Our brown grass signs hit the TV screens

My lawn is dead, and now it’s been on TV. I mentioned a few weeks ago how I have been helping my kids make and sell signs to promote water conservation (we have a very severe drought in California). Anyway, Good Day Sacramento showed up to our brown parcel to do a story last week, and Fox 40 and CBS also did a piece recently too. Someone in Texas reached out to me to let me know the CBS story aired there too. Pretty wild, right? This was fun, so I definitely wanted to share. You can watch below and smile with me about our little signs making it to the tube.

Good Day Sacramento story (watch below or here):

The Foreclosure Look or The Conservation Look? I know brown grass isn’t really sexy, and my lawn looks like I’m going through a foreclosure. But the clincher for me to stop watering was driving by Lake Shasta two months ago. My jaw literally dropped after seeing how profoundly low the lake was. Yes, my ego does take a hit because my lawn isn’t perfect, but in this case conservation trumps image for me. In light of the severity of the drought I’ve simply had to redefine what brown grass represents. Instead of thinking of it as ugly “foreclosure lawn”, it’s instead the look of conservation and civic pride as a Californian. I don’t know about you, but when I see images like the one below, I’m alarmed and motivated to act.

lake-shasta-drought-03Feb2014

CBS Story (watch below or here):

Fox 40 Story (watch below or here):

brown-grass-is-sexy-sign

The Big Point: Whether you like the sign or not, or agree with my decision to “go brown”, I hope you’re encouraged to do all you can to save water inside and outside your home. Please know I’m not judging how others use water either.

Thanks for watching today. This project has been a blast for my family.

Question: What do you think are the best ways to save water for a household?

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The Sacramento Appraisal Blog celebrates 1000 posts!

1000 blog posts. How did that happen? I feel like I’ve just scaled an online mountain. As I look back, this has been a fun ride. It’s been great to connect with so many people locally and nationally, and I have definitely gained friends and contacts across the country. My appraisal career has evolved in amazing ways these past five years too, and I feel very blessed. Thank you for reading, commenting, emailing, sharing posts, challenging me, and growing together. This blog wouldn’t mean anything without you. Thank you for being here.

Part of reaching 1000 posts involves looking back, so it seems fitting to share my ten favorite posts. These all stood out for one reason or another – whether it was because they were funny to me, or maybe they hit a nerve with readers.

Photo by Vicky - blkmgk2 - used with permission on the sacramento appraisal blog

My favorite 10 posts on the Sacramento Appraisal Blog:

  1. Top-10-Image-purchased-by-Sacramento-Appraisal-Blog-from-www.123rf.comphoto_9840969_golden-top-ten-in-rank-list-trophy-isolated-on-white-background.htmlsgame-123RF-St-smParcel Mullet: real estate word of the day
  2. The multi-layered real estate cake analogy
  3. The impact of barking dogs on property value
  4. 10 signs your pool is too big for the neighborhood
  5. Why it matters if it’s a condo or PUD
  6. Blight Week (a 5-part series I wrote)
  7. How Legos can help us understand real estate
  8. How do garage conversions impact property value?
  9. How to know if it’s a 2nd unit or an accessory dwelling
  10. 10 signs you’re overbuilding for the neighborhood

I used to write way too much: These days I write two posts each week, but in the beginning I used to shell out 4 or even 5 posts per week (that’s WAY too much). Remember, if you think blogging is a good idea for business, the best thing you can do is decide to begin. You can never get to 1000 posts or even 100 posts without ever doing the first post. Why not go for it?

I hope this blog has been a helpful resource to you, and I hope it continues to be. I’m optimistic about the future, and I look forward to many more posts. It’s been a great first 1000 posts. Here’s to the next batch.

Photo Credit: Thank you to Vicky for letting me use one of her photos. She’s a local I’ve been following on Instagram and Twitter for a few years.

Question: Are you reaching any milestones this year? Is there anything good happening in your life right now? I’d love to hear in the comments below.

