BiggerPockets Real Estate Podcast - 7: Making Appraisals Work For You with Ryan Lundquist

Episode Date: February 28, 2013

Today on the BiggerPockets Podcast we sit down with Ryan Lundquist, a professional real estate appraiser in the Sacramento area. An appraiser is one of the most important professionals that you, as an investor, are likely to deal with over and over in your business. Furthermore, knowing how to deal with an appraisal, especially when it comes in too low, is a skill that can help any investor. Keeping with the “actionable content” approach that BiggerPockets is known for, this podcast will help you improve your investing by pulling back the curtain on the appraisal industry through our discussion with Ryan. Thank you to everyone who has subscribed in iTunes to help make us one of the top business podcasts in all of iTunes! Every subscription and every review helps us reach more people – so thank you! In Today’s Podcast, We Cover: How you can determine what a property is worth. When you should, and shouldn’t, use Zillow or other AVMs. How to challenge a bad appraisal. What to do when sales prices are higher than the appraiser will go. Dealing with the Hedge Funds in the market. Tips for getting your appraisal amounts higher by bringing your own comps. Dealing with FHA loans in your investments … and the dreaded FHA Appraisals. The most common property condition problems an appraiser is going to ping you on. How to deal with lead based paint in your investments. Links From the Show: Ryan’s Recent BiggerPockets Blog post: How to Challenge a Low Appraisal BP Podcast 004: Commercial Real Estate Investing With Frank Gallinelli How Legos Can Help us Understand Real Estate What Legos Can Teach us About Real Estate Part II Appraisal Woes – BiggerPockets Forum Discussion The BiggerPockets FHA Home Inspection Checklist FHA Lead In Your Home: A Parents Reference Guide Tweetable Topics: “The first step in discovering your property value is defining your location.” (Tweet This!) “Why not be proactive instead of reactive?” (Tweet This!) “In business, go in as a bridge builder, not a name caller.” (Tweet This!) “Investors: Get to know an appraiser – take them out to lunch, build that relationship.” (Tweet This!) “Understand your market at the same level that your appraiser does.” (Tweet This!) About Ryan Ryan Lundquist is a certified residential real estate appraiser based in Sacramento, CA. He provides appraisals and valuation consulting for a variety of clients including CPAs, attorneys, investors, home owners and lenders. Ryan is an avid blogger, bike rider, optimistic doer and family man with two sons. Ryan’s BiggerPockets Profile Ryan’s Company Website: SacramentoAppraisalBlog.com Learn more about your ad choices. Visit megaphone.fm/adchoices

You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the height, you're in the right place. Stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing online. Hey, everybody, and welcome to the Bigger Pockets podcast. This is Show 7. I'm your host, Josh Dorkin, along with my co-host, Brandon Turner. What is going on, Mr. Brandon?

Oh, not much, Josh. But to be honest, I'm getting a little tired of this winter. I'm looking forward to the sunshine again. You know what? We've got inches of snow on our front yard, and it's certainly getting a little bit dreadful, even though we've got 300 days of sunshine here in Denver, Colorado. You do, and I have 300 days of rain out here in San Francisco. Well, you know, you can always get up and move, man.

I could. I don't know. I like my house now. Yeah, nice, nice. well you know it'll be spring soon so and and spring speaking of which is a great time to sell your house or to buy a house and with that in mind we've got a great show today don't we we do and nice transition Josh did you like that that was that was awfully created it was smooth yes well speaking of smooth I've got some cult 45 here just just kidding just kidding well let listen man let's let's say

Let's jump right into this thing, all right. Sounds good. So for all you guys listening, you know that most real estate investing podcasts are typically about the hype and the motivation, which certainly has its place. But here on the BiggerPockets podcast, we like to go further and keep with the tradition of BiggerPockets.com by bringing you actionable real-life strategies that we could use in our day-to-day real estate investing career. years. And of course, that's our goal for today's show as well. Today we're actually going to be sitting down with Ryan Lundquist, a busy appraiser from the Sacramento area, who's got a keen insight, I'd say, into the real estate world through his appraising job. Ryan runs the Sacramento appraisal blog, sacramento appraisal blog.com, and teaches people about exactly what an appraiser

does. Look, bottom line is investors deal with appraisers on a day-to-day basis, and they've got a huge say in how our deals turn out. We thought it'd be great to talk with an appraiser, get to know their side of the industry, so we can, in turn, all become better real estate investors. Hey, real quick, I just wanted to point out, Ryan actually published an article in the Bigger Pockets blog yesterday called How to Challenge a Low Appraisal, advice from a real appraiser, and it actually includes a form you can download that you can send to an appraiser. or to a bank to challenge an appraisal. So it's a pretty great.

You can check it out in the show notes at biggerpockets.com slash show 7. But, yeah, check it out. Here's why savvy real estate investors are obsessed with bonus depreciation. It lets you take that rental property or commercial building you own and depreciate most of the cost

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Pro users get it for free because we believe in it. Just sign in through your pro account to get started. RentReady helps ensure on-time rent with auto reminders, keeps communication professional, and lets you post listings to multiple sites. Check it out at rentready.com slash bigger pockets. That's RentR-E-D-I.com slash Bigger Pockets. Josh, you want to introduce us to our guest. So without further ado, welcome to the show, Ryan.

