

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Jag Chadha: on whatever is given to them, I guess, to do the appraisal so generally.

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Jag Chadha: What we get back is the appraised value. So in a way that was great for me, because I had a 1031 coming. So it may, you know, put my mind that is, knowing that good. At least I can close the loan.

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But on the flip side

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Jag Chadha: that 10 Key Company did not finish its rehab for one year after. In fact, it's still done a shoddy job, so I got

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Jag Chadha: to put it politely. I got messed over pretty badly, and in a sense how the apprais has been done on what? What was actually the status at that time.

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Jag Chadha: I couldn't have closed.

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Jag Chadha: I would have had to buy something else, but I would have been saved a year of pain, so it wasn't quite a question. It was more of a comment about a process about safeguards, and

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CAELI RIDGE: I don't know any comments. I guess it was a learning experience. Yeah, very, very valuable. And i'm sure, Painful as it may have been, Jack, I I know that John John gonna have some comments, too, but based on your description. It sounds like there were some things going on there that

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CAELI RIDGE: weren't within use pap regulation. It it seems a little disjointed to me, John, what would you say about that?

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John Dingeman: So I guess it, not knowing. You know this is one of those things where I I would answer, it depends; but not knowing how the lender ordered the appraisal, did they to the appraiser completed, subject to. But those things were not repaired, and so, therefore the subject to value Wasn't.

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John Dingeman: W Wasn't. Appropriate were they supposed to appraise it, as is those kinds of things, the purchase price is always a challenge. The the Gsts have already reported multiple times. It it's, statistically speaking, that it praises are more likely to praise closer to purchase price.

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John Dingeman: Then they would be on a refinance, because the refinance they don't know what the estimated value by the consumer is it's never shared with the appraiser? And I see, Scott said, why our contract to Sales price disclosed to a

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Well.

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John Dingeman: there's a couple of reasons why we would expect the appraisers to be closer. Anyways, there there is a meeting of the minds re presumably speaking. You have a buyer and a seller in an informed market, making a decision on a a

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John Dingeman: contract price that they've agreed to. And so you'd like to think those 2 individuals got pretty close, and so the data is probably there to support that.

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John Dingeman: The

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John Dingeman: so in that regards. Were they closer to the the purchase price because of the contract was exposed? I would hope not. It should never be a target value that using that as a a target would be a would be a violation of use path.

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John Dingeman: the disclosure of contracted prices. I I believe, Scott, you're talking about in the purchase and sales contract, the appraiser having access to it, etc. That is a safeguard that I don't know the gsts and banks have always asked Pra to be the second look.

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John Dingeman: You know, if i'm an appraiser, and i'm reporting that I have a purchase price of a $100,000, and oh, by the way, I have 6 pages to a purchase and sales agreement, and there's no concessions offered.

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John Dingeman: and then the lender is looking at a 12 page purchase and sale agreement.

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John Dingeman: Why was the appraiser only provided? 6 pages zoom like those are the kinds of safeguards that they would have in place.

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John Dingeman: But the appraiser should also be analyzing that contract, and what they're really doing is also making sure things like personal property and things of that nature are not included in that transaction, at least not in the real property, right? If you're selling me a house, Taylor, for a $100,000, and it includes a. A Mr. A. A.

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John Dingeman: I don't know you name the car. It includes a new Ford escape. Well, then, really, that $100,000 is for the house and the car right? And so the

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John Dingeman: you'd want to take that into consideration. So.

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CAELI RIDGE: And as the lenders we have issues with that personal property cannot be part of Guys part of the the contract, and certainly can't be part of the the appraised value. So

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CAELI RIDGE: you know that that's gotta be if if there's something like that. I I don't know, John, how you'd feel about me saying this that goes off book. I mean it's whatever 2 people agree to outside of the contract. It's up to them.

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John Dingeman: anyway. Yeah. at the end of the day, if the real property, the real property, is the home right. So if the real property was actually worth a $100,000. Well, they got a car in exchange for for nothing. My job is to report the value of the real property. So, removing things like personal property cars or things of that nature, you see that

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John Dingeman: you know. You see things like golf course, memberships and things like that. Those those kinds of things are not part of real prep.

