Real Estate Options in Barnum CO

One of the numerous neighborhoods in Denver, Barnum is situated within West Denver surrounded by 6th Avenue Freeway, Alameda Avenue, Perry Street and Federal Boulevard. The neighborhood area has been named after Barnum and Bailey Circus owner, P.T. Barnum, who in 1882 had purchased over 760 acres for winter stay and many of the streets in the area were named after popular personalities and famous people. Later it was incorporated into the Denver suburbs.

The unique architecture and buildings that were constructed in the early 19th century are still in a good condition and add to the historical heritage of the area. One of them is the community building that has a jail below it, while the firehouse was housed inside. Another attraction is the Bowman House that was constructed in 1910 and is a testimony of the bygone era.

Modern amenities and residential communities is what the town offers to all of the people staying here. The beautiful location, security of your family and easy commuting to work are the prerequisites of a good location and Barnum offers all of it.

Today it is a modern community with all of the amenities including medical facilities, school, shopping complex and entertainment options taking into consideration the local requirements. If you are moving to Denver or its suburbs, Barnum makes for the apt choice. The tree-lined and leafy streets, quaint houses standing along with new townhouses have become a sought after destination for home buyers. Whether you prefer a 100 year old mansion with its old world charm or a brand new condo with all modern amenities, Barnum offers all of the options and more for people looking to settle here.

Most of the home buyers are pensioners who wanted to retire in serene locations, families and couples looking for a place to live and work. The excellent school system and higher education opportunities are an attraction for most families. when you have to decide between your family’s safety and convenience along with an affordable rent or purchase option, it always makes sense to settle a little away from the main city.

Real estate costs and prices have started increasing in the main city and suburbs while the experts are of the opinion that the market is on a rebound with escalation in prices within the next few months. For potential home buyers, checking out the available homes and the surroundings can be an interesting opportunity.

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Real Estate Commission – A Corrupting Influence

Real estate commission is the way in which real estate agents are paid for the services they provide. They receive a percentage of the price received for the property. Effectively, the real estate agent requires the seller of a property (the vendor) to sign over to the real estate agent a part of the property being sold.

Another way of looking at it is to say that the real estate agent, through the wording of the listing contract, effectively has his name added to the title deed of the vendor's property, so that the real estate agent becomes a part-owner of the property. When the property sells, the real estate agent receives a payment that represents his share in the vendor's property.

Most readers will be aware of the arguments in favor of real estate sale commissions, so I won't discuss those here. My focus is on the ways in which the sale process can be skewed against all parties involved, when the motivation to win a commission takes precedence over more important considerations.

Commission is a "winner-takes-all, loser gets nothing" situation. This increases the pressure on the real estate agent to secure a sale. Time is also a problem. If the real estate agent cannot secure a sale within a time acceptable to the vendor, the vendor may take the property off the market, or away from the real estate agent's agency. This will result in a total loss for the real estate agent.

Finally, the vendor becomes an obstacle between the real estate agent and his commission goal. In order to receive payment for his share of the vendor's property, the real estate agent must receive an offer to purchase within the available time, but the offer must be accepted by the vendor. If the vendor decides that the offer is not acceptable, then the real estate agent loses.

In order to win the gambling game that is real estate sales, the real estate agent may decide to tip the odds in his favor – and there are numerous ways in which this can be done.

At the listing stage the real estate agent may use improper means to win the listing contract. These include over-quoting on valuation, and offering dodgy sales figures.

During the sale process the real estate agent may be tempted to tell potential purchasers things that are untrue. I have seen many sale contracts with clauses designed to protect real estate agents against the consequences of false statements. Known as "porkies clauses", they invariably state that the purchaser acknowledges that any information provided to the purchaser by the real estate agent is provided on the understanding that the purchaser will not be relying on it for any purpose.

