Our House Shot Up $100,000 in Value … And It Means Nothing

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**Note from Paula: You’re probably going to wonder how this article’s introduction relates to the headline. Just stick with me for a minute.
is good news always good? maybe

An elderly farmer and his horse tilled the fields for many years. One day his old horse ran away.

The man’s neighbors came to offer sympathies. “How unfortunate,” they said. The man shrugged and replied, “Maybe.”

The next day, the old horse returned, bringing with him three strong wild stallions that could work the fields. Again, the neighbors came. “How lucky!” they cried. The man shrugged and replied, “Maybe.”

The following day, the man’s son was thrown off one of the stallions and shattered his leg. The neighbors came by. “How unfortunate,” they said. “Maybe,” the man replied.

One week later, the military instituted a draft. All young men had to fight on the front lines of a bloody war from which few returned home. But the son, whose leg was broken, was awarded a draft exemption. “How lucky!” the neighbors said. “Maybe,” the man replied.

***
The story above is a Taoist myth. Today I had an experience that reminded me of the tale.

We’ve been trying to borrow against our triplex to buy another rental property. About four months ago, our broker asked us to hire an appraiser. The appraiser’s job is to decide how much our property is worth.

We paid $400 to have an appraiser visit our home. He sent us a figure that was $25,000 more than we paid for the house one year ago. We celebrated. How fortunate … right?

Maybe.

The mortgage broker kept requesting “just one more document.” This stretched for weeks. Weeks turned into months. We diligently kept sending in “one last document” and watched as homes we wanted got snapped up in the meantime.

Two weeks ago our broker informed us that the never-ending string of “just-one-more-things” had lasted for so long that our appraisal is now more than 90 days old. This means it’s out-of-date. We’ll have to pay another $400 for a new appraisal.

Ugh. How irritating, right? …. Maybe.

The second appraiser came to our home last Sunday. We heard the results today: Our house is valued at $100,000 MORE than we paid for it one year ago — a 45 percent increase in value. WHAT????

How fortunate, right? … Maybe.

In the foreseeable future, I guess this is good news. It means we have more access to capital to buy more rental houses. That’s good news, if everything goes according to plan (let’s hope for strong cash flow and good tenants!). Of course, this also exposes us to additional risk, so perhaps it’s bad news. Who knows?

Any “good news” or “bad news” may have far-away consequences we can’t predict. So I’m not celebrating my sudden $100,000 boost in home equity, which is an imaginary concept anyway. (Home value is theoretical except on the day you buy or sell.) And I won’t get too glum if the house later appraises for less than what we paid.

In theory, the house is worth whatever the appraiser says its worth. In reality, the house is worth whatever the free market says its worth, and since I never plan on selling, that number will always remain a mystery.

In the meantime, all I can do is scratch my head, shrug my shoulders and say, “Let’s see.”



Thanks to Sylvester75117 for today’s photo.

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21 Responses to “Our House Shot Up $100,000 in Value … And It Means Nothing”

  1. YFS
    18. Apr, 2012 at 7:21 pm #

    You know what’s funny. My primary residence’s value jumped by 60k in 6 months. I also found this funny, how we have such a drastic swing in value in such short time. Appraisals are all about timing. I agree with you.. home value is determined by purchases and sales not appraisals. With your metrics/measurements on your rental properties why do you think you would be exposing yourself to more risk?

    I found that with my rental properties the biggest risk isn’t the financing but actually property taxes / insurance. (b/c I purchase cheap properties) Meaning, that even if I owned my properties out right I can’t avoid the risk of taxes/insurance.

    • AffordAnything.org
      20. Apr, 2012 at 9:58 am #

      YFS — last year I spent more on insurance and government fees (including taxes, trash and water) than I did on the mortgage.

  2. Luis@wealth-steps
    19. Apr, 2012 at 6:27 am #

    Well, technically your net worth just increased by a $100k but you are right, the appraisal is just paper money.

    Hopefully this will make you refi go by quicker (knock on wood).

    • AffordAnything.org
      20. Apr, 2012 at 10:01 am #

      Luis — this is a reminder that net worth is a silly concept, in my opinion. It’s completely hypothetical. But I hope my new “net worth” helps me invest more so I can earn more real cash!

  3. Dollar D @ The Dollar Disciple
    19. Apr, 2012 at 12:17 pm #

    Wow, that’s pretty awesome! You could buy quite a few properties with that equity, as long as the plex is still cashflow positive. :)

  4. Jen
    19. Apr, 2012 at 3:06 pm #

    I’ve never heard that story before. It’s awesome! Just a reminder to be patient and see how things will turn out before you react :)

  5. BusyExecutiveMoneyBlog
    19. Apr, 2012 at 10:36 pm #

    HI Paula, glad it worked out for you. Are you comfrotable that you really understand why the cashout refinance took so long in the first place? That might be important for future deals.

