An open letter to sellers about pricing during a slower real estate market

Dear Sellers,

How are things? I hope all is well. I wanted to reach out and and pitch some thoughts your way about listing your property in a real estate market that is cooling off. I’m not trying to tell you what to do, but I figured this might give you some helpful context or conversation fodder with your agent. Here goes.

  1. Image purchased at 123rf dot com and used with permission - 14688774_s - smallerBe aware of change: Real estate markets are constantly changing. There are times when values increase and other times when they are flat or decline. This means it’s important to price according to how the market is behaving. Yes, values increased rapidly in recent years, but we’re not in that sort of market any longer. Moreover, the real estate market is cyclical where buyers tend to pay more in the Spring and less in the Fall/Winter.
  2. Know your competition: Price according to the most recent similar listings that are actually getting into contract instead of the highest sales from several months back. Remember that well-priced listings tell us about the current market whereas sales are more like pieces of history because they represent what the market used to be like in the past when these properties got into contract. The bottom line is if you want to sell, you need to be priced in the sweet spot where buyers are currently willing to pay. You can find that sweet spot by looking at sales, but don’t forget to give strong weight to similar actives and pendings.
  3. Be prepared for credits: It’s becoming normal for buyers to ask sellers for credits for repairs or even credits to assist with closing costs. This doesn’t happen in every price range, but it does tend to become more common when a real estate market softens.
  4. Listen to your agent: If your real estate agent keeps telling you the property is overpriced, is there a good reason why you are not listening? Your property might be incredible, but if it’s not generating interest or offers, something is wrong. What is it?
  5. Overpayment expectation: Don’t count on pricing your property really high in hopes of attracting that one magical cash buyer willing to pay extraordinarily more than anyone else. We are no longer in a market where buyers have to overpay since housing inventory is approaching normal levels.

I hope this was helpful. I’m around in case you have further questions or a story to share in the comments below.

Sincerely,

Ryan Lundquist
CA Certified Appraiser
Sacramento Appraisal Blog

p.s. Remember to pick up the dog mess before the appraiser comes  :)

an open letter to sellers from sacramento appraisal blog - image purchased and used with permission

NOTE: This information was written in response to many overpriced listings in the Sacramento area. Your market may or may not be similar. Be sure to study the trends in your market so you can price accordingly.

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

Let’s take a wider view of real estate today. I shared by big monthly post last week about Sacramento County, but what is regional market doing when we consider multiple counties surrounding Sacramento? Let’s look at five quick trends below.

Taking a wide view of real estate - image purchased by sacramento appraisal blog

Two ways to read this post:

  1. Briefly scan the 5 talking points and graphs below in 1 minute.
  2. Take a few minutes to digest the graphs and commentary.

Enjoy and let me know what you think.

free market trend graphs from sacramento appraisal blog

THE SACRAMENTO REGION:

1) Prices have been flat for 4 months:

median price sacramento placer yolo el dorado county

The median price has been the same for four months in the Sacramento Region, which is why so many in the real estate community have been talking about a flat market. As you can see on the graph, values cool off when inventory increases.

But Trendgraphix says… Trendgraphix shows the median price increased over the past few months from $310,000 to $315,000 for the Sacramento Region, but they seem to have pulled their sales data too early. When running stats in MLS for the past four months, the median price is clearly stable at $310,000 for each respective month. This is not to bash Trendgraphix at all because I am an enormous fan of their work. I only wanted to point out the importance of waiting long enough to publish stats, and how publishing even a few days too early can make a big difference.

2) Inventory is steadily increasing in the Sacramento Region:

months of housing inventory in region by sacramento appraisal blog

Housing inventory has been increasing and is helping fuel a greater sense of confidence among buyers (they’ve become more picky too), as well as many price reductions. Housing inventory increased from 2.50 months to 2.64 months over the course of the past month. Inventory is still not very high, but many sellers seem to have an unrealistic mindset about what their properties are worth, which is only leading to inevitable price reductions. Moreover, we are seeing weaker demand than in years past in light of less cash investors playing the market. My advice? Consider pricing according to the most recent competitive listings, that is, ones that are actually getting into contract (as opposed to the highest sale in the neighborhood three months ago).

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

The graph above is a slightly different way to look at inventory. As you can see, the bulk of listings are between 200-400K, but there are quite a few from 400-750K too. Remember, not every price range, neighborhood, or property type is experiencing the same exact trend.

3) It took 2 days longer to sell a home last month:

days on market in placer sac el dorado yolo county by sacramento appraisal blog

In July it took three days longer to sell a home, and last month it took days longer. When days on market increases, it’s a sign the market is slowing down. Yet at the same time this is a very normal trend because the hot buying season does fade away as summer closes. Generally speaking, the higher the price, the longer it is taking to sell.

