The Secret Sauce Behind Roofstock’s Valuation Reports

In this episode, Emil and Tom talk with Leandra Figueroa, the Valuations Manager at Roofstock, about what goes into our valuation reports. --- Transcript:   Emil: Hey everyone. Welcome back to another episode of The Remote Real Estate Investor. My name is Emil Shour, and today I got my co-host Tom Schneider, and we're going to be talking to our valuations manager here at Roofstock. Her name is Leandra Figueroa. We're going to be learning all about what goes into our valuation reports, how Leandra and her team compiled those and what it means for investors. So let's hop in   Emil: Leandra. Thanks for coming on the show. We're excited to have you guided to be here. So like we do before any episode, anytime we have a guest on I go and I scour their LinkedIn, creep on their LinkedIn just to get a background on them. And I noticed that you've been appraising and running valuations for over a decade now, but can you tell our listeners a little bit about yourself and what you do here at Roofstock?   Leandra: So here at Roofstock, I started as a pricing analyst, basically looking at the properties that the sellers are looking to list on Roofstock and looking at the sales comps for that specific property, you know, the same size similar condition, and actually seeing what the property could sell for in our marketplace.   Emil: Nice. And how long have you been at Roofstock   Leandra: Just made three years last month. Thank you.   Tom: 21 years in dog years as a startup,   Leandra: It feels that way.   Emil: So run me through kind of just, you and your team day to day. What are you guys really focusing on?   Leandra: So we have a couple of variations of tasks that come through their valuation tasks. They could be initial pricing tasks. This is where the sellers first engaging with our account managers and kind of just feeling out to see what we feel the price range could be, what they could sell this property for. And then we have another set of tasks where right before a property gets published, you know, the inspection is completed through the certification team, and then we're actually able to give a more accurate opinion of value because we have an inspection report. So that's another step. Those are another bunch of tasks that we do prior to publishing. And then another one that we look at, I guess, similar to the initial pricing is the seller self service. This is where the seller actually requests the valuations themselves and kind of just try to flow through the roof, that process. And so that's another way that we also value the properties that come through.   Tom: That's really interesting. How you talking about this funnel? You're talking about, you know, you do this initial pricing and then you get more information with condition. How big of swings do you see? And I'd love to learn a little bit from an appraiser. Like what is the ways that an appraiser thinks about condition? Because I understand there are categories, right?   Leandra: Correct. Correct. So there's a C1 through C5 and C5 being new construction, never lived in. Though funny enough, some of our sellers, they have a 1960s home and they'll select C1 as the condition.   Tom: But it’s beautiful. It's beautiful. Just kidding.   Leandra: What do you mean it’s not C1?   Tom: That’s literally brand new build, right?   Leandra: Yes. It's absolutely only for new builds and this is in the appraisal world and then C2, maybe more high end rehab renovation. C3 is average, maybe some updates here and there. C4 no updates like normal wear and tear. C5 and C6 is almost like uninhabitable and, and needs major repairs. So yeah,   Tom: How big of a swing do you get in valuation based on condition? You know, if you had to do it like…   Leandra: From our initial pricing?   Tom: Yeah, just kind of a curious question   Leandra: I wouldn't say there's too much of a difference. I think if anything, like I said, some sellers will say, it's the one and then the inspection report comes back and it's more like C3. So we know when sellers say C1, it's just, it's just telling us that they've done some rehab work. And so we kind of try to value it as a C3. And then if it turns out that, you know, after reviewing the inspection report that they did do these high end upgrades, then we're actually going to look for the right comparable and not just stick it at C3. We're going to look for the C2 comps. So it's rare that there's a large variance, I would say maybe five to 7% of the time. It's completely out of range from where we were initially   Tom  (04:47): Trust, but verify, trust, but verify. I got it.   Leandra: Yep.   Emil: Some people who are listening, they're not even sure where, so we publish these valuation reports with each listing that goes on our site. Can you tell the listeners where they can access that with each property?   Leandra: In the analysis tab for each listing, you'll be able to see the valuation report. Initially when you first look at the listing, you'll see the range, you'll see the value range, you'll see the rent range, but clicking on the analysis tab would actually show you the PDF of the report.   Tom: And in that PDF, it's pretty much all the homework, right? You can see the actual comps and the sale date and the square footage.   Leandra: Correct. And if you wanted to see photos of the comparable to kind of just for your own knowledge and how we're comparing it to the subject, you know, just a quick Google search on those comps would be able to show you some photos of the comps we use.   