How you doing? Hey, doing well. Thanks so much for having me, guys. appreciate it. Definitely, definitely. Thanks for coming, man. Well, listen, let's jump right in here. We're going to talk about appraisals and issues of that type here.

So let's get into this. How do you know what a property is worth? Oh, there are so many things. I wish it was just a matter of pulling out a number out of a Magic Hat, and it took just a couple minutes. But these days, it seems like it takes so long to really establish a value because there's so many different types of sales. And really what my goal as an appraiser is is to compare the best available information in the market

and to find the most similar types of properties and then add and subtract based on differences, whether one has a nicer kitchen or bigger lot, third car garage space or whatever, then find out what the market's willing to pay for those things and then adjust for them and come up with the final value. It's really that simple, yet it's kind of complicated because short sales often sell for less. There's dirty REOs. There's pristine investor flips. There's just funky market dynamics where buyers are willing to overpay by 20,000.

And so it's really sifting through a lot of conflicting information a lot of time to come up with that value. So I'm guessing, Ryan, then you don't just go to Zillow and type in what's his estimate? Yeah, no, I actually don't. it's funny people are always always looking at Zillow but it's just not an accurate appraisal especially sometimes the information in Zillow has is really spotty because the information to me as an appraiser is spotty but I need to go pay for that information in certain counties and so they don't have it and so you can look up a property and it could be off by a couple hundred thousand dollars sometimes they nail it but most of the time it's it's off and sometimes it's off quite significantly

Well, so what about potentially going to multiple AVMs, and AVM is automated valuation model for those people who don't know, but Zillow would be an AVM, Trulia. Could I potentially then go to, say, Realtor, Trulia, Zillow, and basically concoct some kind of average to come up with a fair appraisal value, or are these numbers just so randomly off that it's not really going to be? an accurate assessment. You know, it all comes down to the data, how good the data is, because a lot of these sources are pulling the same data. And if the data is inaccurate, if it's not complete,

if it's really not consistent with sales in the neighborhood, then you're going to have a skewed value. And APMs have their place because they can be sort of a good, you know, get your foot in the door to figure out what may be a ballpark figure. I say that with the grain of salt, of course. course, but, you know, it's sort of, it is what it is, but it's just not, it's not going to compare to a human on the ground who really understands the dynamics and the trends in the market. Say, for example, there was a difference of 10% between arm's length sales and short sales. Well, an AVM may not know that, and so there really could be a huge value discrepancy by not knowing some of those things in the market, or maybe a pot house, you know, sold that was totally

stripped and, you know, just found one of those the other day. It's all, that's always fun. But it's just, you know, ABMs don't know that, and so humans do. Gotcha. Gotcha. So there is, there's no replacing feet on the ground is the bottom line here. Yeah, I don't think so. And some people talk about that, you know, appraisers will eventually be replaced. But my big thing is that, you know, maybe that would happen. But the thing is, is it appraisers carry insurance and you can sue an appraiser. And so I think that's a luxury that the real estate world is going to want to keep. Yeah, yeah, for sure. Well, let's get into the appraisal itself.

How do you come up with the numbers for an appraisal? I mean, you know, everybody, there's comps. I mean, other various methodologies. What do people need to know? Yeah, there's the sales comparison approach where you basically compare the subject property to other competitive properties in the neighborhood. And so it's really important, of course, first to define the neighborhood to get those boundaries right, because we all know if you cross the freeway or the other side of the railroad tracks, so to speak, you can be in a completely different market where values are exponentially higher, exponentially lower, or just different. And so it's important to have the neighborhood defined right, and especially, obviously for investors too, because you want to be polling these sales that are truly competitive.

And really what makes a comp is something that would buyers consider? this property as a replacement. If these sales were still listed on the market, would a buyer be shopping for all these houses? So I talk a lot, say, with realtors and sometimes investors, and I get handed sort of a stack of potential comps to say, hey, this is, you know, as support for why the property is worth what it's worth.

But sometimes they're just so different. They're, you know, 700 square feet larger or just have incredible, amazing upgrades. and those don't really compare. So it's just a matter of comparing it to the right properties in the right neighborhood, same neighborhood. But if it's an income production property, too, you're also going to factor in how much income can this property really produce,

and you're going to be looking at the gross rent multiplier, and you're going to be comparing rents. So there's a different layer of analyzing the market in that regard. Gotcha. Now, does that, is that something? that you guys deal with, I would imagine a lot of people are probably crawling up your backside saying, hey, man, this ain't worth this, you know, and trying to influence the way you come up with your numbers. Is that one of your biggest complaints with investors and

homebuyers? Well, I think, I don't know that I'd say it's a complaint, but I just say a critique of some investors is it, I would just say price your properties correctly. Right now, there's such low inventory that you can price the property in my market for almost anything and generate multiple offers at that level, but all sales and listings, it just doesn't support that level because inventory is so low. I think buyers are so hungry and so tired of getting, of having to shop for so many months to actually get into contract that they'll offer anything. And so I think it's just important to realize that. And so there's, you know, sometimes complaints that appraisers are botching deals and sometimes they really are. I'm not