When a purchaser has submitted an offer, and the purchaser cannot be convinced to increase her offer, the real estate agent may be tempted to pressure the vendor into accepting what would otherwise be unacceptable. Observations, such as "the market has softened" or "the market has spoken to us" are used by real estate agents to convince vendors that the real estate agent's high estimation of value can no longer be relied upon, and that the vendor should now accept what the vendor believes is an unacceptably low offer.

For some years now, I have been arguing that real estate services should be provided on a fee-for-service basis.

I will explore the replacement of real estate sale commissions with a fee-for-service structure further in future articles.

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5 Essential Features That Make Real Estate Investing Profitable

Every now and then persons trying to make up their minds where to put their money ask me if real estate ventures are more or less profitable, compared to other businesses opportunities around.

My response is always that apart from its potential for yielding significant profits, investing in real estate often confers long terms benefits.

I discuss five such advantages below:

1. You Can Refurbish (to Enhance the Value of) Real Estate

After you buy a stock, you hold it for a period of time and hopefully sell it for a profit. The success of the stock depends on company management and their corporate success, which is out of your control.

Unlike other conventional investment instruments, like stocks, for instance, whose rate of returns, depend on third parties (e.g. company management), real estate investments are directly under your control.

Even though you will not be able to control changes that may occur in demographic and economic aspects, or impact of nature induced changes, there are many other aspects that you can control, to boost the returns on your investment in it.

Examples include aspects relating to adding repairs, or improvements/enhancements to the physical property and tenants you allow to live in it.

If you do it right, the value of your investment will grow, resulting in increased wealth for you.

2. Real Estate Investing, When Done Right, is Proven to be Profitable Even During a Recession (like the one we’re in right now)

It has on several occasions, been used to effect a bail out, from financial setbacks, such as those that many have experienced during the economic downturn happening in Nigeria today.

A considerable number of clients have confided in me that due to the present economic situation, they are not sure of profitable channels to invest their money. Some of them are done with bonds and treasury bills, but are in dire need of a new investment.

We had extensive discussions, and based on my expertise as a real estate consultant, I recommended landed property investment, as the most suitable and secure alternative channel of investment.

This is because, even if all businesses crumble, land will always appreciate greatly. Then to drive my point home, I ended by sharing the following apt quote, by a former American president:

“Real estate can’t be lost, nor carried away, managed with reasonable care, it’s about the safest investment in the world” – Franklin Roosevelt.

Not surprisingly, the client chose to take my advice – and signed up: it was the obvious, common sense thing to do!

3. Real Estate Investments Are Immune to Inflation

In other words, investing your money in ownership of viable real estate can protect you from the harsh effects that inflation usually has on other conventional investments.

This is because the value of real estate generally tends to rise in positive correlation with inflationary pressures. This is why property values and rental rates go up with rising inflation.

The nature of real estate, therefore affords owners the unique advantage of being able to adjust the rates they offer, to match inflation.

Monthly rents for example can be raised to compensate for inflation – thus providing a cushion effect against inflation induced losses that other monetary investments suffer.

4. Real Estate is Uniquely for Being Universally Acceptable as Collateral, Towards Securing Funding from Banks

Today, real estate in form of either building or lands, with proper titles (i.e. Certificate of Occupancy – aka “C of O”) is the most recognized and accepted form of collateral in Nigeria – and some other parts of the world.

It has the unique feature of being able to protect the interests of both the borrower and the bank (that’s doing the lending), so that funds can be released i.e. after due verification, and terms and conditions are agreed.

This is one of the key advantages a private C of O has over the global C of O, because the former (i.e. private C of O) is what will be needed by the intending borrower, in the event of any future financial dealings with bank in Nigeria.

5. Real Estate Investing Allows Use of Other People’s Money

In other words, you can do it even if you do not have enough money. You just need to know how.

This is possible because real estate is physical property or what is called a hard asset. That is an attribute that makes it attractive to financiers i.e. people with money to invest.

This is why many times real estate products are bought with debt – unlike conventional investment products like stocks which are NOT tangible, and therefore perceived as being more risky to invest in.

