What It’s Worth

A given piece of real estate has a different worth to different people at different times.

One of those times is when you are trying to buy a house, and one of those people is the loan underwriter.

Real property is tough to value because all parcels are unique. By definition, all real estate isWhat appraisers are really doing its own separatespot on the planet, and no two parcels can have the same legal description. You can’t look up the value of a lotlike a share of IBM, all of which are exactly the same.

Another unique aspect of real estate is its immobility. Unlike art, or gold, or bonds, you cannot move a piece ofreal property to a healthier market to get a better price.

Real estate value changes with the interests of the beholder. Future development value of land can be rather morein cash than as existing prairie or alfalfa patch. Liquidation value is lower than long term value (What can I getfor this place if I have a year to sell it? Six months? A week? An hour?). A seven bedroom house has more valueto a family with six kids than to a retired couple.

Lenders have their own green eyeshade view of value. Though I would not dream of justifying the pessimisticfoolishness often applied to people trying to buy homes in Boulder County, some explanation may help.

Lenders think collateral- if I have to foreclose, will I get my money back?

That’s all. No other agenda. But the number of different ways to torture buyers is matched only by the variationin the character of property.

In Boulder County, the leading arguments involve in town versus in the country, and land parcel size versushouse size.

Properties in towns have the easiest time. There are lots of similar houses in towns, and lots of buyers. Similaritymeans more accurate analysis, more buyers means a faster post-foreclosure sale.

Mountain properties get the worst treatment. The houses are heterogeneous, and the supply of buyers muchsmaller. Does that mean they are “worth” less? No way- sellers demand good prices, and buyers will pay them,but some lenders will not loan at all in the mountains for fear it will take too long to get the money back if theyhave to foreclose.

It is large parcels near town where reasonable underwriting judgment turns to lunacy. “We’re only going to loan70% of that sales price because the lot’s too big.”

Say again? This 30-acre site is risky to loan on? The wife and I have been looking for a big lot for ten years, andyou are telling us it’s not worth what we’re paying? Do these idiots know about growth control? Don’t they knowthere are only 14 sites like this on the whole of Davidson Mesa?

Conversations like this make local lenders wish they did something else for a living.

The worst part of the collateral exercise is that the buyer and seller are not out of the woods when the appraiseris done. Low appraisals are relatively rare. The moment of truth is at the very end when the underwriter decideswhether or not she “likes” the appraisal.

Heard all over the county these days are the following- “I need another log home comparable on more than 20acres.” “I don’t think the hot tub really adds $5,000 in value; cut the loan amount.” “Can’t get mortgageinsurance if it’s more than ten acres.” “You have to use two bedroom comparables; that basement room isn’t abedroom because the window is too far up from the floor. Besides, there’s no closet.”

“If it has two kitchens it’s an illegal duplex; take one out.” “I won’t loan on the landscaping; half my equitydisappears if they don’t water the lawn.”

And, in numbers increasing every day, “We’re nervous because your market is so hot.”

Wait. I thought you wanted to be sure the place would re-sell if you had to foreclose. We needed guard dogs tokeep the buyers under control the day this place went on the market. Doesn’t your underwriter know we had sixoffers over list price, and two backups?

The last two markets to be as hot as Boulder County is now were Texas and New England, where lenders lost abuck or two. While pointing at those two examples, every underwriter in the country is told “don’t loan at thetop.”

That Boulder is nowhere near its price top doesn’t guarantee a happy underwriter.