Two appraisals with a 20% difference in value

My appraisal was 20% higher than the other appraiser. That’s what the attorney told me after I sent in my report. My first thought was, “Wow, I’m surprised”, and my second thought was, “Yikes, I hope I didn’t get it too high.” Long story short, the reason why there was such a huge disparity in value came down to comp selection. I chose properties that made reasonable sense for the subject, and the other appraiser chose homes that on paper looked like they could be the right ones, but in the end they were too low.

36955234 - woman making choice between city and country, on gray background

How can value be so far off? Well, let’s take a quick look at this situation and consider some key points for choosing comps. Even if you aren’t from the Sacramento area, what do you notice about my comps and his comps? (Note: I removed addresses and moved the subject property icon slightly to obscure its location).

comps

The Comps – Explaining why there was a 20% difference in value:

  1. Closer to Main Street: The other appraiser chose sales that were either on a busy street (Lincoln Ave) or closer to a main street (Fair Oaks Blvd). Of course it’s fine if sales with a busy location are used, but we have to consider if a value adjustment ought to be given.
  2. Court Location: This is a key point. If you look closely, two of the other appraiser’s “comps” are located in court-type streets off Fair Oaks Blvd. These “court” locations are subject to increased traffic noise from the main street, but they also don’t have the same feel as the subject street. The court location basically has only one street of homes instead of multiple walkable streets with a more traditional neighborhood feel. We have to consider if there is a value difference here instead of blindly calling these locations similar.
  3. One-Mile Radius: The appraiser’s sales are located within a one-mile radius, but that doesn’t mean they are reasonable for use. Just because a sale is within a mile doesn’t mean it’s automatically a “comp” (key point). After all, there is a difference between a “sale” and a “comp”.
  4. Older vs. Newer: Just because it’s a newer sale doesn’t mean it’s the best “comp”. Fresh sales are ideal, but sometimes older sales are more relevant – especially if they are in the immediate neighborhood and require less adjustments than new stuff that’s really less similar (I’m not saying we should pass up new lower-priced “comps” for older higher sales). In this case the other appraiser chose newer sales that were less similar instead of older more similar sales. The irony was there was an older similar property that closed 2.5 years ago on the subject street for 5% higher than the other appraiser’s current value. Since the market has increased in value over these past years, this one sale alone could have been a tell the appraised value was simply too low.
  5. Deep Study: It’s easy to value something in a tract subdivision with model match sales galore, but it can be tricky when working in an area where values differ tremendously from street to street. This is why it’s critical to dig deeply to find how the market really views the subject street and property. I recommend finding sales on the subject’s street (even if they’re older) and asking yourself how these homes compared to the rest of the market at the time of their sale. What sold at a similar level? This type of research helps us see the context of how the subject street might fit in the overall picture of value. Also, if the subject sold in the past (and it was a legit sale), how did it compete with other sales at the time? What did it really compare to? That might also give us clues into the market. The truth is we might need to look through years of sales in the immediate neighborhood and spend multiple hours crunching numbers and scribbling notes so we get a sense of the context of value. If you’ve only struggled for 15-30 minutes, chances are you need to keep looking and continue to make comparisons and seek out advice until you get a good sense of how value tends to work on the subject street and in the immediate area. Otherwise it’s easy to pick nearby sales and call them similar even though they might trend much differently.

I hope that was helpful. Please know my goal isn’t to say my appraisal was perfect (there is no such thing) or to throw another appraiser under the bus. I love my colleagues. In this case there was a clear value difference and frankly the other appraisal just wasn’t reasonable.

real estate blogginBlogging Class: This Thursday I’m teaching a class on effective real estate blogging at SAR from 9-11am. I’d love to have you come out. We’ll have two hours to talk shop and I really hope to give you ideas and empower you to go get it when it comes to blogging. Sign up online here.

Questions: What do you see about the comps above? Any other tips for choosing comps? Anything I missed? I’d love to hear your take.

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Stepping on the real estate scale (at the right time of day)

Values are starting to decline. The market is sliding. Price reductions are increasing. This is exactly what we start to hear around August as the market has transitioned from spring to summer. But is the market really crashing? It could be, but sometimes the issue is simple in that we’re not weighing the market in the right context. Today let’s look at a helpful scale analogy and then unpack the Sacramento market in depth (for those interested). Any thoughts?