4) Sales volume is down 10% in 2014 compared to 2013:

SALES volume in sacramento region - by home appraiser blog

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

Sales volume is down by slightly more than 10% this year compared to last year, and less sales is definitely one of the factors helping to cool the housing market. Less sales has led to increased inventory and a transfer of power from sellers to buyers.

5) Cash is down by 37% this year in the Sacramento Region:

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

I mentioned already that the sales volume is down by 10%, but the X-factor for lower volume is really less cash sales. There have only been about 50 more non-cash sales in 2014 compared to 2013, but almost 2000 less cash sales this year. Having this many fewer sales has made certain months in the year feel sluggish, and it’s certainly contributed to the flattening trend we’ve seen over the past several months.

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

Uptick, but still flat in Placer County: Placer County saw an uptick in median price last month, but it’s not really anything to write home about. One month of data does not mean the market is now increasing after being flat. Moreover, when talking with real estate agents, Placer County is very similar to Sacramento County in that the market is very price sensitive. If it’s not priced right, it’s going to sit.

Placer County housing inventory - by home appraiser blog

months of housing inventory in placer county by sacramento appraisal blog

Inventory in Placer County increased last month: Monthly inventory saw an increase last month from 2.72 months to 2.91 months. This effectively means there are 2.91 months worth of houses for sale in Placer County right now. Generally speaking, the higher the price, the more inventory there is.

days on market in placer county by sacramento appraisal blogIt’s taking two days longer to sell compared to last month: On average it is taking 47 days to sell a home in Placer County compared with 45 days last month. For context it is taking 40 days in Sacramento County and 42 days in the entire region. There were only 2 sales under $100,000, so disregard the 97 days listed above.

Placer County sales volume - by sacramento appraisal blog

Sales volume was fairly similar to last month: Sales volume was similar to last month, and is overall approaching more normal levels (though volume is still down slightly from 2013).

Sharing Trends? It’s a huge joy to put together these graphs each month, and I hope they’re helpful for you and your contacts. If you want to share graphs online or in your newsletter, please see my sharing policy. I hope you reach out for the graphs I didn’t post here too as I’d love to make those available to you. Fill out the form above or send me an email.

Thank you for being here.

Question: How else would you describe the market? I’d love to hear your take no matter what your level of interest or knowledge is about the housing market.

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The real estate market continues to soften in Sacramento

uncle ricoHave you ever met someone stuck in the “glory days” from high school or some other period of life? The best example I can think of is the character Uncle Rico from the 2004 film Napolean Dynamite. This guy could do nothing but think about his former life as a quarterback, and how if he could just go back in time, he’d win the state football championship. He simply couldn’t move on because he was fixated on the past. But isn’t that sort of like what is happening in real estate today? Many sellers are stuck in the mindset that the market is still aggressive like it was in the “glory days” of 2012 and the first half of 2013. But the market has changed. Let’s take a look at ten quick talking points to help explain what the Sacramento market is doing, 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 talking points and graphs quickly.
  2. Grab a cup of coffee and spend a few minutes digesting what is here.

free market trend graphs from sacramento appraisal blog

1)  The median price has been flat for FOUR MONTHS in a row:

median price and inventory since 2013 - by sacramento appraisal blog

The median price has been $270,000 for four months straight in Sacramento County. Can you see why many in the real estate community have been describing the market as flat? Remember of course that not every neighborhood or property type in Sacramento is experiencing this same flat trend, but there is no mistaking the market has been leveling off.

But Trendgraphix Showed an Increase? Trendgraphix in MLS shows the median price increased from $270,000 to $272,000 this month, but unfortunately that’s not an accurate number since they pulled their data a bit too early before all sales from August were entered into MLS.

2) Average sales price has also been flat:

price metrics since 2014 in sacramento county

If you need wisdom, don’t just ask one person for advice, but seek the council of a few. It’s the same in real estate. We need to be careful to not just look at the median price to determine what the market is doing. Let’s also take a look at the average price per sq ft and average sales price in Sacramento County. Of course we can check out other metrics too, which we’ll get into below.

price metrics in sacramento county

As you can see, the past few months of each metric above shows the market is flattening out. The market tends to cool down as summer fades away, but just as I said last month, the cooling began early this year, so it will be interesting to see how the Fall unfolds.

3) Distressed sales are still very low:

REOs and Short Sales in Sacramento County

REOs and Short Sales Percentage and Volume in Sacramento County

There have been slightly more bank-owned sales over these past few months, but any uptick has minimal at best. There is no “foreclosure flood” that has hit the market as REO sales were still just barely over 5% of all sales last month. Short sales have persisted to decline, and only represented about 6% of the market last month.