So real estate investment can be done using cash or mortgage financing. In the latter case, payments can be so arranged to allow payment of low initial sums, provided by you or a willing third party.

Those payments will be happening on landed property which will continue increasing in value throughout the duration of such payments – and indeed beyond. That further inspires confidence in the minds of those financing the acquisition, that their investment is safe.

Little wonder that real estate investing has continued to prosper for so long!

[A WORD OF CAUTION] The listed benefits notwithstanding, I still tell prospective investors that due diligence is a crucial requirement for succeeding.

Whether you do everything yourself or use industry professionals like me, it is imperative that you exercise caution and arm yourself with relevant information and education.

This is something I advice my clients to do all the time, so they can make good decisions in investing.

The importance of the above cannot be overstated, especially in Lagos where quite a number of individuals, have had their fingers badly burnt, because they failed to take the needed precautions.

My purpose is to help clients avoid having such horrible experiences, by bringing my years of experience in this field to bear in serving them.

References/Related Article:

[You can read about more advantages of real estate investing, in this excellent article I found at: http://realestate4investing.com/articles/real-estate-investments/10-advantages-disadvantages-real-estate-investments ]

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How Quality Real Estate Agents SHOW A House?

Although, there are many necessities of being a quality, real estate agent, one of the things, often – overlooked, is how, they will actually, SHOW the specific house. After all, agents only earn – their – keep, when/ if, they make a difference, for the better, in terms of marketing, and selling, any house, they represent! The next time you observe, for example, an Open House, observe, how someone shows the property, and interacts with potential, qualified buyers. Does he balance, the usual, with the unusual, so, he not only uses the time – tested techniques, and ways, but, thinks, outside – the – box, to customize his presentation/ showing, to demonstrate/ illustrate its specific strengths and possibilities? With that in mind, this article will attempt to, briefly, review, consider, examine, and discuss, using the mnemonic approach, what this means and represents, and why it matters.

1. Service/ serving; sustainable; solutions; system; strengths/ stronger: An agent must provide the finest degree of excellence, and service/ representation, to his clients! Consider, whether you are serving this client’s best interests, needs, and priorities! How will a particular agent’s system, make a quality difference? How will he show, the property, to its best advantage, pointing out the strengths, and making the process, and possibilities, stronger, consistently? Will the solutions be, both, relevant and sustainable, and how will he, truly, serve his client?

2. Honesty; honorably; head/ heart; house/ home: Agents owe their clients, genuine honesty, and honorably, represent the best interests of them, rather than any personal agenda, and/ or, self – interest! They balance, the logical, physical aspects of selling and representing, with the emotional ones, in a head/ heart ratio! While they show a house, the art, is conveying how a prospective buyer, might visualize it, as their home!

3. Open Houses; options; opportunities: Different agents conduct Open Houses, differently! Some seem to go through the motions, and are, merely, there, while, owners are better served, when someone, uses these events, to enhance interest, and attention, and makes a connection, with attendees, especially those, who are serious, potential, qualified buyers! They point out the key options, as well as the opportunities, the subject property, possesses, and the possibilities, beyond what some, may be ready to easily, visualize!

4. Winning (features); wants/ wishes; where: What are the winning, most attractive (to others) features of a house, and how is the best way, to highlight, them? One must identify, understand, and know, what their client wants, and align that, with what, a prospective buyer, wishes for, and seeks. Is where the house is located, in terms of neighborhood, block, conveniences (to shopping, transportation, etc), relative safety of the area, and convenience to transportation, a positive, motivating factor, or a distraction?

If you hope to sell your home, it is wise, to SHOW it, to the best of its possibilities! Choose wisely, because, who you hire, often, makes lots of difference!

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How Can a Good Real Estate Agent Help?

Consider the option of going ahead with a real estate agent because he helps the buyer or the seller of the property in more ways than one. Key responsibilities of a good agent make the entire process smooth, transparent, and easy for clients. However, this proposition is fraught with risk because finding a good agent is often a momentous task. This should not discourage home buyers and property sellers from hiring a good real estate agent as he alone can make things hassle-free for you. Therefore, your focus should be to look for an agent instead of searching for properties listed on various sites. Once you have roped in a verified and accredited agent to work on your behalf, the process of buying or renting or selling a home becomes much easier for you.