making light of that. There's some really bad appraisals out there. But other times, an appraiser's doing his or her job and bringing this property in, measuring the market correctly, where the price probably should have been. Okay. So you brought up a really good point about potentially appraiser is botching the numbers. So let's circle back and maybe talk about how can we find a good appraiser. How do you know where to find a good appraiser? How do you get recommendations and look for somebody who is going to give you trustworthy numbers? And then how do you really verify as an investor or a homebuyers if those numbers are kosher? Yeah. Well, it's It's a little bit complicated because you can't handpick your appraiser.

As we all know, anyone in the real estate community, it's not like what it used to be during the previous boom where realtors, investors, homeowners, whoever, the borrower could pick their own appraiser. That system's done away with. And so essentially, you're sort of, you know, it's up to the lender to choose the appraiser. And so you may get a good one. You may get a bad one. I just recommend people to work with reputable lenders who have an appraisal ordering system where they're working with local appraisers and paying them well.

You know, if there's this appraisal management company, this third-party system ordering an appraisal from an appraiser and willing to pay them, you know, $250 when everyone else is getting $400, then you're probably not going to have a very good appraisal. And you definitely don't want to have the lender choosing an appraiser who lives two hours away from the property when there's a ton of appraisers who can handle it locally. And so those are always challenges. And so in some senses, you're not guaranteed quality. You never are. But I think you can sort of minimize damage by finding the lender who really is reputable and, and really is working with good appraisers. That's really good advice.

You know, I've recently, I've been selling a house right now. It's actually supposed to close today, so I'm pretty excited about that. And we had an appraisal, and it came, we were selling the house for 110. I live in a pretty low price area, so 110,000. And the appraisal came back at, you know, remarkably exactly 110,000. I mean, it was within dollars of what the price was. but when he appraised it he compared it which this was a flip it was after the repairs were done he compared it with three comps that were repos and so there were like these terrible looking

properties in worse locations and i i call that lazy appraising because you know he didn't go out to actually find ones that were comparable he went on the three that would just give him his number so then we had a problem with we needed to raise the purchase price uh to cover they want a new siding we needed to raise it 2000 And of course, by then, you can't do that because he can't go out and change his appraisal, even though the comps were ridiculous. So, yeah, I've been experiencing the good appraiser versus a bad appraiser. So I guess on that note, what would you do in a case like that? Or what would you suggest somebody should do if we have a bad appraisal or something that I feel that they use the wrong comps for?

Do I have any thing to do? Be him on the head. Yeah, avoid violence, avoid threat. I have interesting stories about those sometimes. I was kidding, by the way. I'm just talking to the one investor who's listening right now with a baseball bat in its trunk. But I think, I mean, there's a sense where in the world of appraisal you're trying to get a deal closed. Obviously, if the numbers work for you, but it's just not a great appraisal, you're not going to contest that.

And so that's just how it goes. But if something is not legitimate, you just feel like, wow, these are all the wrong comps. I can't believe this happened. And it's really not a good representation of value and it's damaging your pockets. Then you can definitely contest that. Usually lenders have a formal way to contest it and you can do that or your realtor can do that. It's just important to know what that is. But I just always recommend when someone wants to contest an appraisal that they put it in writing.

You don't want to just give the appraiser a call. You don't want to give an emotional speech saying, well, I think values just higher because that really doesn't do anything to advance the conversation. So if you can send in a very cordial and humble letterhead, something that critiques comps in the report, you can point out things about comp one, backs to commercial property, and how does this impact value? The appraiser didn't mention it. It seems like an inferior location.

you know, Comp 2, A, B, and C, Comp 3, A B and C, but then most importantly, provide additional data, give the appraiser, here's two other sales, and would you consider, how does the appraiser feel about these two properties or these adequate comparisons? And so I think it's very, very important to do that because in the appraiser, you know, can take a look at the situation and realize, wow, if I really did, you know, beef up this appraisal and mess things up, then I can at least. go back and include one of those sales. Now, the thing is, though, I'll say that it's really hit and miss. Sometimes you'll have success, and sometimes you won't. And so, you know, it just really depends on the appraiser, it depends on the lender. But also, I will say one last thing, just make sure you're really familiar with the format of an appraisal report so that you can really look at it, interpret it correctly, and you can quickly analyze things and say,

wait, tax record says the property's 1,600 square feet. The appraiser measured 1,400 or 1300. So there's a discrepancy there, and you'll be able to quickly point those things out and be able to then put that into a rebuttal or an appeal. And, hey, if it was just a square footage error, then great. That's an easy fix for the appraiser and should be instant value if the appraiser mess that out. Yeah, a couple weeks ago, we had Frank Gallenelli on the show. And I think it was podcast number four. and he talked about that with his his county appraiser who did the assessment on