4) The number of listings has been increasing (so have price reductions): 

Active listings in Sacramento County by sacramento appraisal blog

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

There were slightly more listings in August compared to July. If the market unfolds like it did last year, listings will increase again in September, but then begin to decline as a part of the normal cooling season in Fall (we’ll see what happens though). The psychology of buyers has been changing drastically over the past two months as buyers are gaining more power from sellers. Buyers seem more prone to believe time is on their side, they are aware of price reductions, and they are generally not willing to pay top dollar unless it is truly warranted. The market has been inching toward a buyer’s market over the past 15 months, but these past few months there were some very big strides taken toward a buyer’s market. In August there were seemingly about 400 price reductions every single day in MLS. For every new listing that came on the market, it seemed there was about an equal number of price reductions. What does that tell us?

5) Inventory increased again last month and is now at 2.4 months:

inventory in sacramento county - by sacramento appraisal blog

Inventory is now at 2.4 months of housing supply (up from 2.2 month last month). This means there are 2.4 months worth of houses for sale right now in Sacramento County. Inventory for the Sacramento Region increased from 2.5 months to 2.65 months, but I’ll get into that on Tuesday when we look at the regional market and Placer County.

months of housing inventory by sacramento appraisal blog

number of listings in sacramento - by home appraiser blog

Inventory is one of the X-factors for setting the tone of the market and the direction of values. Housing inventory is still relatively low, but the market is very soft despite having less than 2.5 months of housing supply. Our market has been tapering off being on “steroids” (cash investors and 3% interest rates), and now we’re seeing how strong the local market really is now that regular non-cash buyers have to support the market. By the way, as you can see above, inventory is not the same at each price level. Generally speaking, the higher the price, the higher the inventory.

6) Sales volume is down 11% from last year:

sales volume in Sacramento County since 2008

Sacramento County has seen about 11% less sales volume so far in 2014 compared to 2013, and sales volume in August 2014 is down 14% from August 2013.

7) FHA sales were 23% 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

Cash is down and FHA is up. That’s been the story over the past few quarters. Last month 23% of all sales were FHA, while the month before saw 25% of all sales as FHA. This 2% decline shows up on the graph above, but take it with a grain of salt until we add in an extra month of data to round out the quarter. It’s actually nice to see that FHA buyers under $200,000 have been over 30% of the market over the past few months. This is fantastic news since first-time owner occupant buyers can finally get into contract again after getting beat out by cash investors when the market was really hot. If it’s been a while since you’ve brushed up on FHA appraisal standards, be sure you get in tune with FHA minimum property requirements.

8) There have been 44% 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

Did you know there have actually been more non-cash purchases so far in 2014 compared with 2013? At the same time there have been about 44% less cash sales during this same time period. 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.

9) It took 3 days longer on average to sell a house last month:

CDOM in Sacramento County - by Sacramento Appraisal Blog

On average it’s taking 40 days to sell a home in Sacramento County and 42 days in the Sacramento Region. Last month it took 37 days to sell a home in Sacramento County, and it’s not a surprise to see the days on market increase since the market has been slowing. Forty days is still relatively quick to sell a home because just a few years back it was taking an average of 90 days to sell in Sacramento. Keep in mind many properties are still selling quickly if they are priced correctly. Generally speaking, the higher the price, the longer it takes to sell. There were only 7 sales above one million last month, so take the 1M+ stat with a grain of salt.

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

interest rates by sacramento appraisal blog since 2008

Interest rates took a very slight dip last month, and they’ve been hovering in the lower 4s all year. The Fed still hasn’t given any indication they will raise rates aggressively since we all know that would be a disaster for the market because of how fragile the housing market and economy still is. It would be an equal disaster to lower rates aggressively too since that would create more upward value movement, and we really need the job market to catch up to the housing market, don’t we?

Was this helpful? I hope this was helpful for you and your clients. My goal each month with writing such a big post is to help illuminate what the market is doing, and in turn help explain why the market is moving the way it is. The real estate market has many “layers” that impact value, which is why it’s important to take a look at so many trends at one given time.

Summary: The market is slowing down, and it’s simply not the “glory days” of 2012 and 2013 any longer. While this is not cheerful news for some sellers, it’s great news for buyers since they are gaining more power to negotiate. Part of the market softening is normal since values tend to cool as the summer fades away, yet part of it is the market adjusting and trying to figure out how to be “normal” and cope without outside cash investors acting as a “steroid” for values. In closing, a few months ago we talked about signs to look for when a market begins to get soft, and many of these things below have been happening.

signs-of-a-soft-real-estate-market-by-sacramento-appraisal-blog-530

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.

