Let me begin by stating that I value this hilltop VERY highly and we have no intention of leaving it soon. I am not so very voyeuristic about my home’s value that I tune into what my friend Steven calls Zillow Porn so very often. I am aware that Zillow has valued my home very much lower than I feel it deserves, but I understand the limitations of a vast algorithmically-driven service like Zillow and simply do not stress over its inconsistencies. No one from Zillow that I know of has come to my home to assess it and, as we all know, that visualization is where the rubber meets the road on home valuations…curb appeal, views, amenities, configuration, etc., etc. An appraisal represents professional opinion based on methodology and market data, but the true “market value” is ultimately what a willing buyer pays a willing seller. Appraisals provide educated estimates using established principles, but markets can sometimes value properties differently than appraisals suggest. The appraisal process combines art and science, requiring professional judgment to interpret market data and property characteristics into a defendable value opinion that serves as a crucial component in real estate transactions and lending decisions. All that said, appraisals are important because they are the basis of financing a home since lenders require some sort of benchmark of value and there is a very definite “feedback loop” where an appraisal may well impact what a buyer is willing to pay for a property.
I am the shoemaker’s son who goes barefoot. That saying is a centuries-old proverb that highlights the irony of professionals neglecting their own needs while serving others. Today, the phrase is used to describe professionals who neglect their own domains, and in my case that means my personal finances. As we all know, so long as you itemize your deductions (which I always have), you can deduct primary home mortgage interest up to $750,000 in mortgage debt (it’s up to $1 million for California taxes). That has caused me to keep a mortgage on my home regardless of my ability to pay it off in full. I know that aging Baby Boomers like the comfort of paying off their mortgages, but with rising property taxes and homeowner insurance costs (at least here in California), it’s a toss-up whether those two expenses overwhelm the interest cost on a mortgage. So who’s kidding whom? You can at least deduct most or all of your interest, but only up to $10,000 of your real estate taxes and none of your homeowner’s insurance. So, I like to keep a mortgage on my home and otherwise invest that money. It gets a bit more complicated when you consider the cost of mortgage money versus the returns on investments since it depends on how you invest and what sort of tax brackets you are dealing with, but there is a good financial argument for maximizing your mortgage and investing the proceeds. Over the last 25-year period, investing in the S&P 500 would have significantly outperformed paying down a mortgage (by a whopping 4.5%), despite higher volatility in stocks. None of that matters if you are financially lazy as I am. When we bought this hilltop, I put on a $630,000 mortgage even though I had plenty of cash to just buy it for cash (believe it or not, almost 35% of home purchases now are for cash). I took an interest-only mortgage since I didn’t want to pay the mortgage down. When the 10 year interest-only term ran out, rather than going to the trouble of refinancing (rates were about 3% then….damn!) I just let my adjustable rate mortgage convert to a twenty-year amortizing mortgage. While I have no problem with the gradual rise in interest rate to 5.5% since then, I do have a problem with the fact that the monthly principal paydown has started to dramatically reduce the mortgage. So now, I want to refinance the mortgage and I need to have an appraisal.
I must admit that I am curious to get an appraisal since I don’t trust the Zillow number to be anywhere near accurate. Real estate appraisals are systematic evaluations conducted by licensed professionals to determine a property’s fair market value. The primary appraisal methods are the sales comparison approach (most common), where they compare the property to recently sold “comparable” properties (comps). The appraiser then makes dollar adjustments for differences (extra bedroom, updated kitchen, larger lot, great views, etc.). They usually then use a cost approach (replacement + land value) to validate. This all requires a review of the exterior, interior, systems and a lot of market research, generating comp charts and such. The appraisers will tell you that they do NOT do this on a price per square foot basis…but strangely enough, they always include a min/max/avg/med price per square foot comparison (go figure). One of the biggest challenges of appraising is coming up with good comparables since most houses are unique as to location, amenities, style and feature considerations that factor into market value. So, like I said, I was curious even though the appraised value would have almost no impact on my refinancing since I was asking for a replacement mortgage of only $575,000.
I have gone to the trouble to research both price per square foot norms and replacement construction cost per square foot norms. To begin with, variation in both is vast. The ppsf nationally is about $250, but for California it is $500…and for Southern California closer to $600. Obviously, you need to factor out both L.A. and San Diego cities, which distort this to the high side. For San Diego the range is $579 county-wide and about $500 for North County area. Where the coastal towns (LaJolla, DelMar, Rancho Santa Fe) run at over $1,000, Vista is $519, San Marcos is $575, and Escondido is $490. This all makes some degree of intuitive sense to me. What makes less sense is that my little enclave of Hidden Meadows tends towards $450 even though the inland rural areas like Valley Center are $450-$500.
Now let’s get down to the nub of the issue. The appraiser came and went through her drill, listening very little to anything I had to say (I’m sure they are trained to do just that). She produced a report that valued the house at $438 ppsf. I was surprised. Then I looked at her comps. Those houses were nothing like ours and only one was on our hilltop enclave since few houses have sold up here in the past 12 months. But two did sell just before that in 2024 and they are both very comparable to this. One was at $477 (several flaws in that home which I think make it undesirable) and the other at $528. The market has not softened so much since then, but still they were excluded. Also, the properties listed for current sale and referenced in the report averaged $520…and that didn’t include the one outlier that is listed at $1,200, a very unique and quirky property that is unlikely to fetch anywhere near that price for several reasons. So, I noted in the appraisal cover letter that California (I love you, you grand Republic) allows you to request a Reconsideration of Valuation (ROV) with an argument. I have submitted my argument and request reconsideration at something $500 or over. We’ll see how my analysis and advocacy influence the valuing of the hilltop…I can imagine it going either way.