The problem of an addition behind a bedroom

Imagine a home owner adds a “Bonus Room” on the rear of a house. It’s nice to have the extra space, right? Well, imagine one of the rear bedrooms now no longer has a direct exit to outside of the home. Is that going to be an issue?

bedroom without egress - by sacramento appraisal blog

The Problem: This home above has an addition of a Bonus Room that essentially removes direct exterior egress from one of the bedrooms. No big deal, right? Well, it actually is a big deal because by definition a bedroom must have two methods of egress. If you didn’t know, according to International Residential Code (R310.1), a bedroom needs to have one doorway that opens to the interior of the house and one doorway or window (of adequate size) that opens directly to the outside of the house (read here for more on what makes a bedroom a bedroom). Thus when an addition of a Bonus Room, Family Room, or Whatever Room blocks the secondary egress in a bedroom….. Houston, we have a problem! All of the sudden a room that was previously considered a bedroom is technically no longer a bedroom. If you’re interested in reading the nitty-gritty of various national codes on the subject, check out this document (pdf).

not a bedroom - sacramento appraisal blog

Impact on Value: Being that I’ve seen this issue twice in the past month, I thought it was worth kicking around some thoughts. Like most things in real estate, we need to look at the problem from a few different angles:

  1. The Lender: Keep in mind a lender might not want to lend on a property when there is a blatant safety issue. Or a lender might ask for the addition to be removed, a secondary egress to be added in the “bedroom” if possible, or for the appraiser to not consider the room as a bedroom any longer. Ultimately the appraiser can ask the lender for some direction or advice, but at the end of the day the appraiser has to communicate very clearly and make decisions that will lead to a credible value.
  2. Not Code Enforcement: Let’s remember it’s not the appraiser’s job to enforce code violations or stop a deal from moving forward if there are code issues. Increasingly lenders want appraisers make comments as if they were home inspectors, engineers, or code enforcement officers, but the appraiser’s job is to come up with a credible value. Bottom line. At the same time, appraisers need to know enough about building code to be able to recognize a blatant egress issue, disclose the issue, and consider if there is any impact on the value (there may or may not be).
  3. Less Bedrooms: Decreasing the bedroom count could impact value since a property is likely less marketable with less bedrooms.
  4. Permits: Let’s realize this addition may not have been done with a permit in the first place, so the appraiser is going to have to figure out what the market is willing to pay for a house that has some non-permitted space. Some appraisers will not assign any value to a non-permitted area, saying “no permit = no value”, while others will try to figure out how much the market is willing to pay for the house in its non-permitted state. Read more on a lack of permits here. Remember that some additions increase the functionality of a floor plan in a positive way, whereas other additions make a floor plan very funky (in a bad way).
  5. The Whole Enchilada: Ultimately, I find myself looking at the “whole enchilada” or entire package of a house when trying to figure out how a layout like this might be seen in the market. For instance, in a recent appraisal consulting assignment, an owner hired me to help him see the market since his house was not selling. On paper it looked like the house should be valued toward the top of the market because of its much larger size, but in actuality the lack of upgrades and funky floor plan (that blocked egress from one bedroom), ended up meaning the house attracted zero offers and was more comparable with the bottom of the market. The way I knew the house was more closely aligned with the bottom of the neighborhood spectrum was finding a few odd floor plan sales (that was lucky), the subject having zero offers at a higher price range, and even a previous sale of the subject property from years ago that showed it sold at the bottom of the market at the time despite its very large size.

I hope that was helpful. By the way, thank you to home inspector Ken Ives for a good conversation on some of the above points as I prepared this post.

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

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Can two separate lots be included in one appraisal?

Can an appraiser include two lots with separate parcel numbers in one appraisal? Maybe, maybe not. This might seem like a random issue that almost never comes up, but I’ve seen it twice very recently, and I just finished an appraisal like this. Thus it’s important to know how to navigate the issue when it does arise. I hope this helps give some context, and I welcome your comments below.