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One reason to take the Assessor’s records with a grain of salt

If the Assessor or Realist says a property is a duplex, does that make it a duplex? Not necessarily. Let me share a quick scenario to help illustrate the importance of taking what the Assessor says with a grain of salt. I recently appraised a property in Sacramento that is listed by the Assessor as a duplex (two houses on one lot). Upon inspecting the property though, the second dwelling was really an accessory unit instead of a full-fledged second unit. But more importantly, after digging around a bit I learned the secondary unit didn’t actually have any permits on file with the planning department or the building department. Granted, there was a fire in the 1970s at Sacramento County headquarters, so permits are incomplete at times, but still all signs in this case pointed toward the secondary unit NOT being permitted (despite Tax Records showing two units).

official records - image purchased by sacramento appraisal blog and used with permission - text

Moral of the Story: The Assessor doesn’t have the final say when it comes to what a property is and whether it is legal or not. In other words, just because the Assessor or Realist says there are two units does not mean there are actually two legal units on the property. Does zoning allow for two units? Were both units built with a permit? These are questions that are best answered from the planning and building department, so we need to give the most weight to what both of these departments say. On a related note, keep in mind Realist might also be incorrect about square footage, zoning, or bed/bath count, so be cautious about giving ultimate authority to what you see listed in Tax Records.

I hope this was a helpful reminder and maybe a good reference point when working with clients. Finding out what is actually legally constructed and allowable in terms of zoning takes work, but it can make all the difference, right?

Questions: Any thoughts on stories to share? Do you think a house with a non-permitted secondary accessory unit would sell for more in the marketplace? I’d love to hear your take.

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The difference between remodeled and renovated (and why it matters in real estate)

I swear I’m not a grammar Nazi. But today I want to bring clarity to two words we constantly kick around in real estate. What is the difference between “remodeled” and “renovated”, and why does it matter for the appraisal process?

updated kitchen - sacramento appraisal blog

The short answer: Renovated means something has been updated, but NOT completely changed. Maybe cabinets were painted, faucets were replaced, baseboards were added, or the interior was painted. In the example above, the kitchen only has new door handles, so it obviously doesn’t mean it’s renovated, but if it had new paint, hardware, appliances, and fixtures, we’d say it was renovated. In contrast, remodeled means something significant was replaced or walls were moved. If new kitchen cabinets were installed or the kitchen was expanded significantly, we’d say the kitchen was remodeled.

Renovated: The area of the home has been modified to meet current market expectations. These modifications are limited in terms of both scope and cost. An updated area of the home should have an improved look and feel, or functional utility. Changes that constitute updates include refurbishment and/or replacing components to meet existing market expectations. Updates do not include significant alterations to the existing structure.

remod kitchen - sacramento appraisal blog

Remodeled: Significant finish and/or structural changes have been made that increase utility and appeal through complete replacement and/or expansion. A removed area reflects fundamental changes that include multiple alterations. These alterations may include some or all of the following: replacement of a major component (cabinet(s), bathtub, or bathroom tile), relocation of plumbing/gas fixtures/appliances, significant structural alterations (relocating walls, and/or the addition of square footage).

Why does this matter? When something is remodeled (brand new or completely changed), buyers might be willing to pay more for it. Think of a remodeled kitchen and how buyers might spend more money in light of a resulting great room concept or a kitchen that has been expanded beyond other tiny kitchens in the neighborhood. This is where it becomes important to communicate details of the remodel to the appraiser and even what sort of feedback you got from buyers and agents. In other words, how did the market respond to the remodel? Also, if you didn’t know, appraisers actually need to indicate in the appraisal report for the subject property if a kitchen or bathroom is “remodeled” or “updated” (only for lender work). Additionally, when choosing comps it helps tremendously to know more about the details of the home so appraisers make proper comparisons and adjustments. MLS photos can help of course, but then again it’s not always obvious if the kitchen cabinets were actually replaced or if the bathtub is brand new, etc… Value is found in the details, isn’t it?