Emil: Got it. Yeah. I was going to ask what's in there besides, I mean, valuation range, obviously you guys pull comps as well. I think neighborhood score is in there. Is there anything else that we add in there?   Leandra: I believe just the subjects data, just your bill bed back, count footage, lot size neighborhood score. I believe school score that's in that as well. And sales comps are going to be in there. Perfect.   Emil: Awesome. Okay. Can you run us through someone who's never done evaluation? Just what does that even look like? Where do you start? What are the processes you go through to get all these comps and come up with the evaluation report?     Leandra: Well, at Roofstock, I mean, the first thing is like, that's verify the data. You know, the seller comes to us with a three bedroom, two bath with 700 square feet and it's like, Ooh, something seems off here. So then we want to look at County records. We want to just see what other data we can find. Funny enough, I have a situation that I ran into this morning where it's a 900 square foot triplex with four bedrooms and three bathrooms. What we found was there was a finished basement that actually has two units. And so what you want to do in those situations, so first verify the data. You want to make sure that we are going to value this properly and you wouldn't be able to use in that situation that I had this morning, priplex comps were all the square footage is above grade. You really want to find one where, you know, there's a main floor and then there's a finished basement with a unit down there. Like that's going to be your best comparable sales. So going back to just the process itself, it's verifying the data before you actually can find what you're looking for, find the right comps, because you want to make sure that you're looking at sales that are recent, especially with market changes. And you want to look at sales that are similar in size, similar in bed bath, count your build location and condition.   Emil: Where are you looking for those comps? Is it Zillow? Is it somewhere else?   Leandra: So we actually have a couple of third party vendors that we use that generate data, sales data, probably from the local MLS or just County record data for prior sales. And so we're taking all that data and actually looking at the ones closest in proximity to the subject. That's really going to define the neighborhood and what that property could sell for. Cause like we know values can differ from one block to another. You see that a lot in Chicago or neighborhoods that are vastly different from blocks of blocks. So we look at third party sources sometimes we'll look at Zillow, but for the most part to sales, we see on Zillow, we've also seen from the data that we pull.   Tom: I think there's this interesting art and science to an appraisal. And you know, you're talking about finding properties that are close in proximity and recent sale. And ideally, you know, you find something that was sold right next door, exact make model. At what point do you put, you know that, Oh, that's too old of a sale that, that shouldn't count in my analysis or, Oh, that's too much square footage. I'd be curious. It's just some general that you, as a longtime appraiser, think about as not valid in comparing.   Leandra: I mean, if the house right next door sold within 12 months, I would still use that as a comp because you have to do this side by side comparison to even see if there was an adjustment in value for that market, for that property. So you have to take more than one comp to figure out what the adjustment is for size, what the adjustment is, if any, for bed bath count and what it is for time, you know, if any, from what the value is today versus where it was last year. So you have to do that analysis with at least three properties. And that's why appraisals tend to have at least three sold comps. So you can really dial it down and figure out what the adjustments are for the different features of the subject.   Tom: Yeah. So that makes sense in that appraisal, it will be much more difficult in areas or more subjective if there isn't a lot of sales. Am I understanding that right?   Leandra: Yeah, that is correct. It's really just based on, and lenders tend to give the most weight to sales comps just because it's kind of like insurance for them. We know we can sell it for this price, should the borrower default or you know, something along those lines. So in areas where there's less sales happening within 12 months, it tends to be difficult. Sometimes we'll have to expand further, go back 18 months and actually apply a time adjustment for those comps that we're using. And even then, it's kind of still just hard to figure out we're having to expand outside the subjects, immediate neighborhood to try to find at least three solid comparables.   Emil: That makes sense. I wrote down a question, I forgot to ask you, as you were going through how we do the evaluations, you mentioned there was a finished basement in that triplex, I'm curious are finished basements included in square footage on a home, or it has to be above ground or whatever you would call it.   Leandra: Correct. On the standard appraisal form. Basements are separated from the above grade square footage. So although this property has two units that are clearly generating income for the owner, that value would be in line on the sales comp grid with the basement and not that above grade level. So it's super important that we find a comp with a similar unit in the basement, which can sometimes be a needle in a haystack, but, but we'll keep expanding and we'll keep doing those time adjustments. If we need to just to find that one, that's really going to help us figure out what this could sell for. So, yeah, you're right. It's not included in the above grade square footage   Tom: Leandra. I know a lot of investors both on the buy and the sell side. They look at Zillow, right? It's super easy. It's kind of tasty, just a single number. What would you have to say to investors who are really banking on that number either as a seller, as a buyer, as that is the truth about what the valuation is on the property?   