[00:00:00] Speaker A: Welcome, listeners. You're listening to the Deeds in the Desert, where real estate investors tune in for the latest news.
[00:00:08] Speaker B: Welcome back to Deeds in the Desert. It's the Pat and Carrie show yet again. And we're going to talk about appraisals, why we use them, why we don't. Maybe how AI is affecting how we analyze real estate. So, Pat, here we are again. Look at us getting older.
[00:00:25] Speaker C: It's the only thing that's changed.
[00:00:26] Speaker B: Nothing's changing.
[00:00:27] Speaker C: No.
[00:00:27] Speaker B: Although we're both working out now a little bit. Yeah. Feeling. Feeling good. Feeling stronger.
[00:00:33] Speaker C: Better? I wouldn't say better. Good. I wouldn't say I'm strong, but I'm stronger.
[00:00:36] Speaker B: Yeah. You know, we used to work out a lot.
[00:00:39] Speaker C: Yes.
[00:00:40] Speaker B: Back in the day.
[00:00:41] Speaker C: Yes.
[00:00:42] Speaker B: We would go to CrossFit at lunch. Remember that? I have showers in the office. It was bad for others, but, you know, we were doing it and we were getting strong.
[00:00:50] Speaker C: Yes.
[00:00:50] Speaker B: It was fun.
[00:00:51] Speaker C: Yeah.
[00:00:51] Speaker B: We've also done a little bit of.
What do we do, some hot yoga. That was interesting. Remember that year you wanted to figure out how to touch your toes?
[00:00:58] Speaker C: That's true.
[00:00:59] Speaker B: Yeah. That was wild too.
[00:01:00] Speaker C: Yeah.
[00:01:00] Speaker B: It's crazy how the evolution changes. And now here we are back again, working out. Now this time we have to have personal trainers because we have no ambition in life because we're getting older.
[00:01:11] Speaker C: Right? Unfortunately true.
[00:01:12] Speaker B: Exactly.
So we're gonna do something with appraisals. We're going to talk about the evolution of appraisals. Kind of like our workout strategies, they're changing drastically.
[00:01:21] Speaker C: Evolving all the time.
[00:01:22] Speaker B: Clearly. Like cracking knees.
I mean, we got it all. We definitely have it all. But I guess we have to talk business. They're going to make us talk business.
So, appraisals.
[00:01:32] Speaker C: Yes.
[00:01:32] Speaker B: You know, this is kind of a taboo for us. Do we use them? Do we not? Why do we use them? And we've talked about this before, you know, the value of appraisals sometimes.
The value of BPOs, sometimes. But we ran across something kind of interesting the other day.
We had a random BPO that was an odd amount because if we would have gotten an appraiser, it would have been different.
[00:01:58] Speaker C: Yeah.
[00:01:59] Speaker B: So why do we not use appraisals?
[00:02:03] Speaker C: Well, I wouldn't say we don't use them. Right. Because we. There are times we do.
You know, really the rationale behind it is on the front end, we have to show a third party opinion of value, a valuation source. That is a requirement that we want to adhere to. And so we will always show that however, now where that opinion of value comes from may differ. May. It may come from appraisal, may come from a broker's opinion of value may come from a different source. The appraisal itself we typically don't utilize because we have found that they are typically inflated, they're typically overvaluing what the property's worth because that's what they think they want you to show.
[00:02:48] Speaker D: Yeah.
[00:02:49] Speaker C: But we as a lender are going to them for surely a third party, independent opinion of value. We want to know what do they think the property's worth.
[00:02:57] Speaker D: Yeah.
[00:02:58] Speaker C: That's their job, to know or ascertain what properties would be sold for under normal marketing conditions.
[00:03:05] Speaker D: Yeah.
[00:03:06] Speaker C: What we found more success with, however, is going to brokers, to going to real estate agents and asking them their opinion of value. Because at the end of the day, they're the ones that are actually transacting. They're the ones with the boots on the ground. They're the ones that are actually talking to buyers and sellers on a daily basis. It's much like I related a lot to a food critic. A food critic is a guy that typically go. Or woman that goes in and critiques your food, but has never operated in a kitchen, has never been a chef, has no idea how this was created, where the ingredients came from, and will critique you on one side of things.