one of his properties and he or on something he was appraised and they had just gotten the number wrong they'd used the wrong I think was the wrong cap rate and so he talked about how to you know as long as you're you know your facts before you

and you know what's going on just present it in a non-emotional kind of a manner and you can get a lot of accomplished that way so now that's really good advice I wish I would have actually talked to you like two weeks ago Yeah, exactly. And I think, too, it's just, it's important to go in with an attitude to build a bridge rather than name call and do all the things that turn off a person from wanting to listen. And so, I mean, as professionals, we should all listen to each other, but you're more prone to gain an audience if you have that, you know, cordial, respectful tone. And so, so that's just really important. And I'd say one last thing, in terms of income properties, pay really close. attention to the gross rent multiplier because that that makes a key difference in the appraisal

when the appraiser uses the income approach and and you know getting the rents right and the GRM right because if that's off and you have better data then absolutely present that. So what exactly is a gross rent multiplier for those who don't know? It's just a metric for dealing with income properties. It would be the sales price or value divided by the monthly rent. And so it's just a way of looking at investment properties. And so if I were to look at five recent sales in the market, then I could divide their sales price by their monthly rent.

And that gives me a certain metric. And the properties that are most similar to the one I'm appraising, I can derive that GRM, the gross rent multiplier, from those properties, and then use that in my appraisal. Now, the least similar properties, the REO beaters and the short sales, there might be a reason why the GRM is, is coming in at a way different level. And so I've got to make sure that I'm using the right GRM in my report.

Otherwise, it can really skew the numbers because investors ultimately are looking at these properties and considering things like their rental income and possibilities. So I've got to consider that as an appraiser. That's great. That's great. Well, listen, just to remind everybody, this is Show 7 on the BiggerPockets podcast. It's BiggerPockets.com slash show 7. Go there, check out the show notes.

We're going to have lots of great information about the... show over there. Let me follow up with a question about the numbers themselves. Seems like there's a lot of discussion all the time about hitting the number, right? Brandon talked about it. We talked about a little bit. Are there any tips that you have for investors to avoid pressuring appraisers on hitting that number? Yeah, absolutely. I would just say make sure in your heart of hearts that you're not pressuring appraiser. I know that sounds really profound, but, you know, take the pressure off. And I think one thing that you can do is just avoid pressure statements.

When you meet the appraiser at the property, you know, you don't want to be saying, oh, man, I've got 40,000 wrapped up in this. It has to appraise. If it doesn't appraise, I'm going to lose everything because that puts a little pressure on the appraiser. Or, you know, I really need this one to work out. Or saying things like, you know, I don't want to ask you to do anything. unethical, but just do your very best. But please, please, don't be unethical. Just do your best. And here's $100 for you. Exactly. Or sometimes investors can say, I'll give you more business

if you make this one work out or work your magic. And that's just, that's a little on the shady side of life. You know what I'm saying? Well, so let's talk about the shady side of life. What What's the shadiest thing you've ever experienced? The shadiest thing. Oh, boy. Oh, come on, man. There's like 25 stories that come to mind right away, aren't there? Yeah, I don't, you know.

I mean, I'm sure something will come up in the course of conversation, but people honestly ask me to lie all the time. And so that bothers me. It really does. And so I don't like that. I don't like being put in that position. And I don't like when people outright lie to me either about their properties. And so I'm not an angry guy here.

I'm not saying this out of anger. But when someone tells me, oh, this property, it's in the best school district. And they totally mischaracterized the neighborhood and comparables. And they're really just trying to get me to hit a number. I just think, man, why are you doing that? If you don't have anything, just don't give me anything, but I just appreciate not being lied to you. Yeah, you're going to find it out anyway. Yeah, I know, exactly.

And then it makes the other person look bad. I don't trust that person. I won't refer business to that person. And so it really destroys any potential relationship in the future, too. It's very short-sided. It's better just to do honest business. Keep things simple. Keep those properties priced correctly.

and avoid pressure on anyone. That's good. That's great advice. Great advice. Hey, man. So somebody tells me that there's a way to learn about understanding real estate via an old toy. Actually, it was Lego. Somebody somehow told me that if I were to go online, there's this article that spells out how Legos can help us understand real estate.

Maybe you could talk to us a little bit about that. Well, yeah, I have actually two posts where I've used Legos to help, you know, convey concepts like functional obsolescence or just show different real estate trends or funky things in houses. And so, yeah, those are fun. I have two boys and we love Legos and sometimes I let that crossover into my blog somehow. Yeah, those were really great posts and we'll be sure to link to those in the show notes. I definitely got a kick out of seeing those, and so we'll make sure to share that with everybody. Thanks. I appreciate that. Yeah, I want to go real quick to something that was going on in the forums over on the Bigger Pockets forums.

There was a question that came up a couple weeks ago, and there's been quite a bit of debate on it. And it kind of relates to what I was talking about earlier with my situation, but a little bit different. So basically this thread called Appraisal Woes. Somebody's trying to sell a house, and the sales price was $253,000, and the appraisal came in $20,000 under. So this person was asking what to do about that. Did they just lower their sales price, or can they do something? I'm wondering, what do you recommend? And also, like, why is there that difference?