Local market knowledge

Equipped with local real estate market knowledge, he provides information of relevant properties available in the area. He studies the options that suit your budget and forwards the shortlisted options to you. This saves your valuable time and money. If you are interested, he shows you the properties. He is familiar with the area you would like to live in and offers accurate information about local infrastructure, school systems, water and sewer charges, public transportation and other concerns that impact your decision to rent or buy a home.

Negotiation

He takes care of the tedious process of negotiating the best deal for you. With skill and expertise, he knows the trends prevailing within the local property market and the competitive prices for various properties. You can bank on him to ensure the best deal and save your hard-money. His commission is also negotiable in most of the cases, depending on the level of involvement and effort put in.

Representation

He acts as your representative throughout the entire buying or selling process and therefore you need a reliable person you can fully trust in matters of right price and the suitable property features you need. He follows your instructions, works tirelessly to minimise your daily involvement in the matter of sale or purchase and seeks your presence only when it is unavoidable – to screen the best options for closing the deal.

Legal assistance

His knowledge about local laws related to the buying and selling of property helps you avoid legal issues. It ensures a smooth deal without any potential conflicts. A legally binding contract is drawn up and he helps you with all the paperwork, referring you to the appropriate professionals for dealing with all the legal matters.

Network

As his up to date with current trends, he nurtures contacts and the professional network to flourish his business. This enables him to be aware of a wide range of available property in the area and suggest options to clients with the help of fellow professionals. Not having an intermediary will deprive you of this big advantage. There is a limit to searching properties online or seeking references through your contacts, but if you have an agent, then there is no limit to the options he can suggest with ease. Most of his suggestions come pretty close to what you look for.

Exposure

Having him on board ensures maximum exposure for your property. Years of experience built an exhaustive database of potential customers and he refers your listing or requirement to generate leads. Gives sound advice on the market value component to price it realistically so that it is sold faster. He provides a visual presentation of your property and suggestions to enhance its marketability and coordinates marketing and advertising of your property on various platforms. Besides, the previews and arranges a walk through each potential home, to show properties that match your requirements and answers all your queries at various stages of the engagement to keep you updated of the progress achieved and ensure your satisfaction.

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Quality Real Estate Representation: Sales, Selling, Marketing, Or A Combination?

We often, discuss, what someone should seek, from the real estate agent, they hire, to serve and represent their best interests, needs, goals, and objectives. An ideal agent possesses a combination of, a true, positive, can – do, attitude, an inspiring, motivating manner, and personality, and a well – developed, relevant, skill – set, and aptitude. However, far too often, we don't consider, other necessary skills and traits, which relate, to achieving the essential necessity, of getting the property sold, etc! With that in mind, this article will attempt to briefly, consider, examine, review, and discuss, the differences between sales, selling, and marketing, and whether, one is most important, or there is a necessary combination, needed and required.

1. Sales: Many agents state, they are, in – sales, rather than stating, they sell real estate. Why is this? Is it because, they perceive a negative connotation, about selling, or are they focusing on what they believe to be, the politically – correct approach (also known as, PC)? What about the concept of selling, do they fear, or lack the confidence / skill, etc, which makes a difference, for the better?

2. Selling: We all sell something, regardless of occupation, or goals and targets? We either sell, ourselves, a product or a service! Professional selling is, both, an art, and a science, requiring a willingness, and ability, to be proactive, and real estate agents, must combine this, with serving the needs, goals, and equal, of one's clients, while maintaining the integrity, and ethics, required, both, by the law, and the Code of Ethics! The science of selling, includes the techniques, needed, and a willingness to master, the essential necessities of handling objections, addressing needs and perceptions, and proactively, bringing together, the seller, with the best qualified, potential buyers, in order to achieve a meeting – of – the – minds!