[00:03:40] Speaker D: Yeah.
[00:03:41] Speaker C: As opposed to somebody that has been involved and is active in the industry.
And so when I go out and get a Yelp review, I prefer to look at not the food critics. But what do other chefs go to? Where do they. Yeah, that's more important to me. And so it's much like in the BPO side, we want to know where those, the BPO values coming from because those are the ones that are actually doing the work. Not in this theoretical world of appraisals.
[00:04:05] Speaker D: Yeah.
[00:04:06] Speaker B: Now it totally. It totally makes sense. And, you know, we've leaned a lot on BPOs because they're more realistic too. I mean, it's so insane. I mean, we're not appraisers. Neither one of us are appraisers. So, you know, not knocking appraisals by any stretch of imagination.
But what is the premise behind them putting value to it?
[00:04:27] Speaker C: Well, the premise is it all got origination through the lending industry. Lenders who were not privy to different markets wanted to lend in different areas. They needed to know what. What the value was because they don't know the buyer and they don't know the seller. They don't know if this is truly an arm's length transaction.
And so they got involved with appraisers. The appraisal industry got involved to support their endeavors of going to new markets where they didn't know what was transpiring. So appraisers in theory are independent third parties that are giving evaluation without knowing the buyer or seller and not knowing if there's any, you know, intricacies associated with their deal. Not that's not shown on paper.
Unfortunately, with the residential housing community, when you go out and get an appraisal, about 90 plus percent of the time, the appraisal will come in at the exact same dollar amount as the contract, the purchase and sale contract. Now is that pure happenstance coincidence or is that just a lazy appraiser saying, oh yeah, that's good enough, we will put it in, I'll find the data to support that value. So it's not giving the buyer headache or the seller headache. Because if either one of those groups hate me, I'm going to get a bad remark on my.
[00:05:42] Speaker D: Yep.
[00:05:43] Speaker B: And nobody's going to call me company.
[00:05:45] Speaker C: And I'm not going to get business going forward.
[00:05:47] Speaker B: Yeah.
[00:05:47] Speaker C: So it's just kind of a sham the way it's turned into. To be honest, in my personal opinion, again, nothing against appraisers themselves. It's just a broken industry.
[00:05:56] Speaker B: It is. Because, you know, it's super ironic and you're 100% correct. You've got the sales contract and that sales contract's only going through if the appraisal is at that value or higher.
[00:06:06] Speaker C: Right.
[00:06:07] Speaker B: Otherwise we're going back to the negotiation table.
[00:06:09] Speaker C: Right.
[00:06:10] Speaker B: Over and over and over again.
So it's just sometimes it's easier just to rubber stamp that thing and move on.
[00:06:16] Speaker C: Exactly.
[00:06:17] Speaker B: But with the bpo, they're looking at other things. They're looking at future growth, they're looking at what's coming into the market, they're looking at who's next store. They're looking at, you know, prior sale. They're looking at so many different things where appraisers are kind of put into a corner, you know, more or less. And they're not able to look at it from a, a more macro.
[00:06:42] Speaker C: Absolutely.
[00:06:43] Speaker B: Side of things. And so we're looking at it from macro and micro. We're looking both directions. But this is, in our opinion, unbiased. But we also use BPOs for another reason.
What, what if we had to take back the property?
[00:06:58] Speaker C: Right. Are the appraisers going to be the ones helping us to sell that asset or Is it going to be the broker, the real estate agent who's actually going to help us with that? And so to your point, we have a built in kind of network at that point of somebody that has some expertise in the field, has some knowledge base of where things should be transacting and we have a built in broker to go to to sell it. We also go to them and say hey, you appraised it or valued it at this number 18 months ago, where what changed? Why is it different? Why is it more, why is it less? Or why is it the same if it has changed? Why and secondarily are we going to be able to get out of this for what we, at least what we have into it?
[00:07:40] Speaker D: Yeah.
[00:07:41] Speaker C: And you know, that's a great built in marketing strategy. To your point of another reason why to use brokers over appraisers.
[00:07:49] Speaker B: So when you build your network of brokers that you're looking to get an opinion of value, what is the criteria that you look for when you're employing them to do this?