Scenario 1: NOT GONNA HAPPEN

John owns a 2200 sq ft home on a half-acre lot, and when he bought the house 10 years ago he also bought a one-acre lot next door so he could have extra space. Each lot has its own parcel number. Now John wants to sell, and he plans to sell both lots together to fetch a premium for having a 1.5 acre lot. Can he do that?

Answer: What John has are two separate lots. He can try to market both properties together, but an appraiser is not going to value them together. Why? Because the lots are not legally bound together. Since each lot can be sold, developed, and financed separately, they will also be appraised separately.

Lot 1 and 2 example B by Sacramento Appraisal Blog

Scenario 2: GONNA HAPPEN

Imagine Anna owns a 2000 sq ft home that technically has two lots that are being sold together. The main house has a lot of 0.50 acres, but there is also a lot at 0.40 acres that legally cannot be sold separately from the main parcel with the home on it. Years ago the neighborhood was subdivided, and this smaller 0.40 acre lot became landlocked. This smaller lot is not buildable, and it is even recorded in the legal description and the preliminary title report.

Answer: In this case it is legit for the appraiser to include both lots in the appraisal because the lots are legally bound together and together they present the highest and best use of the property. An appraiser would appraise this as a home with a 0.90 acre parcel. In short, since these lots belong together, they are sold together, and appraised together.

Lot 1 and 2 example by Sacramento Appraisal Blog

FYI: Fannie Mae Multiple Parcel Requirements (Seller’s Guide B2-3-04):

  • Each parcel must be conveyed in its entirety.
  • Parcels must be adjoined to the other, unless they comply with the following exception. Parcels that otherwise would be adjoined, but are divided by a road, are acceptable if the parcel without a residence is a non-buildable lot (for example, waterfront properties where the parcel without the residence provides access to the water). Evidence that the lot is non-buildable must be included in the loan file.
  • Each parcel must have the same basic zoning (for example, residential, agricultural).
  • The entire property may contain only one dwelling unit. Limited additional non-residential improvements, such as a garage, are acceptable. For example, the adjoining parcel may not have an additional dwelling unit. An improvement that has been built across lot lines is acceptable. For example, a home built across both parcels where the lot line runs under the home is acceptable.
  • The mortgage must be a valid first lien that covers each parcel.

Look Mom, CBS did another story with me: A couple weeks ago I wrote about gentrification in the Oak Park neighborhood. After reading my post, a reporter from CBS Sacramento reached out to do an interview. I feel very honored, so I wanted to share. Click the image to view the story.

cbs 13 - 2

I hope this was helpful.

Questions: Any thoughts, stories, or insight ? Agents, have you sold something like this? Appraisers, did I miss anything? I’d love to hear your take.

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Seeing the signs of a slowing market in Sacramento

I’ve been saying things like, “How did you get so big?” lately to my kids. Sometimes I look at them and just wonder where the time has gone, and how it’s even possible that my oldest is starting to look more like a teenager every day. It’s both sobering and exciting. The truth though is it’s taken 12 years for all this change to happen in my son, but I don’t always see the growth every single day until all of the sudden he looks bigger or older. Can you relate?

slower market - image purchased from 123rf and used with permission by sacramento appraisal blog

No way, the market isn’t slowing: The same thing happens with real estate. It’s easy to plug away and use all the normal cliches to describe the market, but when we pause to really take a closer look, we begin to notice things are different. Let’s take a deeper look into the numbers below. If you’re local, absorb what is here and feel free to share some of the talking points with your contacts. If you’re out of town, I’d love to hear about your market. Email subscribers, I recommend reading this big monthly post on the blog instead of email.

Two ways to read THE BIG MONTHLY POST:

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

DOWNLOAD 51 graphs HERE (zip file): Please download all graphs in this post (and more) here as a zip file (or send me an email). Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share.