I mean, is that common today? What can you tell us about that? Yeah, that's definitely a loaded question. I'll say this, is it's very common in my market right now for appraisals to come in lower. During the previous boom, it was all about, hey, hit the number, man, hit the number, and I'm going to find someone to hit the number. But we've removed that direct link with appraisers. And so it really should be, as it should have been then, an independent valuation.

And so some of the reason why there's a discrepancy there is because properties are overpriced, assuming it wasn't a bad appraisal, of course. But right now, the market, in some senses, it's really propped up. It's being influenced by external factors such as low inventory, historically low rates, exponential cash sales. In Sacramento, 35% of all sales in the whole county are cash right now. That's up 7% over the year. And under $200,000 in quarter four of 2012, 49% of all sales were cash. And so one out of every two sales was cash.

So what that's doing is that it's increasing the median price levels, but basically under $200,000, the market's just out of control. It's just appreciating like wild. But that same appreciation isn't happening at every tier of the market. And what it's doing is it's helping the numbers look a little bit better than they actually are. And so sometimes properties, you know, you really can get into contract, even though your price $20,000 or $30,000, above anything else, you will get multiple offers when you list a property right now in the Sacramento area. And the thing is, is that what the appraiser's analyzing is market value.

And it's like what an appraiser colleague, Patrick Eager, what he says. Imagine market value, if you lined up 100 buyers, what would the typical buyer pay for this house? A lot of times in our dream world, we want that one buyer, the private equity fund, we want Blackstone to come in and they're willing to pay, you know, $15,000 or $20,000 over anyone else because they can and because it works for their cap rates. But what would the typical buyer pay? A lot of times that's, well, that's what the appraiser is analyzing and then the numbers are definitely going to come in lower than what maybe a hedge fund or other buyer. So, okay. Yeah, that makes sense.

And one question I should have asked you earlier probably, but kind of relating to that is, does it make any sense to come up with your own comps to bring to the appraiser? Like in that case where you're under, if I'm adamantly sure that that property is worth 253 and I have comps, can I bring them ahead of time maybe? Or only to if there's a problem with it? Yeah, I would say it's most important in business and life. Why not be proactive instead of reactive? And so I would say as part of your normative practice in business and flipping properties, yeah, come with data.

And even rather than calling them comps where you're saying, hey, here are your comps. Here's how you can do your job. Here's number one, number two, and number three. Just come and say, hey, here's some data I use to list the property. And so really what you're getting at is that this is support for your purchase price or for the contract price. and then you can make notes on Comp 1 and the MLS sheet. If you've talked to the other agent or if you have inside information, then, you know, do all those things. I think that's important.

If you know how to make graphs, which is such a good skill to have, and then you can show trends in the neighborhood with those graphs, bring those. I mean, bring whatever you can. I'd say that's great. Just don't bring the baseball bat, you know? For decades, real estate has been a cornerstone of the world's largest portfolios, but it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Funrise flagship fund. Now you can invest in a $1.1 billion

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Unlike other property managers, Mind manages your property like an investment. They obsessively measure the things that matter for your bottom line. Things like occupancy, delinquency, and net promoter score. And they have the results to prove it. Go to mine.co slash show me to see how mine performs and get your first month free, which is much cheaper than learning the hard way. So, you know, a lot of folks will go to their lenders with these packages, right? They're fully prepared, but they don't, when the appraiser comes in, they may not necessarily have anything pre-packaged or pre-planned.

It sounds to me like you're saying, if you want to potentially influence, and when I say influence, I'm just, I'm not saying in a bad way, I'm just saying, you know, you want to reveal things that you're afraid might be missed, put together some kind of package. talk about what's going on in the neighborhood, talk about potentially highlights of the property itself, features that potentially might make for a better appraisal, things like that, and have it plotted out and just basically, hey, Mr. Appraiser, here you go. Absolutely. And definitely include all the costs you spent to rehab the property as well as any other information like an itemized list,

written list of all your repairs. sometimes get to a property, then someone wants to go over that verbally. I'd love to just get that over email, something I can quickly cut and paste in the report and say, hey, they spent $23,000 on this house. And if you got the house for a really good deal, then let the appraiser know. I said, yeah, I bought this on the court steps. And I just got a slamming deal. And so, I mean, it shouldn't matter what you purchased it for previously, but the lender's going to want to know, why is this house selling for twice of what it did before. And so there's got to be some sort of justification for that, and they're going to be looking

to the appraiser to address that. Now, that's great. That's great. Well, what about that on the flips? You know, there's the guys who go out and they put lipstick on a pig, right? And I'm sure those are our favorites on Bigger Pockets, those guys who basically give a bad name to real estate investors, really. I mean, they just, you know, do bad things.

and assume that the property is going to be worth a lot because they just put pain over peeling paint. And then you've got the guys who are going in there. They're doing really quality work, putting a lot of money in. I guess, you know, we're not going to pass an appraiser. We're not going to fool you by trying to do shoddy workmanship, are we? No, no. I encountered a property recently where there were some shards of glass sticking out from a broken window of a double pane window.

