Some
time ago, in a science class I was required to take, I learned something that I
actually remembered. Here in the United
States, manufacturers of food and other consumer products are required to list
the ingredients in the order of their quantity in said substance, largest to
smallest –
and that’s the reason that when you look at the ingredient list of a lot of
products you see “water” listed first.
And on those items that enter the health-and-wellness category like
shampoo, you’ll see another listing on that back label that reads “Active
Ingredient”. In
essence, even if the item is, say, 90% water, the active ingredient is the
thing that makes the product do what it says it does. For example, the active ingredient in Head
& Shoulders shampoo is Pyrithione
Zinc, and its job is to control and eliminate dandruff. Here’s another way to look at it: if H&S
had ALL the other ingredients EXCEPT Pyrithione
Zinc, it would probably clean your hair, but the shampoo would be ineffective
as a dandruff fighter. (Dandruff
Fighter: good name for an ‘80s cover band.)
In
a mortgage, the active ingredient is the appraisal. You could have ALL the other “ingredients” in
a mortgage ranging from financial verification and assets to proper
debt-to-income ratio and dead-on LTV, but without the appraisal you wouldn’t
have a benchmark –
no benchmark, no loan, no sale/purchase.
This
little exercise bears some attention for both the veteran agents and people who
are buying or selling a home for the first time. When an appraiser comes out to do her/his
job, they classify the condition of the home with one of six grades, and this
factors into the overall value they apply to the home –
yes, I know many of you already know that, but let the others catch up. From the Uniform Appraisal Dataset on
Condition Ratings and Definitions, I give you the six grades with my English
version of each definition:
C1:
Brand new –
no one has lived in this house
C2:
Full remodel –
virtually
all building
components are new or have been recently repaired
or
rehabilitated
C3:
Partial remodel –
improvements
are well maintained and feature limited physical depreciation due to normal
wear and tear
C4:
Never been touched –
some minor deferred maintenance/physical
deterioration
due to normal wear and tear
C5:
Breaking –
obvious deferred maintenance and in need of some significant repairs
C6:
Broken –
substantial damage/defects
that
affect
the
safety, soundness, or structural integrity
Now,
think of these grades as the concentration of the active ingredient: C1 and C2
are going to be at full strength, while C5 and C6 are going to dilute
significantly the effectiveness of the active ingredient, the appraisal. As I said earlier, everything hinges on the
appraisal. If
you’re
an agent getting ready for a listing appointment, take those six definitions
with you and bust them out when you start talking about the price point at
which the home should be listed. This
will give you more credibility when you tactfully point out that, yes, the
neighbor’s home did list and sell for $350,000, but they had fully remodeled
bathrooms and new windows –
your potential client’s home has the original pink bathtub from 1968 and a
window that’s using a plywood sheet instead of a pane of glass. (That’s a LITTLE extreme, I know, but you get
the point.) Potential buyers and their
agents, when armed with the same information, are going to be better prepared
to make offers –
the door swings both ways.
Of
course, in a mortgage, the biggest ingredient is money –
it’s the “water” of the formula, but it’s not going anywhere without the proper
amount of the active ingredient (just like many single guys on a Friday evening
if they don’t use enough Head & Shoulders during the week).
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