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CAELI RIDGE: But they'll and they'll put that stuff in contracts really, because I know that back in the day when I was scrutinizing contracts myself, we would always make sure to tell agents upfront.

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CAELI RIDGE: Personal property has no place in this contract. Get rid of it. I don't want it in my contract. It's just going to muddle things for us and and create problems, and it can. Yes, yeah.

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CAELI RIDGE: Okay, Michelle has a question. Is there best practice for looking at plus and minus percentage of square foot to compare properties?

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John Dingeman: Oh, well, that's a good one, Michelle.

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John Dingeman: I think it. You know a good appraiser is gonna back out and then refine their search. So.

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John Dingeman: generally speaking, you'd like something to be within 10, but i'll be honest with you, you know, if you're looking at a Condo and Manhattan, you know 100 square feet means a lot more than a suburban 6,000 square foot house in the Metro pack flex of Dallas right

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John Dingeman: 100 square feet on a 6,000 square foot. Home means absolutely nothing in that regard. But a 100 square feet means a lot in a

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John Dingeman: apartment in Manhattan right? So it should be within reason, and again go back to what the typical buyer is looking for.

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John Dingeman: And if you get into these exceptional homes like we talked about a little bit earlier, you know, 12510000000 homes. The individuals purchasing this homes are not purchasing, based on square footage. They're not purchasing based on room counts. They're purchasing primarily based on location of view.

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John Dingeman: Right? Right? Right?

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CAELI RIDGE: Okay. I like this one, Mr. Cooper. I this I'm interested in. Answer this, too. So the difference between an appraisal that's done. Let's say I call you and say, hey.

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CAELI RIDGE: you know I'm. Just for my own edification. I want to know what my property is worth. Can you do this appraisal for me. So the difference between that versus one that's being ordered for the purpose of a loan there shouldn't be any difference. I assume it's going to be your answer. But

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CAELI RIDGE: I I feel like maybe he's thinking that there is, or that

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John Dingeman: How would you? How would you answer that

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John Dingeman: You're correct? There should be no difference. I mean the difference should be the form. Use the 1004 that you know today that is used for mortgage financial transaction only, although we do see some appraisers using that for other types of appraisals for listings. In this example, those appraisers are generally disciplined by their State for doing that because they have specific language about lenders and mortgage financing right hard printed language that you can't remove.

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John Dingeman: That being said, the form that they could use for a listing looks almost the same, but it's going to be different, all right. That's where the difference is other than that. The process, the principles and procedures used to determine opinion of of of value on real property remain the same.

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John Dingeman: So it doesn't matter if i'm doing it for an estate, if i'm doing it for a listing appraisal. If i'm doing it for a refinance, or i'm doing it for a purchase. The process is the same.

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CAELI RIDGE: I had a follow up question to that. Oh, so as investors in particular, when there's going to be rehab, whether it's minor or it's significant, because a lot of times the Burr method right? I'm. Sure you're familiar with that that acronym by rehab rent refi.

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CAELI RIDGE: Do you think that there is value a little or a lot in them getting their own independent appraisal, which they know. And those of you who don't know this I can't use that appraisal. I have to order it myself as the lender when you come back to us for the refinance. But is there any

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CAELI RIDGE: value other than I guess? Peace of mind either way of them doing that independently, finding an appraiser in the area that

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John Dingeman: they go and get that that valuation from. Yeah, I mean, I I actually used to work with a couple of let's call them Fix and flippers, and and they would revamp their

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John Dingeman: their punch list if you will. Their improvements that they were going to use chile, and so they would just ask me. It was more of

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John Dingeman: the appraisals were, hey, if we use these materials, if we make this kind of addition. So in other words, we convert the garage to living space, right and and all that kind of stuff. So we add the square footage. What is this gonna do to the value of the property?