Leandra: I would say, don't. No, I mean on the surface, it's nice to see, but I wouldn't just stick with one, right? Like [email protected]. Look at Redfin, look at Zillow. And more importantly, Zillow has a really nice tool where you can actually dial it down to properties that are more similar in size, kind of how we look for comparable properties when we're valuing our listings, you could do the same thing in Zillow. There's a filter section where you can filter out the small stuff, the big stuff, the stuff different in size. I mean, I'm different in age, different in size and kind of like narrow your search radius to really get a good idea of what your property could be worth. But definitely don't be fixated on that zestimate or that Redfin estimate. Do your own research and do your own comp polls super easy. Zillow has that nifty tool. And I would definitely start there.   Tom: That's great. So get into it. Look at the actual sales comps before leaning so heavily just on that one number they pull up. That's great.   Emil: I want to second that actually. So I track my Zestimate pretty regularly and the first property I bought, it's been about three years since I bought it. And it looked like on paper, according to the Zestimate that it had appreciated like $40,000. So I went to do a cash out refi and it was significantly less just because I think this is just not knowing any better. You really, really have to take into account the quality, like you mentioned, right? Like they're just probably doing it more so based off size, square footage and the surrounding area, but off all the homes in the area where they're coming up with that, or the kitchens are brand new, the bathrooms are brand new in your home. It's a little more dated. You're not going to get in that range.   Leandra: Right. You're right.   Tom: You think you're a C2 Emil, you're a C3 Emil.   Emil: I'm a total C3.   Leandra: No, you hit it right on the nose with that. I mean, Zillow takes all the sales and Zillow doesn't know what the condition is of your property or the property, the other properties that have sold. So that's where really takes that human touch to really figure out and dig deeper. Like, you know, is this actually a good comp.   Emil: Right   Tom: My other question that I have is, so you look at tons of comps all the time. I'd be interested if you've noticed any trends we're roughly, I don't know, two, three months going into a pandemic. Have you noticed any things with the sales price or do you think it's still too early to notice any adjustments and I'd love your thoughts on it?   Leandra: Yeah. I mean, still valuing properties today. Honestly, I have not seen yet any big price drops to where it's significant. What I have seen is a slowdown in actual sales. So a lot of sales data is more from like March, December, January. There's really not too many recent transactions. And then rightly so, right. People may are a little nervous, but I haven't seen a decline in crisis yet.   Tom: It's the function of doing transactions have been stalled up with shelter in place and not being able to go out and do appraisals and counties shutting down. That makes a lot of sense.   Leandra: Yeah, definitely.   Emil: One of the last things I wanted to ask you, so these valuation ranges we have on our reports, what percent of the time is the appraisal coming back in that range? How often are we basically missing? Do we have any data around that   Leandra: we do. It's a small percentage that we're missing. I would say less than 10% of the time. We might have an appraisal that comes in below our value range, but nine times out of 10, almost the appraisal or the actual sell price is within our value range.   Emil: I'm curious, have there been any scenarios where the appraisal comes in lower and someone uses our valuation report to go back to the bank or the appraiser to actually rebut it and it comes in higher?   Leandra: Yes. Whenever that happens, the transaction team reaches out to my team and we review the appraisal report. We review our report and the sales comps we use versus the comps the appraiser used and just see what type of adjustments the appraiser will used in their reports. I had one recently where the appraiser didn't even review the purchase contract. So they don't even know how much this property is being purchased for. And a lot of people just see this as a non MLS sale. So they think there's a discount applied to our properties when there's not. So in those cases, him, I will prepare a rebuttal and send it to the lender. And then the lender would send it back to the appraiser just to kind of review. We might give them additional comps to consider or comment on why it wasn't used in their report.   Emil: Nice. Okay. That's awesome. I didn't even know he provided that. That's great.   