And then this high-quality contractor or investor put duct tape over it to cover it. And it didn't fool me. Didn't fool the lender either. So, no, no. I mean, anyone, you know, worth a hill of beans in the real estate community will be able to look right through that and just see the poor workmanship. And I know in my market investors who really do a good job, because I know a lot of them personally or I've just been able to observe their work and I know the ones who

really don't do a good job and I know that's why in a lot of cases their property sell for less because they just really aren't done that well or they're trying to market their property to an FHA buyer but then I go then there's 10 FHA repairs on the property and then I'm thinking guys why aren't you getting this right so the quality of work that you do is going to be reflective in the price period there's no no two-quire questions about that, right? Absolutely.

It really, really matters. But I will say, too, it comes back to knowing the neighborhood market because you certainly don't want to over-improve the property. You know, in a $100,000 neighborhood. You probably don't want to put the $25,000 kitchen remodel, right? And so it's really important to know that again. And I will say, for investors, get to know an appraiser, take an appraiser out to lunch, get to know someone that you can do that.

He just wants a free lunch. guys. I'm free all next, you know, these next few weeks. I prefer to eat between 12 and 2. No, no, I'm serious because it's so important to have that relationship because I think what appraisers are seeing out in the market is crucial. And sometimes it's different than maybe investors. And I think that there's a sharing that can go on there because I do think also that investors are very, very in touch with the market, especially the ones doing high volume. Yeah. And one of the things that we like to tell people all the time is, you know, you get a lot of these newbies who are like, hey, how do I, you know, how do I start investing? What do I do? How do I get to know the values of the properties, things like that? And we always say, listen, you've got to go out and look at every property in your market. You need to understand your market as well as an appraiser would understand it. You're not necessarily going to do an appraisal on the property. But if you go and you look at 50, 100 properties in your area, you're going to have a pretty good damn idea of what a property's worth. And I think having that sense of education

and understanding is going to make you a better investor. It's going to help you to know whether or not to over-improve or not over-improve a property, for example. I think that's one of the problems you find a lot of newbies doing is they go out and they spend way too much money for the property and they end up, you know, making a lot less or nothing. I've made that mistake a number of times, actually. I mean, like, where I've paid too much for property, or maybe not even pay too much, you know, but I put way too much into it. And so, you know, it always usually works out okay, and I've been lucky maybe.

But there's definitely a point where you need to know your market and know that, like, my market does not need granite countertops. I mean, there are no granite countertops. honor tops in my county, except for, you know, the really high-end houses on the hill. And that's something I had to learn earlier on was that it's okay for me to put laminated in. And, you know, that's acceptable. So, yeah, so that's great. I'd actually like to move a little bit in something you mentioned earlier. FHA. What can you tell us about FHA? And some people might not even know what that stands for. And I guess what can you tell us about that?

Sure thing. Well, basically FHA guarantees loans. And so these are really a hot commodity in the market because buyers only have to put down 96, or they have to put down only 3.5% of the purchase price. And in some markets, like in California, where prices are still higher than a lot of places, that really means a lot because then buyers can get into properties and, um, and, um, and, And then really FHA has strict guidelines too where they want properties that are safe, sound, and secure. Those are their three Ss. And they have really a detailed list of minimum property requirements. And so the appraiser is going to go in there and they, you know, they're making sure that everything works. And they're making sure that there's no health and safety hazards as much as the appraiser can do. Because there's some things that appraisers aren't just kind of, the appraisers aren't specialists and, you know, toxic mold and, you know, environmental hazards, so to speak. So it can really be a good deal for buyers because they can get into a property that should be in pretty okay condition and get a loan to where they don't have to put down a lot of money.

That's great. Yeah. And in our show notes, BiggerPockets.com slash show 7. We actually have an article. It's FHA inspection checklist, which is a really popular post on the site. and we'll point to that and let people know so they can go through and check that out whenever they are going to have their properties appraised. I want to jump really quick to probably some of the most common FHA condition issues. Maybe you can fill us in on what are the things you see most often. Sure, I think one of the things I see most often is defective paint surface where there's chipping, peeling, laking paint or there's bare wood. It's got to be covered and a house is built before 1978 where there could be the potential for lead-based paint. That's a safety issue. And so that's why it has to be properly cured. So if you're flipping a property, just make sure

that's good. Make sure all the appliances work. If there's a heater there, if there's an air conditioner there, they should work. That's also, that's very, very common. In California, there's carbon monoxide detectors required now, and so make sure that those are there. Basically, just go through the house as if you were a 12-year-old and make sure things work. If the windows won't open, then make sure that they can open.

If the sliding glass door doesn't open, it's got to open. And so one thing that I see, though, that this has kind of been coming up quite a bit lately is that as an appraiser, I have to inspect the attic. I have to do an inspection from the shoulders up to just sort of visually observe what's going on up there.