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The 4 requirements for a room to be considered a bedroom

Is it a bedroom or not? Let’s talk about what makes a bedroom a bedroom. I had someone ask me this question a few weeks ago after I wrote about whether a bedroom needs a window or not. I hope this is helpful. Feel free to pitch in any further insight or ask questions below.

what makes a bedroom a bedroom - by sacramento appraisal blog

Four things a room MUST have to be considered a bedroom:

  1. Entrance: A bedroom needs at least two methods of egress, so it should be accessible from the house (commonly through a door), and then have one other exit (window or door).
  2. Ceiling Height: A bedroom ceiling needs to be at least 7 ft tall. It’s okay if some portions of the ceiling are below this level, but at least 50% of the ceiling needs to be a minimum of 7 ft in height. Most ceilings tend to be at least 8 ft tall, so ceiling height is not usually an issue (R305.1).
  3. Escape: A bedroom must have one other method of egress beyond the entrance point. A door to the exterior works as an exit point, and so does a window. According to the International Residential Code, a bedroom window can be between 24 and 44 inches from the floor, it needs at least 5.7 square feet for the opening, and it must measure no less than 24 inches high and 20 inches wide (R310.1).
  4. Size: The room should be at least 70 sq ft, and more specifically the room cannot be smaller than 7 feet in any horizontal direction (sorry, that 1’x70′ room won’t work) (R304.2 / R304.4).

As you can see, size, access, light, and ventilation all matter when it comes to defining a bedroom (IRC). There is one more issue we should talk about though. The closet.

vintage home in sacramentoAre closets required? A bedroom should probably have a closet since most buyers expect one, but technically the International Residential Code does NOT mandate a bedroom to have a closet. So the lack of a closet does not necessarily mean a room cannot be a bedroom. However, we must ask, what does the local real estate market expect, and what is required by the local city/county? Would buyers consider a room as a bedroom if there is no closet? In newer tract subdivisions it’s probably a bigger deal to have no closet, but in older classic homes where bedrooms were sometimes not built with closets, it’s very likely not an issue at all. For instance, consider a Victorian home without closets in any bedrooms. While some in the real estate community say closets are always required, that rule doesn’t really apply here for two reasons: 1) The IRC definition of a bedroom does not actually mandate a closet; and 2) If the market considers the rooms as bedrooms, that’s what they are. It would be highly improbable for buyers to walk through an old Victorian home without closets and say, “The house was stunning and utterly perfect… but there weren’t any bedrooms”. Does that make sense? Ultimately closets are not technically mandated by the international definition, but they may be expected and/or required by local code.

Any further thoughts or insight? I’d love to hear your take.

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Three things to keep in mind about real estate during the Fall months

How does the real estate market usually behave during the Fall? Let’s take a look today at three quick talking points to help explain the market in Sacramento. It’s not like I’m revealing mysterious truths below, but it’s powerful to be confident that the trends we tend to talk about are actually backed up by data.

1) Prices tend to cool off during the Fall months:

fall in sacramento county 2 - by sacramento appraisal blog

fall in sacramento county - by sacramento appraisal blog

The median price very often sees a dip during the Fall months. This is normal, it’s what happened last year, and it is probably what is going to happen this year since the market tends to slow down after August. However, keep in mind sometimes the market really doesn’t see a seasonal price dip if values are experiencing explosive appreciation (see 2004 and 2012). At the same time, if the market is declining, the decline will very likely persist all the way through the fourth quarter of the year. We all know this since it’s Real Estate 101, but it’s good to actually see the trend.

2) Sales volume tends to decline during the Fall months:

fall in sacramento county sales volume - by sacramento appraisal blog

sales volume 2008 to 2014 - by sacramento appraisal blog Real estate is definitely cyclical, so it’s no surprise there are more sales during the Summer than the Fall. This is true every year in Sacramento County and really throughout the United States. Last year we saw a freakishly low number of sales as the market struggled to adapt to cash investors exiting the market and the looming government shutdown. This year we are entering the Fall market with more of a “normal” market, but one that already has a higher level of inventory as well as many overpriced listings.

3) Housing inventory tends to increase slightly during the Fall months:

housing inventory in fall 2008 to 2014 - by sacramento appraisal blog

housing inventory in fall - by sacramento appraisal blog

Housing inventory tends to show a slight increase or at least hover at summer levels for a short period of time before ALWAYS showing a drop in December. Remember, inventory can increase in two ways: 1) More listings hit the market and outpace the number of sales; or 2) The number of sales declines while listings stay relatively the same. Case-in-point: Last year housing inventory saw a big increase from September to November, but not because so many more listings hit the market. The reality was sales volume hit a 6-year low during this time period.

Question: What do you think the best month of the year is to buy a home? I’d love to hear your take in the comments.

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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.

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