Application:

  1. Use the words correctly in listings and appraisals.
  2. Use the words correctly in conversation.
  3. Help appraisers understand if something really is remodeled.
  4. Win the real estate category on Jeopardy by using these words correctly.

NOTE: This post is not meant to rag on real estate agents in any way. That’s the furthest thing from my intention and the way I do life and business. This is simply about knowing definitions and communicating more effectively – especially with appraisers.

I hope this was helpful. If you want to go even further, check out 5 real estate words that make you sound smart.

Question: Any thoughts on stories to share? I’d love to hear your take.

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What market value looks like in real estate

What is market value? Does it depend on who you ask or is there a definitive answer? Let’s take a look at an image below to help illustrate Fannie Mae’s definition of market value – which is what appraisers use in their reports. Knowing how to think about and explain this definition can be really helpful when working with buyers, sellers, and appraisers – especially in a market with many overpriced properties right now. I created the image below, and I hope it’s a helpful visual.

KEY POINT: One buyer might be willing to pay more than anyone, but how much would most buyers pay? If you lined up 100 buyers, what would most of them pay for the property? That’s what the appraised value should represent.

what market value looks like - sacramento appraisal blog - 530

The Definition of Market Value from Fannie Mae: Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

NOTE: There are other definitions of value that appraisers use for different types of appraisals, but most mortgage finance transactions will use Fannie Mae’s definition of value.

I hope this was helpful.

Question: Any thoughts on stories to share? I’d love to hear your take.

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5 trends to watch in Sacramento’s regional real estate market

If you want to understand real estate, it’s important to see the big picture. It’s one thing to unpack trends for a neighborhood or county, but when we take a panoramic view of the region we can often get a fuller sense of how the market is really moving. Buckle up and let’s go for a quick tour of five trends to watch in Sacramento’s regional market. Remember, I do two big market posts around the second week each month, and there are two ways to read these posts. You can scan the highlighted text quickly or take a few minutes to digest what is here.

market trends in sacramento 2 - image purchased and used with permission

graphs from sacramento appraisal blog 3

THE SACRAMENTO REGION:

1) Prices have been flat for three months in the Sacramento Region:

median price sacramento placer yolo el dorado county

The median price has been the same for three months in the Sacramento Region, which shows the market has definitely cooled off. There may be some sub-markets that are still hot and showing increases in value, but the overall trend for the region is very telling. When looking at the median price, average price per sq ft, and average sales price in multiple counties, the market as a whole has been clearly flat for the past 90 days.

sacbiz journalQuote in SacBiz: By the way, I was quoted in the Sacramento Business Journal yesterday in an article about the slow market. Check it out at Slower real estate market could just be normalizing. It’s always an honor to share my two cents. I’d love to hear your take on the market too.

2) Inventory is steadily increasing in the Sacramento Region:

inventory in sacramento placer yolo el dorado county

Housing inventory has been increasing in the Sacramento Region over the past several months, which is creating more opportunity for buyers to get into contract (and be more picky). This has also increased competition for sellers to compete for a smaller pool of buyers. Inventory is still relatively low, which means well-priced properties are generating quick and multiple offers, yet there are also ample price reductions since many properties are simply overpriced. Sellers, pay attention to this trend because you need to price your property correctly in this market or it is going to sit.

months of housing inventory in region by sacramento appraisal blog

The higher the price, the more inventory there is. This is a normal trend, but it’s always interesting to see, isn’t it? Moreover, when we know how much inventory there is at a certain price range, we can help coach buyers and sellers about what they might expect.

number of listings in Placer  Yolo El Dorado Sacramento - by home appraiser blog

3) It’s taking 40 days on average to sell a house in the Sacramento Region:

days on market in placer sac el dorado yolo county by sacramento appraisal blog Last month it took three days longer to sell a property compared with the previous month, which is one more sign the market is slowing down. Before calling in the troops and sounding the alarm, remember it’s normal for the market to cool off as summer fades away. Generally speaking, the higher the price, the longer it is taking to sell.