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John Dingeman: And then they would make a decision. I mean, sometimes I did 2 or 3 appraisals. It was, what if we just do all these upgrades? What if we do all these upgrades plus an addition? What if we just fix it cosmetically.

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John Dingeman: And then they would make a decision. Well, you know what. Let's just fix it cosmetically. That's our highest return.

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CAELI RIDGE: and then being able to use that. So let's say I mean. I don't know if you can answer this, but you kind of touched on it earlier, but they get that appraisal the last one that they did, based on the the back and forth we order as the lender the appraised goal, which is a random selection. Right? We have nothing to do with that it's done and the differences are huge.

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CAELI RIDGE: We can

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CAELI RIDGE: have that conversation guys the way that that Scott detailed it earlier. We have to look at those those specific differences, and maybe if there was something missed.

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CAELI RIDGE: and and the condition and and etc., anyway, I I don't want to be the dead horse there. There's one more question here, and then I think we can

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CAELI RIDGE: we can say thank you so much. Can you elaborate on doing appraisals and comps for small multi-family.

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CAELI RIDGE: Hi, kadia, 3 or 4 units, and if you can't find light, comp in the direct area, or in the last 3 to 6 months, what are the next set of criteria to use, and I think I know the answer. But i'm going to see how smartly i'm go ahead, John

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John Dingeman: Caddy. It was a that's a great question, too. So again, we're talking about 2, 3, and 4 family. Assuming that that's where we stop right. Anything more than that is, is a a certified general, and that's an apartment

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John Dingeman: right? So 2 3 4 family. It really the process is no different than a single family. With respect to how i'm looking for things, the proximity in the data sale. Those are all

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John Dingeman: God. Those are just. Those are guidelines that are kind of made up. They're not in the in the selling guide. So not in the Handbook, 4,000 that one, etc. They're just based on the principle of substitution. But go back to

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John Dingeman: back in the beginning, when I said I was looking for house and wasn't eligible because it was a a 55 plus community. So I used to praise in this community in Arizona it was 55 plus. I was a primary appraiser for it. I did most of the appraisals we're listing and then lenders also ended up hiring me right.

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John Dingeman: They there were no other 55 plus communities that were close to it across the street within a mile. That's what we're talking about. Right there were.

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John Dingeman: They were non adult plus communities, right? So they were just traditional. Ho! A pods!

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John Dingeman: Those are not appropriate sales comparable to use. And then, of course, nobody was exchanging these properties, so the date of sale could have been even longer up to a year, maybe even more. In fact, a model match that's a year or 2 old might be my best comparable sale.

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John Dingeman: For example, the lenders and underwriters. Aren't gonna like that right chile, but but it could be. And so what I do is again call the market participant. And I say, listen! If somebody wanted to buy in this 55 plus community.

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John Dingeman: It has golf course to everything. They don't have to leave it, and you don't have any available inventory. Where do they go? And when the agent tells me it's 7 miles away.

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John Dingeman: and they tell me which community to go to.

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John Dingeman: Then those are my competing properties. Somebody might not like it, but i'm going to explain it, and I'm going to say the agents that farm the market indicate These are comparable to the subject property. Remember, again, every buyer is different. So those buyers, for example, didn't care how far they were from downtown. Phoenix.

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John Dingeman: They have everything at their their hands

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John Dingeman: when it's related to a 2, 3, and 4 family. Ideally, I want the same properties, right? So I want. If I said triplex, I want other triplexes ideally. But if I can tell that the investors.

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John Dingeman: the the folks that are looking for a return on their investment are looking at the income, not the resale of that property.

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John Dingeman: then the room count, bedroom, count specifically, might be more important.

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and so

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John Dingeman: I I could use a duplex and a fourplex in comparison. If, for example, i'm valuing the property on a per bedroom basis.

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John Dingeman: right? Because I can just multiply that out. But

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John Dingeman: again, if you see activity in the market that says there's a preference to a duplex over fourplex, or whatever the cases, then, that may influence the opinion of value on the from the sales comparison approach it Does that make sense?