[00:08:01] Speaker C: Yeah, deal volume. I want to see them doing a lot of deals outside of guesstimating value. I want to see them actually doing transactions buying and selling real estate. Second is number years in the industry. I want to know that this isn't the, their first rodeo that they've been through in market cycles before. And then third, I want to look at what property type we are evaluating and what their expertise is. Real estate is not the same.
Single family detached house is not the same as a casino that you see behind us. The appraiser and broker. That is opinion giving an opinion of value on that should be different when it comes to those two different types. So we want to go and get the, you know, right to the source of the knowledge and, and get their opinion of value.
[00:08:47] Speaker D: Okay.
[00:08:48] Speaker B: So more or less, kind of, kind of a little bit of a, I don't know, an assessment of value happening for sure to see if the value of the broker is there as well.
[00:09:01] Speaker C: No doubt.
[00:09:01] Speaker B: No pun intended.
[00:09:03] Speaker C: Nice joke.
[00:09:04] Speaker B: Is there value with the broker?
They're going to use that later on social, I just know it.
Okay, so now we have, now we have options, right. Our options are we can get a broker opinion, an appraiser. We could go to the county assessor's website, I guess if we wanted to. Which. Have you ever used that?
[00:09:25] Speaker C: Have we ever used that? I think we have once.
[00:09:28] Speaker B: Okay. Were we desperate? Why did we use that?
[00:09:31] Speaker C: I'm not, I don't remember why. Yeah, but I'm Pretty sure we did do it one time and I don't remember the rationale behind it.
[00:09:38] Speaker B: So how does the county assessor determine value?
[00:09:42] Speaker C: They do kind of global appraisals, which is, you know, the average price per square foot or per lot is X. We're going to put that across everything. And they don't really look at the intricacies involved. Is there a river running through your land? Land and half of it is covered by a flood zone.
That probably will have a detrimental effect on, on the valuation.
Is there great ingress, egress associated with it? Was there great access, visibility? None of that is really shown on an assessor's appraised value.
[00:10:18] Speaker D: Yeah.
[00:10:19] Speaker C: Although that's what they call it.
[00:10:21] Speaker D: Yeah.
[00:10:22] Speaker B: So we've got these third parties, you know, we have to have a third party review.
Does that preclude us from doing an internal review of value?
[00:10:31] Speaker C: No, as a matter of fact, it is something that we get done and we want to present that to investors because in theory it is an independent third party opinion of value.
As a lender, as a kind of a broker in the deal. Right. We don't really have skin in it. We're matching up lenders, our investors, to borrowers, the people who actually need the money, and just kind of consummating that marriage between the two of them. We have kind of a responsibility to kind of look through those documentations, make sure there's nothing fraudulent going on and make sure that they're above board and accurate. So one of the ways we do that is kind of doing our own internal opinions of value. When we do that, we don't advertise it to the clients because it could be deemed, you know, not independent. And it's not a third party, an arm's length transaction. However, it is something that we want to take a look at, make sure just does it pass the sniff test?
[00:11:27] Speaker D: Yeah.
[00:11:27] Speaker C: Does this feel right? Is there something else going on here? And so, yes, we do run our own evaluations and we put a lot of onus on that as well. And so sometimes you will see BPOs or valuations come back at extremely high levels or extremely low levels. It doesn't necessarily mean that that's what we believe it to be. And what will usually be indicative of those wild swings in value is we don't believe it to be that high or that low. And it's something kind of in between. And so with ones that you see advertised at an extremely high rate, it's probably one that we think is actually a little bit lower than that. So we feel comfortable doing at the higher rate or the ones that are at the really low numbers, the tens or 20% loan to values.
[00:12:10] Speaker B: And we're shaking our heads.
[00:12:10] Speaker C: We're saying, how in the world did they come up with this? There's no way we would give them 50% of this value. It just. It's not a good deal.
[00:12:18] Speaker D: Yeah.
[00:12:19] Speaker C: And so we'll give them much less than that. And that's why the Ms. No market in the LTV.
[00:12:24] Speaker B: So it's interesting you say that. Let's say we have a BPO that comes in at 17%.