And if there's not an attic access and there is an attic, then before you list the property on the market, just make sure you put in a scuttle because the appraiser's going to have to do that. And I just called one out. It was actually an investor flip. And I made the value opinion subject to me inspecting the attic. And so now I have to go back out there,

it costs to borrow $100, bucks, bolt up the loan for probably a week or so, while they make sure that they cut a square in the ceiling. That's great, great, great advice. Hey, you talked about lead paint, and there's been some controversy, controversy about lead paints of late on bigger pockets. I think there was just a little bit of confusion between some folks, but let's talk about lead paint and and you know obviously when when when folks go and they they sell a property built

previous to 78 they've got to give over the lead paint disclosure but what else do they need to do particularly when it comes to a property that's being purchased with kids you know so I know there's a little bit of confusion some folks have actually thought that that property has to be completely remediated of lead paint And that would cost a fortune. So what do you need to actually get done to protect this property for the next buyer? Well, according to from an FHA perspective, there shouldn't be any defective paint surface, which would be chipping, flaking, peeling paint, which would basically allow potential lead to be breathed.

And so it's important if there's any surface like that, that it's, the paint has to be properly scraped and then sealed with paint or an FHA approved sealant because, so then that way it can't be just be flicked off and little Johnny starts munching on chips. We don't want to meeting those kind of chips. And so that's really what it comes down to. I mean, if we had to totally remediate lead, I mean, our housing stock in America would just, be in really deep trouble. And so that's really what's most important. If you are interested, FHA actually has about a 50-page handbook about how to properly cure a defective paint service. So if you're looking for some inspiring reading, go for it. Yeah, that's great. And I think we can probably link to that in the show notes too. We'll see if we can find that and throw it up there. So be sure to check out that at biggerpockets.com slash show seven.

A Ryan, so earlier on the podcast you talked about something that I think we should touch on a little bit more here before we head out. And that's the topic of hedge funds. You mentioned Blackstone. You know, for those people are probably unfamiliar. The hedge funds are really starting to get into the single-family rental business. And they're scooping up properties around the country. But, you know, unlike what some of the gurus might make you believe. you know, they're not buying all the inventory.

You know, there's still plenty of property to go around. But why don't we talk about what are you seeing? You know, what are these guys doing? What's their price point? And at least for what you're witnessing and how is it affecting the local market? Sure thing. Well, yeah, it's been amazing to see investor activity in the Sacramento market lately. It's really, I would say investors are absolutely dominating the market.

where I said before, cash is pushing up median price levels, kind of making things look a little bit better than they are, since our unemployment is still 10%. So we have all this growth driven by outside forces, and one of those forces is definitely investors in hedge funds, private equity funds like Blackstone. They've purchased about 500 properties since August 1st, 2012, which is a significant amount.

They own about 900 right now in Sacramento County because they've been here before, owned properties before. But really, what they've done is that they've gone in and purchased really anything. They're buying on the court steps. They're buying on MLS and really have been real estate locusts in a certain regard. But the thing is, is that they aren't buying everything. There are still are properties. It's really difficult for others to get in on them sometimes since there's only about a one-month supply of inventory.

But what it's done effectively, though, is it's really driven up prices. It's created increased competition. Sometimes Blackstone, I've seen them overpay a good 10,000, 15,000 on properties. They've also purchased flips. And so it's been good for investors. And so investors who have properties and who have held on to them for years, I've seen a lot of private deals, but I've also seen deals on MLS where investors have been selling to them. Since I blogged about it several times, I have people calling me on a weekly basis saying, what's their phone number? I want to sell to them.

Whereas a lot of people, it's funny in the real estate community, black sense sort of like Voldemort where in Harry Potter, if you know the series, no one wants to say Voldemort, the evil figure's name because he has so much power. And I think in the real estate community, it's like that where a lot of agents don't want to really share publicly that they're frustrated. with Blackstone. And I'm not saying they're evil. I think that they're really savvy. But, you know, I think that's definitely a dynamic playing out. So do you see that they're avoiding the really ugly houses that are they only buying the good ones or are they buying everything that they can in every kind of a condition? You know, I haven't looked at every property, obviously, but I have noticed that they've stayed away from two specific areas in Sacramento that others would more categorize as the ghetto.

And so they focused 81% of their purchases, as I calculated a couple weeks ago, were under $200,000. And 19% were above that. And most of them were really below $250. And so the vast bulk of what they focused on is sort of the first-time buyer market. And so because they're not focusing on every neighborhood, I would say to other investors, it's time to diversify. Focus on where they're not going. or focus on other price points above 300,000.

Diversify, get a different plan together. And of course, I don't think they're going to be buying forever either because your money's got to run out at some point, even though they have millions. Yeah, no, listen, I mean, that's a really good advice. I actually had a conversation with a couple of private equity guys a couple weeks ago, and one of which works at a company that was scooping up properties left and right, And it's interesting.

You know, on the down low, obviously, I'm not going to say who he was and who he works for. But, you know, he basically was saying, listen, this is what's hot right now. And while it's hot, we're in. And so we're going to keep getting in. We're going to keep buying. And frankly, we don't give a damn what the price is. We're just trying to scoop up inventory so that we can justify to our investors that we're buying real estate and we're buying rental property. And at some point, things are going to change.

we're going to dump, we're going to unload our portfolios, and everybody's going to be happy again that the evil funds are out of the game again. So exactly what you said is true. I mean, these guys aren't going to be around forever. They're in now. They're probably, you know, some will be in tomorrow, but others might not.