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CAELI RIDGE: I I think it did to me. Is it right? Am I right in my understanding that the triplex, just since we we touched on. It is the least common of all the residential property types, and probably the the least common in terms of cops. To find.

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CAELI RIDGE: That's an a. Is that an accurate statement?

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John Dingeman: I

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John Dingeman: I think that just depends on the market to I mean, yeah. So I presumably generally see something as a 2 or a 4. I think that just duplexes are probably more prevalent than anything, and then for is is probably there's more for is because the limitations. Once you go past 4 units

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John Dingeman: you're now approaching, you know, apartment building, and different zoning and restrictions, etc. So

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John Dingeman: I, you know.

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John Dingeman: really, at the end of the day when an investor is looking at building those they're doing their own highest best use analysis hopefully getting the help of an appraiser. And and they're trying to determine it. What's the appropriate number of rooms, and what's the appropriate number of units

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CAELI RIDGE: I got one more I know I lied one more. How much does an appraiser look into a permitted versus non permitted area on a property.

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John Dingeman: Another great question, so Fanny May, I think it was 2017 has an appraiser update, so that's their their newsletters that go to appraisers on a quarterly basis, and they had permitted versus allowable.

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John Dingeman: We can also say permissible. So those are 2 different words that get confused by appraisers and users of appraisal services all the time.

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John Dingeman: Give you an example.

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John Dingeman: In Phoenix, for example, we see garage or carport conversions frequently

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John Dingeman: depending on the neighborhood. Right

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John Dingeman: They may be not. They may not be permitted by the jurisdiction.

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John Dingeman: but they're allowed. So the the zoning would allow you to do it. They just didn't do it. Does it contribute to value? My job is to measure that contributory value.

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John Dingeman: So

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John Dingeman: Kelly and team, If, for example.

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John Dingeman: and I'm. Just making numbers in the the story up for the purpose of this right. If the city of Phoenix said, You know all we need is a retrospective permit, and it's like $25. You just do it. We'll approve it pretty much right.

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John Dingeman: Well, it the potential buyer, the typical buyer for that property is going to go. Wait a minute, so I get all this extra space. It's not permitted today, but it's going to cost me $25, and somebody come out and visit the property, and it's probably going to be included. I'm all for it.

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John Dingeman: Let's just do it right. However, if it's not permissible legally through zoning. That's a different issue altogether. So if you had to have a garage.

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John Dingeman: and as an appraiser, I'm. Saying that is a garage, and whatever i'm adjusting with the market would say, oh, Kelly is gonna say if I have to convert that back to a garage to make it legal.

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John Dingeman: It's gonna cost me x dollars to do it, and the headache to do it, and blah blah blah! So i'm going to discount that price right? I'm going to offer John something less than what he's asking, because it's going to cause these problems and headaches for me.

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John Dingeman: So again, it's permitted versus permissible or 2 different things when we say permitted. That is some function of the jurisdictional authority to say that it's built to code or or something that nature Again, something can be non permitted, but permissible legally under the zoning.

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CAELI RIDGE: Yeah. So I think the answer. There guys is check with the city.

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CAELI RIDGE: Call the city and find out what you can and can't do and be real clear about that, because whatever happens on the front end, you're gonna want to to know for the future and and resell or right it, it could create bigger issues than than if not John. I owe you something, man. I don't know how i'm gonna make this up to you, but I I got a I got something good coming your way.

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CAELI RIDGE: This is fantastic.

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CAELI RIDGE: Thank you for joining us. I really appreciate it. Community folks. Please send me your topic, thoughts and ideas I will record on those and get you guys some feedback.

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CAELI RIDGE: as always we are here on. Stand by anything you need. You know how to reach us, and we'll see in a couple of weeks. Thank you, John.

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John Dingeman: Thank you, Taylor. Thank you. Everyone really appreciate it.

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CAELI RIDGE: Thanks.

Calling All Real Estate Investors

Guest Speaker John Dingeman: Expert Appraisal Discussion

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