Tom: Another question into the crystal ball of appraisals and valuations. So I know right now for originating loans, right? You'd get your appraisal done. And they've always been very particular about doing the full shebang, like an appraiser going to the site. And my understanding is they're getting a little bit looser, at least on the refinance where they're allowing what's called a desktop appraisal. I'd love for you to touch on your thoughts on, you know, where this is going and maybe touch on a little bit about kind of like a desktop appraisal. Like how is that different? And then also, where do you think the, uh, the crystal ball going? I like it, how my voice gets higher as I'm at the end of my sentence. It's like aggressively like full off. Okay, go ahead.   Leandra: You know, even pre COVID Fannie Mae was already working on some sort of desktop reports to help lenders kind of speed up the appraisal process. There's markets today where it takes two weeks to get an appraisal done, maybe even longer, because there's not a lot of appraisers in that area. So in an effort to try to speed up the process, that transaction process or the processing of alone, they were already working on what the industry calls a 1004 P and it's basically a desktop report for appraisers, but an inspector goes and does the inspection. And somehow this was supposed to speed up the process because then appraisers are not having to go out and do the inspection themselves. There's someone else doing it, doing that part of the work, and then giving that information to the appraiser. And the appraiser is just sitting at home, cranking out these desktop reports.   Leandra: So now with COVID-19, I've seen a lot of lenders lean towards, and this is great for everyone's safety is using desktop reports. The only setback to a desktop report is if you had like a brand new remodel done on your house and you're refinancing the, appraiser's not going to know that, um, the appraiser's going to do just based on exterior or what I've seen. There's a company that a couple colleagues work for where they're doing this inspection report. Having the owners actually take photos of their interior and send that to the appraiser. So there's ways around it without, you know, having to expose anyone to anything, you know, for the safety of inspectors and appraisers and for the safety of the homeowners and the people that live there. I have seen more desktops being ordered right now, which is great. I think we could still do an accurate appraisal without having to go inside the property.   Tom: That's great. Yeah. I want to get credit for that C2.   Leandra: You really do. I'm seeing like a $500,000 difference. One of my colleagues did an appraisal in Montclair and it was valued at 1.2 million. And then the borrower's like, hold on. I did all this work. Like I know my house is worth more. And then my friend went back and actually was like, Oh my gosh, this is nothing like the prior MLS photos. Like I was completely wrong. And the value came back at 1.7M. So it's important to actually see if you've done any remodeling for an interior, some sort of interior inspection to be done, whether it's the borrower taking the photos or, or the appraiser just doing the inspection.   Tom: Makes sense. All right. Time for some quick fire questions. Hope you're ready. I hope you're ready. So we do this with some guests. It's a quick either or decision some real estate related some not really real estate related, but all right. So are you ready for this Leandra?   Leandra: Okay.   Tom: High rent growth or low vacancy.   Leandra: Wow. That's tough. No vacancy.   Tom: Good choice. Safe play. I liked that one too. Yeah.   Leandra: Yeah. Slow and steady wins the race. I mean, at least it's consistent.   Tom: Yeah. Flow or appreciation cash flow.   Leandra: Cash flow   Tom: Ooh. Is surprising from an appraiser. Not thinking about that appreciation, but yeah. Debt or equity?   Leandra: Equity   Tom: Equity, love it. Local or remote investing?   Leandra: Ooh. I mean, if I was local in Memphis, then I might say local, but remote. Definitely   Tom: Single family or multifamily?   Leandra: Ooh, that's a good one. I actually have a lot of people ask me about that. Multifamily.   Tom: Ooh. Do you notice a big difference in appreciation between the two, like over the last several years?   Leandra: No. No, not at all. Not really. I think why I would choose multifamily is just a higher cash flow. You know, more rents coming in and again, with the low vacancy, you know, it just sounds like a win for me.   Tom: Turnkey or massive project?   Leandra: Turn key.   Tom: All right. My last three questions, midnight oil or early bird worm?   Leandra: Early bird worm.   Tom: Love it. Text message or email?   Leandra: Text   Tom: And the last question. Olive oil or butter?   Leandra: Olive oil   Tom: Love it. All right. You did it. You made it through. Excellent.   Emil: Well done.   Leandra: Oh my God. That was so fun.   Tom: Well, thank you so much for coming on Leandra. This was enlightening. I love to talk about valuations with you and always learning a little bit. This is fantastic.   Leandra: Thanks for having me. This is great.   Emil: Thanks again to Leandra for coming on our show. This week learned a lot. I hope you did as well before you guys go, wanted to tell you about some new we have going on at Roofstock. It is our referral program. So if you invite your friends and they buy or sell a rental property on Roofstock, you get $250. And so does your friends. So just head over to [inaudible] dot com slash my dash referrals, and you'll be able to invite your friends with a simple link. And again, if they end up buying a property or selling a property through the Roofstock marketplace, they'll get $250 and you'll get $250 for every friend. You refer to check that out and we'll check you out on next week's episode. See you later. Happy investing.   Tom: Happy investing