4) There are 6% more listings this month compared to last month:

number of listings in Placer Sacramento Yolo El Dorado county - July 2014 - by home appraiser blog

The number of listings jumped by about 6% from last month to this month, while the number of sales rose by just over 2% (pending sales did increase though). Overall since the number of listings outpaced sales and pendings, inventory saw an increase.

5) Sales volume is down by 11% from last year in the Sacramento Region:

cash sales and volume in sacramento region - by home appraiser blog

Sales volume is down about 11% from where it was last year for the Sacramento region. Why? In large part it’s a reaction to investors stepping away from the market one year ago. Less cash sales in the region created a gap in sales, and the market is simply trying to figure out how to normalize or adjust now that investors have taken their foot off the gas pedal. You can see in the graph above how there has been about the same number of non-cash sales in 2013 and 2014, but the number of cash sales is very noticeably down this year. Keep in mind investors didn’t gut the market in Placer County or El Dorado County like they did in Sacramento County, but what happens in surrounding areas still matters for market trends.

BONUS MATERIAL: PLACER COUNTY

Placer County median price and inventory - by home appraiser blog

median price in placer county and sacramento county by sacramento appraisal blog

Prices have been flat in Placer County: Just like Sacramento County, Placer County is best described as flat. The median price saw a dip to $379,000 from $380,000 this month, but overall has been hovering around $380,000 for three months in a row after a small seasonal uptick this spring. It seems the peak of summer has hit, so it is likely to see the market soften up over the Fall (which is completely normal to see). Last year the market felt really sluggish though at this time in light of the looming government shutdown. This year we don’t have the same phenomenon, so the market is a bit different.

Placer County housing inventory - by home appraiser blog

months of housing inventory in placer county by sacramento appraisal blog

Inventory saw a very minor decline last month: Monthly inventory saw a very slight decrease, but really it’s still hovering at about the same level. As you can see, inventory above $750,000 is far different from the rest of the market. Generally speaking, the higher the price, the more inventory there is.

days on market in placer county by sacramento appraisal blog

It’s taking one week longer to sell compared to last month: On average it is taking 45 days to sell a home in Placer County as opposed to 37 days in Sacramento County (and 40 days in the Sacramento Region). Generally speaking, the higher the price, the longer it is taking to sell (which is normal). There were only 14 sales between 100-200K, so take the days on market with a grain of salt. Overall it took about one week longer to sell a home last month compared to the previous month.

Placer County sales volume - by sacramento appraisal blog

Sales volume is approaching more normal levels: Sales volume saw an increase last month, but volume is still down by 7.5% from July 2013. Overall volume is starting to hit much more normal levels.

number of listings in PLACER county - july 2014 - by home appraiser blog

There are more listings this month than last month: Listings increased by 5% from last month to this month. At the beginning of July there were 1387 active listings on the market, and at the beginning of August there were 1457 listings. This isn’t news to write home over, but the number of listings is something important to watch because if sales don’t increase at the same rate, the market will inevitably soften. Inventory actually went down slightly though in July in light of sales slightly outpacing listings in Placer County (very slight decline).

interest rates inventory median price in placer county by sacramento appraisal blog

It’s a joy to put these graphs together every month. Yes, it takes quite a bit of time, but it’s worth it. As always, I’d love to hear your take on how the market is unfolding too. Moreover, if you have ideas for how to refine or present trends, I’m always game to get some constructive feedback.

Sharing Trends with your Clients? If you want to share graphs online or in your newsletter, please see my sharing policy. Thank you for sharing.

Questions: How else would you describe the market? I’d love to hear your take.

If you liked this post, subscribe by email (or RSS). Thanks for being here.

