Mining for Data - Part 1

The appraiser's opinion of the value of a property on a given date is always subject to certain assumptions. If I am an investor trying to maximize my gain through trading of stocks or securities, I want the most up-to-date information about the market, including both the current price quote and some information on trends not only with respect to the price itself, but also the number of shares being traded in a given trading session. If the price is rising with large numbers of shares being traded, it is a different market than one where the price is rising with few shares being traded. Supply and demand always has an impact on price and value.

Real estate sales reports are victims of much longer time lags than stock trading reports. It is for that reason that so many people were caught by surprise when the national real estate market began its decline in late 2005. While technology has allowed us to close the information gap somewhat by speeding up certain processes, the real estate sales cycle does not normally operate very quickly (at least not from the perspective of a stock trader). Let us examine the process, first.

When a real property owner decides to sell his property, he does not simply submit a "sell" order to his broker and wait for the notice to arrive in his e-mail that the sale has taken place. He needs to determine what asking price should be attached to the property, and that entails a valuation of some sort. He may do it himself by looking at advertisements for other properties along with public data about sales of other properties near his. Or, he may hire an appraiser to do the work for him.

Of course, I recommend the latter -- that is my business -- but it is going to cost the property owner about $350 in this area for a good residential appraisal (one that is more than a simple "CMA" done for free by a real estate agent hoping for a listing). In actuality, that price for an appraisal may be a very cheap investment tool, when the time value of money is considered. A $100,000 mortgage for 30 years at 6.5% has a $632/month payment; if the appraisal helps to sell the home only two weeks faster, it has paid for itself in saved house payments. Relocation companies, which buy a house from the employee as an incentive to the move and then hope to resell the home and break even, generally contract for at least two separate appraisals, which must have values within 5% of each other; if they are not, a third appraisal is sometimes ordered. Relocation appraisals are more complex, and rather than providing "market value" provide an anticipated sales price involving a forecast of the next 90-120 days in the market; they are also more expensive (about $500 each) and yet the relocation companies consider them to be important investment tools because they save money in the long run.

There are some limitations to the ordinary property owner doing his own research and valuation. The first is a lack of objectivity; the fact that anything a person owns is automatically going to be seen as being "better" or more valuable than most other properties competing with it. The second is a restricted data pool from which to draw information; a professional should have access to subscription data sources which are much more extensive than those an ordinary consumer can access. A third is general knowledge about market trends, both long and short term, since the most available data is always that which tells of the success of other participants in the market, and downplays their failures and mistakes.

I need to inject a caveat here which may sound like I am up on my soapbox again, but government statistics are notoriously untrustworthy. They tend to be compiled by agencies having a vested interest in the outcome, whether it be the increased ability to collect taxes, or the need to trumpet the success of a government program and ensure the employment of the bureaucrats involved. Further, the expansion of on-line information sources, many compiled by individuals motivated by "causes", tends to increase the possibility that any data obtained could be tainted by prejudicial effects. Care must be exercised in choosing data sources.

The data used in an ordinary appraisal for marketing purposes should be as recent as possible, and if older data is used, sales prices of the comparables may need to be adjusted for the effect of market change over time. Six months is normally considered to be a reasonable parameter for the date of sale, but it should be kept in mind that the closing date alone may not be the only time factor involved. If a person puts his property on the market today, he will do so at what he thinks is a proper asking price. If the property is priced correctly, it can be expected that a certain "exposure time" will elapse before an agreement with a buyer will occur. That information is hard to come by, unless the listing history of the comparable, including all price reductions, is available, because a "reasonable exposure time" may not be the same as the total market time of the property. Further, after a sales agreement is executed, there is usually a delay between the time of agreement and the actual recording of the sale (the closing date). Thus, if a typical marketing time (based on a reasonable exposure period) is 60-90 days, and a typical time to closing is 3-4 weeks, use of a six month old sale without the additional marketing information can give a very deceptive indication of value depending on whether the market is rising, stable, or falling.

I'm going to keep these posts as short as I can, so this novella will be in installments.