Why don't you go get two or three or four more?
[00:12:33] Speaker C: We could.
We could. But we would also do it on the other side as well. Right. When there's a 90 LTV, why don't we go out and get it? Yeah.
[00:12:41] Speaker B: Keep working it to the stage that, you know, it looks like it fits the bill.
[00:12:45] Speaker C: Right. And do it just like an appraiser does, which is trying to make both sides of the equation happy. Because we're an independent, independent third party here. Right. We're just trying to marry up investors to borrowers. We could do that. And many firms do that.
[00:12:59] Speaker B: I'm sure.
[00:12:59] Speaker C: However, what's the point? It makes it easier for the salespeople to sell it.
[00:13:04] Speaker D: Yeah.
[00:13:04] Speaker C: It makes it easier for new clients to go in and feel warm and fuzzy about going into the deal. But at the end of the day, it's one person's opinion of value.
[00:13:12] Speaker D: Yeah.
[00:13:13] Speaker B: Period.
[00:13:13] Speaker C: That's it.
[00:13:14] Speaker B: Exactly.
[00:13:15] Speaker C: And so to put so much onus on one piece of information, I think is a little shortsighted and one that we as investors or even as a company sometimes put a little too much credence in.
[00:13:29] Speaker D: Yeah.
[00:13:29] Speaker C: Because it is just one piece of the pie.
[00:13:31] Speaker B: Absolutely. Which kind of leads you back to. Again, it's, you know, who you're working with that really matters because there's a reason why we have an underwriting department.
[00:13:42] Speaker C: Right.
[00:13:42] Speaker B: It's not to just review a bpo.
[00:13:45] Speaker C: Right.
[00:13:45] Speaker B: So there's a lot that's going into the actual review of the asset prior to us ever even getting a bpo.
I know damn well, working with you as long as I have, that you're not getting a BPO until you're comfortable with the value.
[00:13:59] Speaker C: Right.
[00:14:00] Speaker B: Period. Right. We're not going out and be like, hey, well, let's just test the theory.
No, we've already tested it through our underwriting process to determine whether or not we feel it's viable to put out as an investment for our investors.
Otherwise, there's no need to go get a value. It's already not made. The 90% plus that doesn't get approved around here.
So something important for individuals to remember. And yes, we're not going out going, all right, we got to get it in between this window. So we're going to go to four broke. No, we pay one time, we get one opinion of value, and that's where it sticks.
[00:14:35] Speaker C: Right.
[00:14:36] Speaker B: But now I'm an investor. I invest in this loan. It was, you know, presented to me at 20% LTV, and we are in a foreclosure process. And now all of a sudden we're butting up against 100% value with sale and 100% of my capital being returned, and I'm not seeing an 80% capital gain.
This is why.
[00:15:00] Speaker C: This is why. Yeah, this is why. And most of the times it is why. Because the appraiser, and it's usually appraisers, not BPOs, that we fall into that trap of have. Have put a arbitrary value on the property. That is just unrealistic.
[00:15:16] Speaker D: Yeah.
[00:15:17] Speaker C: And because it's unrealistic, our investors has anchored to this high valuation that has never been obtainable to. To really go into the deal.
[00:15:26] Speaker D: Yeah.
[00:15:26] Speaker C: And so they are usually disappointed of the outcomes when we have to foreclose. That there isn't that 80% buffer of equity there. That's much less going into it.
[00:15:37] Speaker D: Okay.
[00:15:37] Speaker B: So maybe more important in this conversation is not the appraisal, not the broker price opinion. It is our evaluation process and the ratio of loan to value or loan to cost that we are willing to put out to our investors. So what does that look like from an internal process?
What approximately is that percentage and what does it look like for. And let's take it from acquisition, development to construction.
[00:16:04] Speaker C: Yeah. And that's really the key. Right. Because each one of those has a different level of risk with different risk tolerances. The ltvs change. So let's start on the acquisition side, which is typically the most risky part of the whole process. There's many more unknowns, many more delays that could arise. And because of that, you need to be compensated for that additional risk. One way we can de risk it is doing lower loan to values and lower loan to cost. So on average, of those three life stages of a project, you will see the lowest loan to value, lowest loan to cost associated with the acquisition loans.