3. Marketing: Quality representation is only accomplished, when a comprehensive, well – considered, marketing plan, is perceived, and conceived of, created, and used, to attract the right buyers, to consider his client's property! First, it's important to recognize the target – market, most likely to seriously consider, this specific home, and use the best combination of vehicles, to market and promote it, effectively! Then, one must determine, the best way, to expend these funds, in order to get the best, bang – for – the – buck, and achieve his clients expectations.

4. Combination: The best approach is, to use, a combination of these necessities, to provide, what most seek, which includes, selling the home, in the shortest period of time, at the best price, with a minimum of hassle!

Doesn't it make sense, to consider, the best way, to market, and sell, a house, from the onset? Thoroughly discuss these ideas and concepts / approaches, with the agents, you interview, before you hire, the one, who will best represent you!

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8 Important Ways Homeowners Benefit From Using Real Estate Agents

Whether, you are a homeowner, who has decided, it’s time to sell his house, and relocate, or a potential buyer, seeking for the so – called, home of your dreams (the American Dream of home ownership), you will have the choice, of either, doing so, on your own, or using the services of, and being represented by a quality, experienced, professional, real estate agent. Some believe they will get a better deal, when they do so, on their own, because, there will be no, or fewer commissions. However, according to the National Association of Realtors, or NAR, homeowners, generally, net more, even after considering these, than those who do so, alone. Buyers also benefit because the right agent, has the local knowledge, to properly provide you, with relevant, professionally prepared, Competitive Market Analysis (or CMA), so you have a better idea of market value and the competition. With that in mind, this article will attempt to briefly, examine, review, consider, and discuss, 8 important reasons, homeowners benefit from using the right real estate agents, for their specific needs, and situation.

1. Local knowledge: Although markets, and times, change, in the vast number of circumstances, you will get your best offers, in the first few weeks, after it’s listed on the market. Therefore, pricing it right, from the start, often makes the difference, in a significant, major way!

2. Marketing expertise: The right agent, will create a customized, personal marketing plan, which addresses your specific residence and property, location, etc, as well as your priorities, needs, etc. There is no, one – size – fits – all, marketing process, so using a quality real estate professional, often makes a significant difference.

3. Agent’s network: Those who try to sell their house, on their own, often discover, they fail to attract as many potential buyers, as those using a professional. This is referred to, as an agent’s network, which includes the important tool, of listing the property, on the Multiple Listing Service, etc.

4. Hold client’s hand: The process of selling one’s house, is often, a stressful one, so using a professional, who has been through it before, and has a better idea of what to expect and anticipation, eases many of these stresses. Seek someone who patiently, is willing to, hold your hand, through the entire process.

5. Explanations/ expectations/ modifications: Rather than assuming or guessing, wouldn’t it help, to have clear explanations? Many homeowners have excessive or wrong expectations, and the individual, who represents you, must have the inner strength, to explain fully, his reasoning, and strategies. In addition, modifications, in terms of marketing, strategies, and pricing, are necessary, and someone with more experience and expertise, is far better positioned to guide you properly.

6. Convenience: Do you want to have to stick around the house, to show, the property, or wouldn’t it make sense, to hire someone, to do so, professionally? Open – houses, are only a small component in the overall strategy!

7. Negotiating: Professionally negotiating, on your behalf, benefits the client! Wouldn’t a professional, do a better job, in most cases?

8. From transaction stage, through closing: Hire someone who will be there for you, from the initial listing stages, showings, marketing, service, to the transaction stage, and then, until the closing, and house transfer is completed!

These are only 8 of the advantages of hiring the right person to represent your real estate needs. Focus on your needs, interview several, and choose, the right agent, for you!