The real estate train is slowing down in Sacramento

Slow. Flat. Price sensitive. Competitive if priced correctly. These are words that describe the Sacramento real estate market. Some consumers may not be in tune with this reality because last they heard the market was “on fire”, but those in the trenches of the industry know the real estate train is slowing down. Let’s take a look at ten quick talking points to help explain how the market is unfolding and why it is moving the way it is. I hope this is helpful for you and your clients.

Two ways to read this post:

  1. Scan the highlighted text and graphs quickly.
  2. Grab a cup of coffee and spend a few minutes digesting what is here.

free graphs from sacramento appraisal blog

1)  The median price has been the same for three months in a row:

median price and inventory since 2013 - by sacramento appraisal blog

The market saw a normal seasonal uptick for the spring of 2014, but the median price has been flat now at $270,000 for three months in a row. Keep in mind that not every neighborhood and price segment in Sacramento are experiencing the same flat trend as shown above, though charts for surrounding counties do have a similar flatness. Remember too that real estate markets are constantly changing, so it’s not a surprise to see the market has been flat – especially as summer begins to fade away.

price metrics in sacramento county

In the midst of a flat median price and average price per sq ft, the average sales price did see an uptick last month. If we were to isolate the average sales price, we’d say the market is increasing in value, but this is why it’s important to look at more than one metric. What are all the metrics saying together?

2) The number of listings is increasing (so are price reductions):

Active listings in Sacramento County by sacramento appraisal blog

number of listings in sacramento - July 2014 - by home appraiser blog

There were 8% more listings that hit the market in July. It’s normal to see more listings during the spring and summer, yet what is happening with these listings is the real story. Over the past two months in particular there have been increasingly more price reductions, which shows many properties are simply overpriced and that the market is getting soft. If inventory continues to increase, this trend of price reductions will likely persist since sellers will need to compete for a limited pool of buyers. This is important news for sellers because it underscores the need to price properties correctly. At the same time this is welcome news for buyers since they can be slightly more selective.

3) Inventory increased again last month and is now at 2.2 months:

inventory in sacramento county - by sacramento appraisal blog

Inventory increased again this past month and is now at 2.23 months of housing supply, which is about where it was when the market bottomed out in early 2012. This essentially means there are 2.23 months worth of houses for sale based on how many sales there were last month.

months of housing inventory by sacramento appraisal blog

number of listings in sacramento - by home appraiser blog

Inventory is increasing, and that is causing the market to slow down, but inventory is ultimately still fairly low. It is still a sellers’ market, but buyers are very noticeably gaining power. As you can see above, inventory is not the same at each price level. Generally speaking, the higher the price, the more houses there are for sale.

4) Sales volume is down 8% from last year but up from last month:

sales volume in Sacramento County since 2008sales volume in Sacramento County

Sales volume in July 2014 is down 8% from July 2013. When looking at the past 90 days in 2014 compared to the same time last year, volume is down by 10%. In the Sacramento region, sales volume is about 11% lower. However, the good news is that sales volume increased from last month to this month, and has been increasing all year mostly (after a couple of very slow months to begin the year).

5) FHA sales were 25% of all sales in Sacramento County last month:

FHA and cash sales since 2009 in Sacramento County by sacramento appraisal blog

FHA and cash sales under 200K in Sacramento County by sacramento appraisal blog

FHA has been making quite the comeback over the past year and has been filling some of the gap left by cash investors exiting the market. In fact, FHA sales represented 25% of all sales in Sacramento County last month and 32% of all sales under $200,000. We have not seen FHA percentages this high since 2012. Keep in mind FHA sales used to be 30% of all sales in Sacramento County between 2009 and 2011, so there is a precedent for FHA buyers being able to absorb even more of the market. As the market inches toward a buyers’ market, be sure you are familiar with FHA minimum property requirements.