So don't worry, diversify, and, you know, there's always going to be plenty of property around for you to jump into. Absolutely. Well said. I agree. Yeah, I guess we kind of probably should be get wrapping this thing up now. We do have a few questions that we like to ask at the end, though, Ryan, so I guess we'll just burn through those real quick. First of all, do you have a favorite real estate book? I know you're an appraiser, but do you have a favorite real estate

book out there? You know, honestly, I just, I'm not a huge reader. That just doesn't do it for me. So I'd say, I'd say no. I mean, I've certainly read all the essentials for my coursework. and continuing education, but that's not what sparks me in life. So I, you know, what's that spark you? What sparks you? You know, I love community building, working with my neighborhood association. I run a nonprofit to advocate for homeless youth. I love kayaking, biking, doing Legos with my kids, you know, just being outdoors,

camping in the backyard, building out of used wood. You know, those things are my passion. building out of used wood, explain that. Oh, well, I just love to, you know, redeem scraps that are sitting around to, you know, get two-by-fours and four-by-fours and, you know, sheets from somewhere. And, you know, I once built a clubhouse out of pallet wood. And I just take a lot of joy in that. Or I built a table for my porch last summer just out of scrapwood. So that's cool.

That's fun. Yeah. Oh, that's great. That's great. One of the big questions that we like to ask is differentiating between the top performers out there and the wannabes. Typically, when we're talking to investors, we'll ask them, hey, what do you think really sets these best investors apart? But why don't we apply that to appraisers here? You're one of these guys that I know I know nothing but good things about.

You've got a fantastic reputation. And so, you know, what do you think sets you apart potentially from some of the appraisers who are not as, you know, they're not doing their job as well? What's the difference? Well, first, thanks so much. I appreciate the high praise. I am just, I'm going to work really hard. And I know four years ago I started a blog to have an online voice to really just build connections with. people. And so that's really important in my presentation of business and life. I want to connect

with people and I will continually work very hard to diversify. And as I look at the trends in the market, I, you know, this refi boom will end for me as an appraiser. I've got a lot of lender work right now. And so I'm not putting all my eggs in that basket. I'm continually seeking other types of work and always, always fishing for private appraisals so that I can really thrive. That's very, very huge. I know when the market crashed, I didn't lose millions of dollars like a couple of the investors have talked about. But, man, there were a couple really dark years where I spent a lot of time on Craigslist

selling stuff in the house and where things got really meager. And I just, I want to make sure that I'm staying ahead of the curve, that I'm analyzing the trends very carefully so that I can be ready for what happens next in the market. That's great. And, you know, do you think it would be a good idea for investors to potentially go out and learn a lot more about appraisals, potentially get licensed in order to, you know, potentially run a better business, more effective, efficient, or do you think that's just going a little bit too far? I think that's probably going too far. I would say, let's some of the business. I would say, let's some, someone else who's professional, you know, add that person to your team, focus on what you do best,

but really get to know how to think like an appraiser because you want to have that mindset when you're approaching selling your properties or purchasing your properties because that's really the key. So honestly, it's a little bit challenging to go get an appraisal license right now for a lot of reasons. And so it would just, it would really be honestly an uphill battle. So I would recommend against that. Gotcha. That's great, Ryan. Hey, listen, where can people find out more about you?

I know they can go to your blog, which is Sacramento appraisal blog.com. Awesome. Anywhere else? Are you on Facebook, Twitter, Gplus? I know you're on bigger pockets, that's for sure. Yeah, yeah, Facebook.com slash Sacramento appraiser. And then on Twitter, I'm SAC appraiser.

And you're on Gplus as well somewhere. And Gplus, yeah. Awesome. Awesome. All right, man. Well, listen, it's been an absolute pleasure. I know I've learned a lot. and hopefully everyone else has as well.

Thanks so much for being on the show. Hey, thanks, guys. I really appreciate the opportunity. Thanks so much. Thank you, Ryan. All right, everyone. That was our show with real estate appraiser, Ryan Lundquist. I know.

I'm glad to hear that you liked it so much, Brandon. I did. Listen, I know I learned a ton of great things on the show, and I hope you guys all did. Certainly Brandon did. from the sound of it. As always, you can review all the links from this show on the show notes at BiggerPockets.com slash show 7.

As of today, we're actually having 115. Show 17. 5-star reviews in iTunes. And that's pretty damn awesome. This would be possible without the help of all of you guys. So, you know, I really just want to thank you. Of course, remember to follow us on Facebook at facebook.com slash bigger pockets and on Twitter at Twitter.com

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Thank you so much for listening. This is Joshua Dorkin, signing off. You're listening to Bigger Pockets Radio. Simplifying Real Estate for Investors large and small. If you're here looking to learn about real estate investing, without all the hype, you're in the right place. Be sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing.

online. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calicoke content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own.

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