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Essentials Of Marketing, Sales, And Selling Real Estate

Some people, appear to believe, the only thing needed, to successfully, sell one’s home, is making the decision to do so, and, offering it, for sale, advertising it, etc. Statistics indicate, in the vast number of instances, when homeowners use a professional, to sell their houses, they benefit, by receiving, a higher selling price, with less stress/ hassle/ inconvenience, and doing so, in a shorter period of time. Professional real estate agents understand the market, nuances, methods/ techniques, and serve, and represent their client’s best interests. With that in mind, this article will attempt to, briefly, consider, examine, review, and discuss, some of the essentials of marketing, sales, and selling real estate.

1. Marketing: The process should begin, with client, and agent, being on the same – page, and agreeing to how to proceed, to achieve the homeowner’s objectives and priorities. One should hire an agent, who perceives and conceives of, creates, develops, explains thoroughly (to client’s satisfaction, and understanding), the components of his marketing plan, and the reasoning, and rationale, which makes it make sense, and achieve the primary objectives. Marketing must include: determining the home’s niche; prioritizing approaches; determining the best options and alternatives, etc; considering media choices, and deciding, which ones, might make the most sense, for the particular property; a marketing budget; and; fully explaining the reasoning behind the listing price, and the essentials of making price adjustments, if necessary.

2. Sales: Many, falsely, believe, sales, and selling, are the same! Sales, is a process, and approach, using the tried – and – proven approaches, without thinking, outside – the – box! It means creating a plan of action, in order to maximize the results, which a client, might achieve, and receive.

3. Selling: Unlike sales, selling is a consistent, proactive, activity, which emphasizes, closing – the – deal! It is, when performed properly, and effectively, both, an art, and a science. The art is the technique, which includes: attracting buyers, and other agents; articulating an inspiring, motivating, message, which is responsive to the potential buyers needs, goals, and priorities; matching up, the right buyer, with the right house; asking for the sale; and closing the deal. Obviously, this is not, a one – step, simplistic activity, but, rather, a well – considered, effectively trained, experience – focused, tried – and – proven, method, for achieving the goal!

If you hope to sell your home, begin by hiring the right, real estate agent, for you, who will, be able to, professionally, handle the marketing, sales, and selling of your house. Take the time, to interview agents, and hire the one, who is best for you!

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Ohio Real Estate Lawyers

While Ohio real estate law does not require you to have a real estate lawyer, there are certain instances in which having a lawyer may be a good idea. When buying a property that has any common interest developments, it may be difficult for the average consumer to discern between parts of the property that are for one’s exclusive use versus parts that are for community use. Common interest developments, such as condominiums, may have ongoing litigation that may have an adverse effect on the future value of the property. A real estate lawyer can explain what the possible outcomes of ongoing litigation may be, so you can make an informed choice about whether you want to invest in the property. A real estate lawyer can also help ensure that the title to a property is good before a buyer closes on a sale.

Try and find a lawyer who is recommended by someone you trust, such as a friend or family member. Never choose a real estate lawyer simply based on the recommendation of your real estate agent. However, you may be able to find a lawyer who is also a licensed realtor.

You should ensure that the lawyer specializes in real estate law by checking with state and local bar associations and realtors’ associations. The American College of Real Estate Lawyers (ACREL) website provides links to members by state, and has many members from Ohio.

Most lawyers will answer preliminary questions for free. Make a list of your questions and use this list to help you find a lawyer who you think will represent your interests in a competent and ethical manner. Before making a final decision, ask what the lawyer’s charges are. Some real estate lawyers will work on for a fixed fee in more straightforward cases.

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Real Estate Appraisal – Bring Back the Cost Approach

In the last few years there has been a trend toward a complete discounting of the Cost Approach to value in residential appraisal. For owner occupied homes, the sole technique is now the Sales Comparison Analysis, which involves selecting and comparing individual property sales to a subject property.

Many lenders and government agencies no longer require the Cost Approach technique, even on new or nearly new construction, and appraisers are often instructed to omit it completely, or not to place any reliance on the results. When a lender does require that the Cost Approach be completed, it seems that this is only so that a proper amount of homeowner insurance can be determined. This is, of course, something critically important to the lender as well as the homeowner, but should not be the only criteria for the use of a cost-depreciation analysis.