One Paragraph to Describe the Sacramento Market: The housing market has had an aggressive feel for most of the year. Pending sales have been a good 10-15%+ higher than normal, sales volume in the Sacramento region is up 10% this year, and values have seen a modest seasonal uptick too. Overall the market is still quite competitive in some price ranges because inventory and interest rates are still low, but there have been some subtle changes lately that help us see the market is beginning to slow down. Remember, it is normal for markets to slow, and the past two years have seen a very definitive seasonal market where the Spring is hot and the Fall is soft. For instance, it took 2 days longer to sell a home last month compared with the previous month, price reductions are growing in number, the median price in Sacramento County has been hovering at the same level for 90 days, interest rates have seen a minor increase, and housing inventory has seen a slight uptick. As housing supply presumably continues to increase over the next few months, watch out for more price reductions, unrealistic expectations from sellers, and buyers gaining more power.

I’m NOT saying the market is declining. I’m simply saying the strong seasonal market is showing signs of beginning to slow. Those who take notice can make informed real estate decisions and/or help clients price their homes properly (see 3 points below about pricing).

Sacramento County Market Trends for July 2015:

  1. The median price has been hovering at $290,000 for 90 days.
  2. It took an average of 31 days to sell a house last month (30 in June).
  3. Cash sales were 16.7% of all sales in July (very normal level).
  4. Short Sales and REOs were only 4% of sales last month.
  5. FHA sales were 26.5% of all sales in Sacramento County in July.
  6. Sales volume is 8.6% higher so far in 2015 compared to last year.
  7. Sales volume was 12% higher in July 2015 compared to July 2014.
  8. There is a 1.9 month supply of homes for sale (1.6 in June).
  9. The average price per sq ft is 185 (6% higher than last July).
  10. The average sales price is $320,732 (slightly lower than previous month).

price metrics since 2014 in sacramento county

inventory in sacramento county  Since 2013 - part 2 - by sacramento appraisal blog

CDOM in Sacramento County - by Sacramento Appraisal Blog

inventory - July 2015 - by home appraiser blog

sales volume through june 2015 in sacramento county

median price and inventory since jan 2013 - by sacramento appraisal blog

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

Sacramento Regional Trends for July 2015 (Sac, Placer, Yolo, El Dorado):

  1. Sales volume was up 14.5% in July 2015 compared to July 2014.
  2. Sales volume for the year is up 10.3% compared with 2014.
  3. The median price at $330,000 is up 6% from last year, but down 1% from the past two months.
  4. Cash sales were 17% of all sales last month (very normal level).
  5. It took an average of 35 days to sell a house last month (33 days in June).
  6. FHA sales were 23.1% of all sales in the region last month.
  7. There is 1.98 months of housing inventory (up from 1.85 in June).
  8. The average sales price is $367,775 (6.8% higher than last year, but down slightly from previous month at $370K).
  9. It took 5 less days to sell a house this July compared to July 2014.
  10. Distressed sales were less than 4% of all sales last month (REOs / Short Sales).

median price and inventory in sacramento placer yolo el dorado county

Regional market median price - by home appraiser blog

days on market in placer sac el dorado yolo county by sacramento appraisal blogmonths of housing inventory in region by sacramento appraisal bloginterest rates inventory median price in sacramento regional market by sacramento appraisal blog

Placer County Market Trends for July 2015:

  1. The median price in Placer County is $395,000 (it’s been hovering between $391,000 to 401,000 over the past few months).
  2. The median price is 4.2% higher than one year ago (July 2014).
  3. It took 40 days on average to sell a house last month (4 more days than June, but 5 less days than last year).
  4. Cash sales were 16% of all sales last month.
  5. FHA sales were 18.8% of all sales in Placer County last month.
  6. Sales volume was 14% higher this July compared to last July.
  7. Sales volume is up 17.8% in 2015 compared to last year.
  8. There is 2.17 months of housing inventory (up from 1.88 months in June).
  9. The average price per sq ft is is 202 (up from 182 last July).
  10. The average sales price is $430,599 (5.4% higher than July 2014, but lower than June).