6) There have been 40% less cash purchases in 2014 compared with 2013:

cash sales and volume in sacramento county - by home appraiser blog - Copy

Cash sales since 2009 in Sacramento County by sacramento appraisal blog

Cash investors drove the market for quite some time until they began to pull back just over one year ago. In fact, there have been about 40% less cash sales so far in 2014 compared to the same time period last year. When investors stopped buying it created a gap of sales, and over the past year the market has been trying to figure out how to respond to this gap. In other words, if we added in the number of extra cash sales from last year to this year’s total sales volume, we’d have a very similar number for both years. Remember, if cash volume was still as high as it was last year, inventory would be incredibly low, and the market would feel much like it did in early 2013.

7) It’s taking 37 days on average to sell a house:

CDOM in Sacramento County - by Sacramento Appraisal Blog

On average it’s taking 37 days to sell a house in Sacramento County and 40 days in the Sacramento Region. Last month it was taking 35 days to sell a home in Sacramento County. When a property is priced correctly it will sell very quickly and even have multiple offers, but an overpriced property is going to sit on the market. Generally speaking, the higher the price, the longer it takes to sell. For further context, it was taking almost 90 days to sell a house just a few years ago.

8) Interest rates are hovering in the 4% range:

interest rates by sacramento appraisal blog since 2008

interest rates by sacramento appraisal blog

Interest rates took a very slight dip last month, and they’ve been hovering in the lower 4s all year. What happens with interest rates will impact affordability for buyers over the long haul, but very minor changes probably won’t impact the market like increases in housing inventory will. The Fed hasn’t given any indication they will raise rates aggressively since they know how fragile the housing market is these days. Remember that one of the reasons why values increased so rapidly these past two years was because interest rates went below 4% for the first time ever. You can see in the graph above how the Fed deliberately lowered rates when the recession hit in 2008.

9) Today’s market is being driven by other factors compared to 2013:

layers of the market since 2011 sacramento county - by sacramento appraisal blog

layers of the market sacramento county - by sacramento appraisal blog

layers of the market sacramento county since 2001 - by sacramento appraisal blog

Part of being in tune with real estate or becoming a local expert (for agents and appraisers) is being able to explain how the market is moving and why the market is moving. The real estate market has many “layers” that impact value, and the key factors that were driving the market in early 2013 were cash investors, interest rates in the 3s, and a housing supply of less than one month. Now the “layers” of the market have shifted where inventory is over 2.2 months, interest rates are in the 4s, cash is now at a normal level (about 20% of sales), and the local economy is bound to be a bigger player in shaping the real estate market. While our economy seems to be slowly improving, it’s still not easy to get a job.

Median price & unemployment in Sacramento County since 2008

The unemployment rate in Sacramento County and California have both been declining, but take the jobless rate with a grain of salt when you see it on graphs like the ones above. An improving job market does help real estate values, and it’s important to watch over time, but since there are essentially less people participating in today’s job market, it’s only natural to see unemployment decline.

10) The median price is 32% lower from the peak in 2005:

context for median price since the real estate bubble by sacramento appraisal blog

Lastly, in case you needed some market trivia to impress your friends or you’re playing a game of real estate Jeopardy, the current median price in Sacramento County is about 32% lower than the peak in 2005. At times the real estate community is fixated on comparing current values with the previous peak of the market, and sometimes we even hear conversations about values getting back to those levels. But let’s remember how unaffordable and unsustainable that market was at the time. At the same time there is surely value in knowing the peak of the market and how far we’ve come since then, but ultimately what the house is worth right now is probably more valuable for current sellers and buyers.

Summary: After a typical seasonal uptick during the spring, the market has definitely changed over the past few months and is showing clear signs of slowing down. We are seeing this change show up with properties taking longer to sell, a flat median price, an increase of price reductions, higher inventory, more credits from sellers to buyers, and generally buyers starting to feel like they have more power to negotiate. The market is still competitive because inventory is still low, but it is extremely price sensitive, which is seen with buyers being more picky. Keep in mind it is fairly normal to see the market slow down as summer fades away, though the slowness seemed to slow up a bit sooner than usual this year, which means it will be interesting to see how this trend unfolds in coming months.