[00:16:40] Speaker D: Yeah.
[00:16:41] Speaker C: Those currently average 70% of cost or 60% of value.
[00:16:47] Speaker D: Okay.
[00:16:48] Speaker C: On average, some of them are a little bit Higher, some are a little lower. But that's kind of where it pops out at. On the development side of things or the early construction side of things, you'll see that increase by 5%, so about 65 and 75% to loan to value and loan to cost. And then on the finished product side or true construction loans, you'll see it increase another 5% up to that 80 and 70% numbers. Okay, so in average, we're at the high 60s in a blended portfolio.
[00:17:21] Speaker D: Yeah.
[00:17:22] Speaker C: On a loan to value basis and mid-70s on a low loan to cost basis.
[00:17:27] Speaker B: Okay, so that's probably the most important thing that people need to take from this podcast is you may see a BPO or an appraisal, higher, lower, et cetera.
They need to stay within our range. They need to consider that range when they're investing with us, knowing that if we have to foreclose on that property, we're looking somewhere between 20 to 25% equity.
And at the time the loan is issued.
[00:17:57] Speaker C: That's correct. Things change.
[00:17:58] Speaker B: So let's talk about that.
[00:17:59] Speaker C: Yeah, things do change for the positive and the negative. Usually for the positive you don't hear about. Because we don't get any of the upside. Right. We are, we. We're here simply to mitigate risk because we don't partake in the upside. The one thing we can change is how much downside risk do we have. One way to do that is through the ltv. And so, you know, we will see a process in which the value of the property changes throughout time. Is easy to see and understand with a construction loan. Yeah, it's easy to see and understand that a property that has no house built on it is worth less than a property with a house built on it. Yeah, it's, it's understandable. We can see the value creation. Other times it's not as apparent. The value creation can come through entitlements can come through. Zoning and planning can come through engineering can come through just general market conditions. What is real estate training transacting for in that particular market? Yeah, you know, the ebbs and flows associated with real estate valuation can be more macro in nature and therefore something outside of our control.
[00:19:10] Speaker D: Yeah.
[00:19:10] Speaker C: Or more micro in nature, such as the density, how many units they're going to get on that potential particular piece of land.
And so we do see that transact happen quite often that you will see a negative or positive impact to valuations from the date of original origination to the date of ultimate sale of the asset.
[00:19:34] Speaker B: Yeah, ltv is always moving, always. And that's something we have to remember when we're investing in these types of products. It is always moving. So sometimes, like you said, for the better, sometimes not.
[00:19:45] Speaker C: Right.
[00:19:45] Speaker B: It really depends on, you know, so many factors. I mean, we could sit here and talk about all of them, but every specific loan is different. And that's something that, and that's why our investors have choices. Right?
And when you're investing in a loan, you have a choice of when you invest in that loan. Acquisition, development, construction.
So read the investment overviews. You know, consider the risk in these investments because there is risk, but there's a lot of reward too in this. And we've seen that definitely up to this point. What have we funded? 2.3 billion.
[00:20:17] Speaker C: I think we're going on 2, 4 now.
[00:20:20] Speaker B: 2.4 billion.
[00:20:21] Speaker C: Yeah.
[00:20:22] Speaker B: What, what would you attribute your success to?
[00:20:26] Speaker C: You know, I think we look at things much different than the average lender does. As you pointed out, we actually have an underwriting department here that we don't just rely on that third party opinion of value. Most lenders, whether that's hard money or more institutional, your normal banks and community centers will rely on a third party opinion of value. Whatever that number comes in at, they will say that's the value source. We'll give them X percentage on that based on their ministry building blocks that they have that are fairly arbitrary of we do 65% alone to value or 60% in this region or whatever their arbitrary number is. We'll take a more holistic approach and look at the borrower's asset that we're going to be collateralized by, but also the borrower themselves. So we spend most of our time underwriting that asset. That's where our background is and at the end of the day, that's where our collateral is.
[00:21:21] Speaker D: Right?