Years ago a Cost Approach was always required for an appraisal report. The basis of this approach was the Principle of Substitution, which holds that a prudent buyer will not pay more for a home than the cost to acquire an equally desirable substitute home. Accordingly, the reproduction or replacement cost new of a home set the upper possible limit on value, particularly for an existing preowned home. So this analysis served not only as an additional means of estimating value, but also as a governor on runaway home prices.

The cost approach also served an important function as an educational tool for appraisers. To perform this approach, an appraiser had to have at least a minimal working knowledge of residential construction and to carefully observe the quality and condition of the various components of the home. Cost data services, which still exist today, provide continuously updated information on the various costs of construction involved in a home and some are quite accurate.

One service publishes a manual with a wealth of good data and information, complete with descriptions and photographs that illustrate the differences in quality and appearance for different types of homes, which is a great way for new or inexperienced appraisers to familiarize themselves with these features. In recent times I have come across reports by relatively new appraisers where no cost approach was done and it was painfully obvious that the appraiser knew very little about construction or how to evaluate the differences between their subject and the comparable sales they used in the Sales Comparison Analysis. I suspect we have a new generation of appraisers out there who have this deficiency and that's a bad sign for the future. The best appraisers know something about construction and can immediately spot differences among homes as to their quality level. This ability is also critical for the appraisal reviewer.

The Cost Approach is not without its weaknesses. The primary weakness is in the estimate of depreciation, be it physical, functional or external in nature. These things are difficult to estimate, but again, the appraiser who learns how to do this becomes more knowledgeable and competent, both in the Cost and Sales Comparison methods. Another weakness is in estimating the land value. Actual sales are often not available as a means to determine what buyers are paying for a similar lot and so market abstraction (also called extraction) is used to estimate the ratio of land value to dwelling value from market sales of already built homes. Improperly done, this technique is subject to serious errors. The general rule for the Cost Approach is that it is most accurate when the dwelling is not very old and sales of nearby similar lots are available.

I am of the opinion that the majority of foreclosures involve relatively new homes and that this is where the largest amount of lending losses occur. At least, that's how it is in my local market which has always had a lot of new construction. There are many reasons for foreclosures, but certainly one is upgrades.

Builders typically offer various home models at "base" prices and offer upgrades for both the home and the lot. Buyers can choose from a wide variety of options to enhance the home and can choose lots that are different in size or that have more trees or other desirable aspects. This is great for the buyer but can become a nightmare for the lender when a foreclosure happens because so many of those nice upgrades do not hold their value in subsequent foreclosure sales, and often do not hold their value as the distressed homeowner desperately tries to sell the home to avoid foreclosure.

The homeowner finds out they are "upside down" meaning the home cannot be sold for as much as the mortgage amount, especially when the initial down payment was very low or when financing costs were included (rolled into) the mortgage, necessitating an increase in the sale price. Another problem is inflated upgrade cost where some builders mark up the prices of upgrades well beyond normal prices that consumers pay at retail stores, even with installation added on. This is similar to what many service contractors (plumbers, car mechanics, etc.) do because they want to make a profit on the "parts" as well as the labor. The problem comes when the markup is excessive.

There is little an appraiser can do about upgrades when it can be shown that buyers often do select upgrades with their new home purchase. In the absence of current resales or foreclosures to compare with, it is not possible to estimate the resale value of upgrades, and values ​​are estimated as of a given date, not the future.

The Cost Approach long served as a reasonable basis for making adjustments to market sales in the Sales Comparison Analysis for individual items. If a home needed a new roof, the appraiser had a handy source for determining the cost for this. Likewise for appliances, HVAC equipment, a garage and the like. Removing the Cost Approach and the good data that comes with it forces too many appraisers to have to guess at these kinds of adjustments and the results can vary wildly from one appraiser to the next.