42512389 - white scale on a wooden table top view, fitness and weight loss concept

A Scale Analogy: Imagine being on a diet and stepping on a scale in the morning before breakfast and then again at night after eating all day. What would happen? Well, it’s going to look like you gained some weight during the day because the body is light and empty in the morning and naturally heavier at night after a day of eating. Unless you want to punish yourself with thoughts of weight gain, the key for using a scale would be to weigh yourself every day around the same time so you are comparing the same context each day. Otherwise when comparing one context (morning) with a different context (night), it might look like you gained weight when you might have actually lost some.

The Big Point: In real estate we have to consider what it looks like to weigh the market. Often at this time of year we start hearing things like, “Values are starting to tank”, when in reality the market may simply be softening for the season. The problem is we don’t see the softening though because we’re stepping on the scale at the wrong time of day so to speak. For example, if we compare stats from June to July, it looks like the market is declining in value since stats have sagged. Yet if we step back and weigh the market in context by comparing June/July 2016 data vs June/July 2015 data, we see stats also sagged last year. Bingo! This helps us see it’s normal for the market to soften up at this time of year (of course it could be declining, but that’s a different post). In short, if we want to get better at seeing the market it’s critical to compare the latest month of data with the same month last year. Otherwise it’s very easy to start making market claims when the truth is we just might be misreading the trend. If you want to use bigger chunks of data like quarters, that’s fine too. Just compare the past quarter today with the same time period last year. You can also look at many years of data to get an even better sense of seasonal trends.

—-—–—– And here’s my big monthly market update  ———–—–

Big monthly market update post - sacramento appraisal blog - image purchased from 123rfTwo ways to read the BIG POST:

  1. Scan the talking points and graphs quickly.
  2. Grab a cup of coffee and spend time digesting what is here.

DOWNLOAD 62 graphs HERE: Please download all graphs in this post (and more) here as a zip file. Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

Slowing Market (Quick Summary): The hot spring season is definitely transitioning to a slower market. What do I mean? It’s taking slightly longer to sell today compared to last month, the median price and average sales price declined from the previous month, inventory saw a 20% increase from June (it’s still really low though), and price reductions have been more common. Yet at the same time the market is actually stronger this year as it was taking 4 days longer to sell last year and price metrics are a good 7-10% higher this year too. Overall the market feels fairly “hot” under $300,000, but there has been notable price resistance at higher price levels. These days well-priced properties are going quickly, but otherwise buyers can smell a high price from a mile away – and they’re not biting. It’s easy to think the market is starting to turn or tank, but it’s normal for the market to soften at this time of year. Unless we begin to see otherwise, right now it looks like we are seeing what seems like the start of a typical seasonal downtrend.

Presidential Election & the Market: We’re hearing lots of talk about how the market is strong because it’s a presidential year, but let’s remember the market is doing what it is doing as a result of years of unfolding trends. The presidential election doesn’t all of a sudden trump (no pun intended) the factors that have been driving the market for years and have caused the market to be where it is today. For context, values in Sacramento were increasing rapidly in 2004, utterly tanking in despair in 2008, recovering in 2012 (due to cash investors and 4% rates), and now the market is figuring out how to be normal after modest value increases this spring. Sure, there could be some impact because it’s a presidential year, but let’s defuse the hype and not overstate it. Take a look at the stats and graphs below and see if you can discern any real difference because this year is a presidential year.

Sacramento County:

  1. The median price is 100% higher than it was in early 2012.
  2. There were only 4 sales under $100K last month (single family detached).
  3. Sales volume has been about the same this year compared to last year.
  4. FHA volume is down about 8% this year compared to 2015.
  5. FHA sales were 26% of all sales last month.
  6. Cash sales were only 12% of all sales last month.
  7. It took an average of 27 days to sell a home last month, which is 2 days more than the previous month (and 4 less days compared to last year).
  8. REOs were only 2% of all sales last month and short sales were 2.7%.
  9. There is only 1.69 months of housing supply in Sacramento County, which is 11% lower than it was last year at the same time.
  10. The median price declined by 2.7% last month and the average sales price also declined, though both are 10% higher than they were last year at the same time.