Placer County median price since 2012 - by home appraiser blogPlacer County sales volume - by sacramento appraisal blogPlacer County median price and inventory - by home appraiser blogmonths of housing inventory in placer county by sacramento appraisal blogdays on market in placer county by sacramento appraisal blognumber of listings in PLACER county - July 2015 - by home appraiser blog

I hope this was helpful. Thank you so much for being here.

Quick Pricing Advice:

  1. Price according to the most recent listings that are getting into contract rather than the highest sales from the Spring.
  2. Remember how price sensitive the market is right now. Despite inventory and interest rates being low, buyers are not biting on overpriced listings.
  3. Price according to the neighborhood market rather than county-wide trends. The county-wide market may show increases or declines, but your neighborhood might be more or less aggressive compared to the entire county.

DOWNLOAD 51 graphs HERE (zip file): Please download all graphs in this post (and more) here as a zip file (or send me an email). Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share.

Questions: How do you think sellers and buyers are feeling about the market right now? What are you seeing out there?

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The smell of gentrification in Oak Park

Gentrification is either a dirty word or something wonderful depending on who you ask. One of the best examples of gentrification locally is the Oak Park area of Sacramento. Let’s take a deeper look at this neighborhood that is in the process of change. I’d love to hear your take in the comments below.

Oak Park high sale

Seriously, $428,000? When telling a few locals on Twitter last week that a property on 34th Street recently sold for $428,000, the responses were mostly, “What the heck? Really? Wow!!” I know that doesn’t sound like much for certain areas of the country, but it gives pause for Oak Park because it seems symbolic of what is happening in the neighborhood as well as indicative of values that have risen dramatically in recent years.

What is gentrification? According to Merriam Webster, it is the process of renewal and rebuilding accompanying the influx of middle-class or affluent people into deteriorating areas that often displaces poorer residents.

1) Neighborhoods Have Life Cycles:

Growth: A period during which there are gains in public favor and acceptance. Demand increases.
Stability: A period of equilibrium without marked gains or losses. No real obvious change.
Decline: A period of diminishing demand and acceptance.
Renewal: A period of rejuvenation and rebirth of market demand.

2) The Good & Bad: Blight needs to be cleaned up, so it’s a good thing when that begins to happen in neighborhoods. However, it’s a bad thing when native residents are displaced because they can no longer afford the neighborhood.

An Example of Gentrification: The Oak Park area of Sacramento has been gentrifying for more than a decade. In some portions of the neighborhood there are signs of revitalization as residential properties are rehabbed, chain link fences are removed, and commercial businesses along Broadway are starting to attract outsiders (which is something that rarely happened in previous years). Overall a shift in attitude is taking place, and that is being reflected with greater demand and higher home prices. There are “gentrification pockets” so to speak in various areas of Oak Park, but not all areas.

Oak Park Sales in Sacramento - by Sacramento Appraisal Blog

Here are all Oak Park sales over the past 6+ years. This graph shows all portions of Oak Park including North Oak Park (not Med Center). These are residential sales from MLS (no private sales). The highest sale in Oak Park recently closed at $428,000. On one hand this sale is higher than anything else, and that gives us pause, but on the other hand it is larger in size and new homes tend to command a value premium.

Oak Park and Med Center Sales in Sacramento - by Sacramento Appraisal Blog

Med Center Thoughts: North Oak Park has been a very hot market, and some would say the line between Med Center and North Oak Park has been blurred in recent years, meaning higher values of the Med Center area have trickled throughout North Oak Park. If you are a buyer, would you pay a premium for Med Center or do you not care? As an appraiser I like to graph Med Center separately because some properties in Med Center can still command a premium. However, the graph does show the highest prices in Oak Park are more readily competing with Med Center prices.