[00:21:21] Speaker C: That's the piece that we can foreclose and take back the easiest. So we want to make sure we're surrounded by a blanket of equity. Okay, But I would say the, if there's one key, it's working with the right people.
We have the ability to pick and choose who we work with. And I like to think that we work with good people and good borrowers. These are not people that are out just trying to scam a bank and get money out of them. These people are ones that I've talked to, I've sat down with. I've seen their project, I've seen what, what kind of car they're driving to the property. I've seen the Prior properties that they've done both successfully and ones that didn't turn out as well. I want to see the good, the bad and the ugly. And I like to believe that these are tried true borrowers that have been through the market cycles, that had been through the 0 sevens, eight to nines when property values got cut in half.
[00:22:18] Speaker D: Yeah.
[00:22:18] Speaker C: What happened then? What did they do at that point? So I think a lot of our success is purely just being a middleman. We just deal with really good investors and really good borrowers.
[00:22:29] Speaker D: Yeah.
[00:22:29] Speaker C: And it's simple as that.
[00:22:31] Speaker B: Okay.
I don't think I have anything else, but we're going to, we're going to mess with our marketing crew behind the cameras right now because we started this episode. He's over here wondering what's about to happen.
He's about to take off his headphones. But he knows well enough that working with Carrie always comes with some hidden gems along the way. So now he's sitting there wondering. So, Pat, we started this episode talking about the fact that we started working out.
[00:23:00] Speaker C: That's correct.
[00:23:01] Speaker B: And I know I'm not as strong as you, but we're gonna arm wrestle.
[00:23:05] Speaker C: Oh, God.
[00:23:07] Speaker B: And we are. They're laughing behind the scenes right now. So I'm gonna do an outro first and then we're going to stand up and we do have a camera in front of us. So we're going to arm wrestle, but I'm going to get a three quarter head start.
Is that fair?
[00:23:22] Speaker C: That's fair.
[00:23:23] Speaker B: I mean, it's fair, right?
[00:23:24] Speaker C: That's. That's fair.
[00:23:25] Speaker B: It's fair. Okay, so when is my performance review?
Yeah, I think I missed that, didn't I?
[00:23:35] Speaker C: Well, now it's going to be today.
[00:23:37] Speaker B: I'm guessing it's going to be today right now.
[00:23:39] Speaker C: Yeah.
[00:23:40] Speaker B: If, if you win, I'll do your performance review.
If you don't win.
I'm just kidding. So I'm going to do an outro really quick just so he has it. But. And then we'll, we'll let him decide which outro he wants to use.
[00:23:52] Speaker C: Deal.
[00:23:53] Speaker B: So thank you so much for joining us for deeds in the desert where we are talking to Pat Vassar over here as it pertains to the value of assets, what we should consider as investors, maybe what we should consider for loan to value properties where we want to invest.
You know, there's risk and there's reward with every investment. So thank you so much for joining us. We'll see you next time.
We started this episode talking about the fact that Pat and I are finally working out again. Finally. We're getting older, but we're still working out.
[00:24:23] Speaker D: Pat.
[00:24:25] Speaker B: Loan to value. Loan to cost this way.
Loan to cost that way. Loan to value.
[00:24:32] Speaker C: Deal.
[00:24:32] Speaker B: Ready?
[00:24:33] Speaker C: Let's go.
[00:24:35] Speaker B: Set.
[00:24:36] Speaker C: Set.
[00:24:36] Speaker B: I get a start?
[00:24:38] Speaker C: You get start right here. I get start here. Okay. Ready? Yeah.
[00:24:41] Speaker B: Set out. Go.
[00:24:43] Speaker C: Let me know when you want to start.
[00:24:44] Speaker B: Go.
[00:24:45] Speaker C: Okay, let me know. Are you going?
Wait, right now? We're going. This is life.
[00:24:50] Speaker B: It's going to be loaded cost.
[00:24:52] Speaker C: Oh, loaded cost wins. Loaded cost definitely wins. Not loaded value.
[00:25:00] Speaker D: See you next time.
[00:25:02] Speaker A: Thanks for joining us this week on Deeds in the Desert, where short term investments meet long term investors. We hope you enjoyed the content so much that you share it with all your friends. Who doesn't like learning about passive fixed income, right?
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