Some of my Favorite Graphs this Month:

Median price since 2013 in sacramento county

price metrics since 2015 in sacramento county - look at all

inventory - July 2016 - by home appraiser blog

CDOM in Sacramento County - by Sacramento Regional Appraisal Blog

Bottom of the Market in Sacramento

inventory in sacramento county Since 2011 - by sacramento appraisal blog

seasonal market in sacramento county sales volume 6

Interest Rates Since 2001 layers of the market in sacramento county - by sacramento appraisal blog

SACRAMENTO REGIONAL MARKET:

  1. The median price is 97% higher than it was in early 2012.
  2. It took 1 day longer to sell last month compared to June (but 4 less days compared to July 2015).
  3. Sales volume is about the same as it was last year at the same time.
  4. Cash sales were 14% of all sales last month.
  5. Cash sales volume is 6% lower this year than last year.
  6. FHA sales were 22% of all sales last month.
  7. FHA sales volume is down nearly 8% this year so far.
  8. There is 1.96 months of housing supply in the region right now, which is just about the same as last year during this time.
  9. The median price, average sales price, and avg price per sq ft all declined last month from June, though they’re all up 7-8% from last year.
  10. REOs were only 2% of all sales last month and short sales were the same.

Some of my Favorite Regional Graphs:

days on market in placer sac el dorado yolo county by sacramento appraisal blog interest rates inventory median price in sacramento regional market by sacramento appraisal blog - market median price and inventory in sacramento regional market 2013 median price sacramento placer yolo el dorado county Regional Inventory - by Sacramento regional appraisal blog Regional market median price - by home appraiser blog sacramento region volume - FHA and conventional - by appraiser blog

PLACER COUNTY:

  1. Today’s median price is 72% higher than it was in early 2012.
  2. It took 3 more days to sell a house last month than the previous month (but 4 less days than last year at the same time).
  3. Sales volume was down about 11% in July 2016 compared to last July and is down slightly for the year about 3%.
  4. Both FHA sales and cash sales were each 15% of all sales last month.
  5. There is 2.25 months of housing supply in Placer County right now, which is up very slightly from last year at the same time (but up 30% from last month).
  6. The median price increased about 1% from the previous month, but for a better context it’s up 10% from last year at the same time.
  7. The average price per sq ft was $216 last month (was $202 last year at the same time).
  8. The average sales price was $480K last month (up about 11% from last year).
  9. Bank owned sales were only 1% of all sales last month.
  10. Short sales were 0.07% of sales last month.

Some of my Favorite Placer County Graphs:

days on market in placer county by sacramento appraisal blog interest rates inventory median price in placer county by sacramento appraisal blog months of housing inventory in placer county by sacramento appraisal blog number of listings in PLACER county - 2016 Placer County housing inventory - by home appraiser blog Placer County price and inventory - by sacramento appraisal blog Placer County sales volume - by sacramento appraisal blog

DOWNLOAD 62 graphs HERE: Please download all graphs in this post (and more) here as a zip file. Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

Question: Did I miss anything? Any other market insight you’d like to add? I’d love to hear your take.

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Does a fence need to be painted to meet FHA standards?

Does a fence need to be painted or stained to meet FHA minimum property standards? During an FHA refinance an appraiser recently told a home owner that his fence needed paint or stain for the loan to work. Is that really true though? Let’s dig into this issue. I’d love to hear your take in the comments.

FHA appraisal standards for wood fence - sacramento appraisal blog

The Quick Gist: FHA requires appraisers to identify defective paint surfaces on a home’s exterior (which also includes the fence). However, this doesn’t mean a fence actually needs to be painted. Being that most fences such as cedar, cypress, and redwood are already considered a sustainable wood (or sealed or treated), they don’t actually need to be painted. Think about it practically in that new home builders don’t paint their fences and neither do the vast bulk of property owners. But if a fence has been painted in the past and now has defective paint (peeling, chipping, flaking), then the defective portion should be scraped and sealed according to FHA standards (see p 497 in FHA Manual 4000.1 for a paragraph on defective paint).