Sharing Trends with your Clients? If you want to share graphs online or in your newsletter, please see my sharing policy. Thank you for sharing.

Questions: How else would you describe the market? I’d love to hear your take.

If you liked this post, subscribe by email (or RSS). Thanks for being here.

An interview with the “Voice of Appraisal” show

I did an interview recently with Phil Crawford of the Voice of Appraisal show. This was a real honor since I love what Phil is doing for the appraisal industry. It’s nice to hear a fresh voice in a field that needs more unity and sometimes a reminder to embrace a progressive vision for business. Give the interview a listen below (or here) and let me know what you think. Phil and I talk shop for about 20 minutes, and my segment begins at 15:11. Thank you so much to anyone who came here after listening to the show too. I am truly honored.

Thoughts on Being a Local Real Estate Expert: One of the things Phil and I talked about briefly was the importance of becoming a local real estate expert. I cannot emphasize how vital it is for both appraisers and real estate agents to pay close attention to local real estate data. I know that sounds dull, but keep in mind how effective it is for business when you can speak confidently and definitely about HOW the market is moving and WHY it is moving. Being in tune with your real estate market in depth is especially helpful since consumers are trusting websites like Zillow more and more these days. Why not invite consumers to trust you instead? Why let a big company become the go-to source for real estate data and information?

knowing real estate trends

This is a slide from one of the presentations I give in real estate offices each month on seeing the current market. I unpack this slide a bit further in 3 reasons why knowing real estate trends is NOT just for data geeks.

voice of appraisal interview

Blog Tidbits: For any new subscribers, I post two times per week (sometimes only once). Most of the time I talk about issues that are relevant nationally for the real estate community, though at least twice a month I have two very hyper-local posts on the Sacramento housing market. Trends here of course often tend to echo what is happening in other places too.

Question: Any thoughts on marketing in real estate, the appraisal industry, or knowing local data? I’d love to hear your take. If you’re here for the first time too, please introduce yourself.

If you liked this post, subscribe by email (or RSS). Thanks for being here.

How much is that extra lot size really worth?

I was asked a great question the other day about how much a larger lot is worth, and I wanted to share the conversation in case it’s helpful. Any thoughts?

Question: Does lot size play a big part when you determine a home’s value? Say for example the subject home is exactly the same in size and floor plan as a comparable home, but the lot size is 5000 sq. ft. bigger on the subject home. Will that give the subject home a lot more value compared to the comparable home?

larger lot - sacramento appraisal blog

Answer: A larger lot can add substantially to the appraised value, but how much value is really based on what larger lots have sold for in the neighborhood compared to smaller lots. If you can find some homes with larger lots and compare them to homes with standard-sized lots, that will help give you a good sense of what the market is willing to pay. Sometimes you’ll notice a very large difference in price depending on the lot size, but other times the difference might not be that much, which is why it’s important to consider the following:

6 things to keep in mind about valuing a larger lot size:

  1. Image purchased at 123rf dot com and used with permission - 14688774_s - smallerLocation of extra space: If the extra 5000 sq ft is in the front yard, that might not be too valuable. How many buyers want a really large front yard to mow?
  2. Small dent in total lot size: In some neighborhoods an extra 5000 sq ft might make no difference at all because the extra space might only be a dent in the total lot size. For instance, an extra 5000 sq ft when considering three acres is only 4% of the total lot size, and that’s likely minimal in the eyes of most buyers.
  3. Adverse location of lot: If a lot is located on a busy street or has some other adverse location, this can definitely impact the marketability of the larger size since buyers might pay less of a premium for the larger site.
  4. New construction premium: Builders often charge a tremendous lot premium for larger lots, but the resale market might not recognize and pay for that same premium. An owner might say, “I paid $100,000 extra for this lot when I bought it,” but that does not mean the market is willing to pay an extra $100K when the house sells on MLS a few years later.
  5. Utility of lot: Remember if the additional lot size is not usable because of zoning, an easement, vernal pools or some other issue on the lot, the extra space might not add much value.
  6. Double the size double the value: Keep in mind lots do not typically double in value when they double in size. It’s similar to an XXL shirt not selling for twice as much as a small t-shirt despite being nearly twice the size. For example, if one acre sold for $100,000, you probably won’t see 5 acres sell for $500,000. Each additional acre will likely have a lower price than the initial $100,000 per acre. This is the law of diminishing returns.