    • AffordAnything.org
      20. Apr, 2012 at 10:08 am #

      BusyExec — this is common; many other real estate investors experience the same thing. Banks are still feeling the pain of the financial crisis and are wary of housing investors.

  6. Everett WA Real Estate
    20. Apr, 2012 at 7:55 am #

    Wow. LOL. This happens all the time because an appraisal is an opinion of value. Our team has to fight this all time with our REOs and short sales generally because the appraiser has come in with some ridiculously high value at which we could never feasibly sell the home in today’s market. For example we are rebutting one right now that is 75K above our BPO value because the appraiser doesn’t take the lack of access and the fact the home is built on a huge slope into account. Ultimately your last line is the most correct – it is worth what someone is willing and able to pay in an open and free market.

    • AffordAnything.org
      20. Apr, 2012 at 10:05 am #

      Everett — exactly! The huge disparity between the opinions of the two appraisers who worked within three months of each other illustrates how “out of left field” their opinions can be. Which appraiser was right? Who knows! In this case, the most recent appraisal benefits my goals, so I’m happy.

  7. Christa
    20. Apr, 2012 at 9:55 am #

    Great tie-in! I love the Taoist myth, and your house value story was a great illustration of the belief.

  8. femmefrugality
    20. Apr, 2012 at 10:40 am #

    There’s recently been an appraisal scandal in our city. People who have been living in their houses for years and paid off the mortgage, with no intent to sell, and some on a limited income, saw their properties’ values go up drastically. This means increased taxes, which is exactly why they’re being done. It’s a real problem. Were these people looking to sell/borrow for new properties like you, it would be great news. The liability is something that hadn’t occurred to me before.

    The worst thing is is that the appraisals seems kind of arbitrary. One guy’s driveway is said to be worth more than his house. It’s in the city, but there’s no way any logic could make sense of that one. There’s all these appeals and everything going on. Huge mess.

  9. ImpulseSave
    20. Apr, 2012 at 11:51 am #

    What a great story. And I also agree with what you said in one of the comments about net worth – it’s entirely theoretical. Even the cash you can hold in your hand is only as valuable as someone else says it is. If you go to another country where the dollar is more or less valuable than the local currency, it’s value changes. The point is: you’ve just seen first-hand how values can change so quickly, so there is no reason to count chickens before they hatch! It’s great that you can have access to more equity now, but I wonder how this may affect your taxes or insurance rates? Do you have any idea?

  10. JodyChunder
    23. Apr, 2012 at 3:07 am #

    Awesome news! Now you can buy up more rental properties afore everyone else gets to them when the shortsales and foreclosures come flushing in. You will be a millionaire Landlord if this kind of equity appreciation keeps up! Finally! Rent out those houses and show them all!

    • AffordAnything.org
      23. Apr, 2012 at 1:31 pm #

      @Jody – Thank you! I certainly hope to be a millionaire landlord one day — we’ll see how it goes!

  11. C
    23. Apr, 2012 at 9:03 pm #

    Lol, everyone is into rental houses these days, but it’s the way to go while not everyone has access to capital, that is the time for the investors to dominate the RE market – again. I think the banks prefer it this way, investors can absorb losses (or raise rents), where homeowners have tighter margins to work (higher risk), being as they are at the very end of the consumer/consumption line.

  12. Azra - ReadyForZero
    24. Apr, 2012 at 5:47 pm #

    Love the story and the tie in to real life. Funny how life can be seen as a string of fortunate and unfortunate incidents…it’s up to each individual on how they choose to react to it. Your level headedness is what makes you a solid investor and hey, at the very least, the higher appraisal value helps you reach the goals you’ve set out for yourself a bit faster.

    • AffordAnything.org
      25. Apr, 2012 at 11:44 am #

      @Azra – Thanks! I try to abide by the ethos of not getting too excited when things go well, and not getting too down when things go poorly. Its easier said than done, but thats the goal. …. understanding the difference between an “on-paper” gain vs. a “realized” gain is a pretty important key for most investors.

  13. Matt
    09. Oct, 2012 at 12:40 pm #

    I loved this article. It’s great to see that someone else understands that a home’s value is ultimately based on free market forces. Whether it’s a home or a stock or whatever: you don’t make or lose any money until you buy or sell.

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