FHA-photo-by-Ryan-LundquistThe Reality: Appraisers are not trained to identify whether wood is sealed or not. Maybe some appraisers have that skill set, but most probably don’t. While on the phone with HUD yesterday I even asked them how an appraiser would specifically identify a fence that was not sealed. Crickets. The person on the phone did not have an answer other than to say FHA requires a fence to be sealed from the elements. This means a reasonable focus for appraisers would be to call out defective paint on fences, but otherwise assume the wood is sealed unless there is evidence to suggest otherwise. Does that seem like good common sense? One further point to consider is something my friend Realtor Dean Rinker said in a conversation recently. Even if the standard was the fence needed to be painted, would that also include the neighbor’s portion of the fence too? Imagine that.

14727880 - 3d illustration: a group of cans of paint and roller

Yeah, but the house was built in 1968: I’ve seen people quote the following section from the old FHA manual (or a recent FAQ) in support that fences need to be painted. The idea is that if a fence was built before 1978 when lead-based paint was used, then the home’s fence should be painted to curb any safety issue. First off, if the fence has never been painted, there is NO safety issue with lead-based paint. Thus the age of the house is not the driving issue in this conversation on fences. Most of all, this section states an appraiser should be looking for defective paint on the fence, but it does NOT state the fence needs paint. It is true FHA does not want bare wood on the house, but it is entirely normal for fences to be “bare” (keep in mind wood on fences is sealed or treated though, so it is technically not bare).

If the home was built before 1978, the appraiser should note the condition and location of all defective paint in the home. Inspect all interior and exterior surfaces – wars [sic], stairs, deck porch, railing, windows and doors – for defective paint (chipping, flaking or peeling). Exterior surfaces include those surfaces on fences, detached garages, storage sheds and other outbuildings and appurtenant structures (FHA’S 4150.2 Old Manual).

When it comes to FHA the standards aren’t always as clear as we’d like them to be. This is why it’s critical to know what the FHA manual actually says, consider the spirit of the FHA manual, be in tune with how the bulk of appraisers deal with issues, and of course use common sense.

Questions: Any stories, insight, or examples to share? Did I miss anything? I’d love to hear your take.

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Choosing comps when there is a gated community

I had a real estate agent ask a fantastic question recently about choosing comps when there is a gated neighborhood. Here’s the issue: If the subject property is NOT located in a gated community, can an appraiser use “comps” that are similar and within 0.25 miles but are in a gated community? My answer is YES and NO.

45853684 - iron gate

YES: An appraiser can definitely use sales from a gated community. If there isn’t a price difference inside and outside the gate, an appraiser can use gated sales and make no value adjustment. Or if there is a price difference between the two locations, an appraiser can always choose to use gated “comps”, but also make an up or down adjustment to account for the value difference.

NO: Sound the alarm because it’s a red flag if you are valuing something outside a gate but only using gated “comps”. After all, what is the gate keeping in? And what is it keeping out? Despite being nearby, a gated subdivision could be a much different market that is higher or lower in price. Realistically, if I am only using gated sales for my “comps”, I haven’t really shown what the market is willing to pay outside the gate. There could be a value difference, which is why it’s critical to find non-gated sales to help tell the story of value for the subject property (even if the sales are older). It goes back to an “apples to apples’ comparison where we want to try to use the most similar sales in terms of size, location, condition, quality, bed/bath count, etc… Ultimately as we study the market we can make the distinction between properties that are truly “comps” from ones that are merely sales.

A local example: Here is a graph of all 2500 to 3500 sq ft sales in the Crocker Ranch area of Roseville. The blue dots are the gated sales and the yellow dots are the non-gated sales.

Crocker Ranch Neighborhood - Sacramento Appraisal Blog

The graph helps show larger-sized properties inside the gated areas tend to command higher prices. Obviously there are some higher non-gated sales too, but the highest sales in the area over the past 7 years have come from within the gate. This is why we have to study sales and then choose “comps” accordingly.

choosing comps in appraisal - sacramento real estate appraisal blog

Questions: Do you find values to be higher or lower outside of a gated community? Any other advice or wisdom you’d offer when it comes to choosing comps? Did I miss anything?

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