Long ago homes were valued only by a Cost Approach. The Sales Comparison Analysis (formerly known as the Market Approach) came later. I don't believe it is a coincidence that foreclosure rates and personal bankruptcies caused by unaffordable mortgage amounts and runaway home prices seem to have increased so much in recent years while the use of the Cost Approach has declined at the same time. Not do I believe it is a coincidence that the decrease in emphasis on cost minus depreciation began about the same time as tremendous inflows of capital into the marketplace encouraged every sort of easy money credit scheme that allowed so many people to buy homes they couldn't actually afford and that has severely damaged not only the US economy, but the entire world. Mountains of money to lend tend to push caution to the side.

I believe that the Sales Comparison Analysis is surely a good valuation technique, but its down side is that there are too many clever ways for market participants to smuggle hidden costs, fees and even fraud into sales contracts, which make their way silently into market data services and onto appraisal reports. The same can be true for unhidden costs like seller paid loan discount fees and other monies paid toward buyer closing costs. At a minimum, an accurate Cost Approach serves as a useful check on the results of even the most thorough and detailed Sales Comparison Analysis where the appraiser is carefully searching for and analyzing such things. Undesirable things can and do happen in real estate and some can slip past even the best Sales Comparison Analysis because they happen quietly and incrementally.

An example of this is what I call closing cost price compounding. A real estate agent provides a seller a pricing analysis where the agent has found 20 recent sales of similar homes in the area and averaged the prices to arrive at a figure he or she believes is correct for the home. The home is then marketed at that price. Along comes a buyer (perhaps from a higher cost market) who lacks cash, needs some assistance with his closing costs, and makes an offer at or very near the asking price. The seller counters with an offer in which he adds the amount of assistance the buyer asked for to the price.

But what if this type of assistance turns out to be normal for the area and is already reflected in the selling prices of those 20 homes used to set the asking price to begin with? The new sale closes at the upwardly adjusted price and is then used as a "comp" by other agents and by appraisers and the process continues with every repeat occurrence of the needy buyer, causing home prices to rise, affordability to lessen, creating more needy Buyers, and setting in motion a snowball effect where prices to rise eventually to the point that they exceed even cost new. This is not unlike interest compounding on your savings account. Over time your balance goes up faster and faster. Combine this with other inflationary market tendencies and you get a nasty bubble that will some day burst to the peril of us all … again.

Obviously, this could be avoided by competent sales agents who understand that those 20 sales already included heavy seller costs and inform their clients of this, but many do not and there is a built in incentive to pay prices as high as possible among people working on commission. An accurate Cost Approach would tend to catch this anomaly immediately or at least decrease its effects down the line in future sales because when home prices begin to exceed what it would cost to build an equally desirable substitute home brand new, the competent appraiser knows that something is wrong and that they need to dig deeper into the market data.

A Cost Approach is also a great lie detector for fraudulent appraisals. If an appraiser included a Cost Approach and is using a known cost source or manual that others can subscribe or view, then the estimated costs shown in the appraisal can be reproduced from that same source by someone reviewing the report. So if the appraiser has fudged on cost, that can be detected simply by examining the cost source and parameters the appraiser had described. Moreover, even if the appraiser showed the correct costs, the fraudulently inflated appraisal will exhibit inflated land value in the Cost Approach with little or no support as to where the land value estimate comes from or why it is so high. In fraudulent appraisals, the Cost Approach is "plugged in" with numbers to match the Sales Comparison Analysis. That's because an honest Cost Approach would have indicated a significantly lower value for the home.

There are other examples of how the Cost Approach could eliminate or reduce runaway home prices, and even detect fraud. I believe it is a foolish mistake to take away or encourage the disuse of any type of analysis or tool from appraisers that has a basis in market data. An analyst in any field of study should be willing and enabled to use as many ways as possible of looking at a problem. Focusing on just one method encourages tunnel vision. I say bring back the Cost Approach and let appraisers decide how useful or accurate it is on a case by case basis. It is not the end-all be-all solution but it is a valuable and worthwhile tool.

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