larger lot backs railroad - sacramento appraisal blog

As you can see, a simple real estate question can sometimes stir many issues. In fact, this post could easily be twice as long. Just remember when you are dealing with a lot that is larger in size for the neighborhood, pay attention to previous similar sales (be sure the lot has similar utility and zoning). You’ll need to crunch data and do research, but on top of that it will be important to get in the mind of potential buyers to understand how the market would respond to the larger lot size.

Question: Anything else you’d add? Comments are welcome below.

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The relevance of listings in a slower real estate market

Everyone knows appraisers use sales during an appraisal, but how do listings fit into the picture? What can listings tell us about the market?

The Scoop on Listings: Paying attention to listings is critical for both appraisers and the real estate community because they can help us see what the market is doing. Think about it this way. Sales show us what the market used to be like 30 to 60 days ago when these properties first got into contract, but listings help us see what the market is like right now. In other words, sales are pieces of history to illustrate the immediate past, but listings more accurately reflect the temperature of the current market.

snail in a race photo 2 - bought by sacramento appraisal blog and used with permission

On top of using three sales, appraisers are basically required to use 1 or 2 listings for most lenders. This means appraisers will need to include a couple active or pending listings in the report that support the appraised value. Keep in mind appraisers may or may not use listings in private appraisals for divorce, estate planning, litigation… If a market is increasing, listings will likely be priced higher, and if a market is cooling or declining listings are probably going to be priced lower than the most recent sales. Sometimes though listings are simply pried too high as shown below:

fair oaks neighborhood

This graph of neighborhood sales shows listings are priced significantly higher than the most recent sales. Part of the issue in this neighborhood is there are not many listings, which can skew the median price. But the thing is a number of neighborhoods in the Sacramento area are showing a similar trend right now with listings priced too high. As you can see, current sales are higher than they were during the beginning of the year, but the market has actually flattened out lately in many areas. This is why higher priced listings don’t always mean value is truly at that level. Sometimes when a market slows down it takes a bit of time for listings to get in sync with the change that happened. Are buyers actually making offers at those higher prices? Does it seem reasonable for value to be that high? Has something changed in the market so that current listings are legitimately marketable at higher levels? The same is true for low-ball listings or short sales. Just because a property is priced that low does not mean the market is that low.

A few thoughts about listings in Sacramento right now:

  1. Many listings are simply overpriced. The market is very price sensitive, so if the price isn’t right, it’s going to sit.
  2. Just as one sale does not make the market, one higher or lower listing does not make or break value either.
  3. There are lots of price reductions right now, but remember there are lots of pendings too, which shows the market is still competitive. Inventory may be higher, but it is still not very high.
  4. More housing inventory will slow down the market, which means it’s not the type of market to try to price it like it’s 2013 (when the market was really hot and inventory was declining). Buyers have more selection and they’ve become a bit more picky, which is something sellers need to consider.

4 temptations when a real estate market slows down:

  1. Use older sales that sold at higher levels to substantiate a higher contract price.
  2. Ignore current listings that are priced lower and might actually better reflect the housing market.
  3. Use listings that are priced higher to gauge the market even though these higher listings are not moving at that price.
  4. You get into contract at a high level and expect a higher appraisal despite data not supporting those prices any longer.

Question: Anything else you’d add?

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