SNL’s Gentrification Skit: By the way, if you haven’t seen Saturday Night Live’s skit on gentrification, they nailed it. Watch below (or here). There is some language, so be careful about kids being present.

Questions: Any thoughts, stories, or points to share? I’d love to hear your take. How has your perception of Oak Park changed over the past decade? Do you think there is a price difference between Med Center and North Oak Park? What are the strengths and weaknesses of gentrification?

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Behind the scenes of how appraisals are ordered

How are appraisals ordered? How much time are appraisers actually given to finish the report? What is it like on the appraisers’ side of things? Let’s take a look at what happen before, during, and after an appraisal is ordered for a loan. Knowing how things work can foster informed conversations and help everyone plan for an effective escrow too. I hope this helps.

how appraisals are ordered - by sacramento appraisal blog - image purchased and used with permission from 123rf

My Interview on CBS: By the way, last week I was interviewed by CBS to talk about housing trends. Click here to see the video or scroll to the bottom of this post.

NOTE: The info below is relevant only for how appraisals are ordered in the lending world. Private appraisals do not require use of an AMC.

Before the Appraisal Order:

  • Appraisers typically have to be on an approved list for an Appraisal Management Company (AMC) to be sent appraisal orders. Appraisers apply to be on such a list, submit a resume, a few work samples, etc… In case you don’t know what an AMC is, according to NAR, an Appraisal Management Company (AMC) works with lenders and appraisers to facilitate the ordering, tracking, quality control and delivery of appraisal reports.
  • The AMC puts together a list of what they expect from appraisers. Sometimes the list is just one paragraph, but other times it might literally be three pages long of what they expect on the inspection, or how the appraiser should handle certain situations if they arise. When the order is sent to the appraiser, this list is attached along with the order.

Image purchased at 123rf dot com and used with permission - 14688774_s - smallerThe Appraisal Order:

  • When an appraisal is needed, an AMC will order one from one of their approved appraisers. If there is not an available appraiser on their list, the AMC will try to find an appraiser to add to their list.
  • Some AMCs will send out a blast order to a large group of appraisers. Typically the fee is very low and the turn-time is very quick. The first appraiser to click on the order is the one who gets it.
  • Other AMCs or appraisal departments will send out an order to a specific appraiser, and give the appraiser anywhere from several to 24 hours to accept the order.
  • Appraisers are regularly given about 7 days to finish an appraisal, though some AMCs may require 3-5 days.
  • If the appraiser doesn’t like the fee or turn-time that is offered, the appraiser can negotiate for a different fee and deadline. Some AMCs listen to appraisers and approve higher fees as needed, whereas other AMCs are bottom feeders only searching for the cheapest and fastest service.
  • An appraisal is usually due no later than a specific time such as 12pm, 1pm, or by midnight of the given due date.
  • A rush fee might result for an appraisal that is due several days prior to the normal turn-time or even just one day.

appraisal value - image purchased by Sacramento Appraisal Blog from 123rt dot com 4During the Appraisal Order:

  • AMCs usually want the appraiser to call to set the inspection within the first 24 hours of accepting the order.
  • Once the inspection is set, the appraiser has to update the AMC’s online appraisal platform with the inspection time.
  • The appraiser is usually required to give status updates every 24 or 48 hours.
  • The ordering platform can actually track how well an appraiser communicates and whether deadlines are met, which can result in more or less work for the appraiser.
  • The appraisal might be due in 7 days, but if nobody can give the appraiser access until day 6, the appraiser is likely going to ask for several more days to complete the assignment.
  • If the property ends up being more complex, the appraiser may need additional time or even a fee increase.
  • The appraiser can access the purchase contract and other provided documents in the AMC’s online portal. Keep in mind the appraiser only has access to whatever documents are there though (usually the purchase contract, but rarely the pest report, TDS, or title report).
  • INVOICE: Many AMCs require the appraiser to NOT include the invoice with the appraisal. There can be a big difference between what the Borrower is paying for the appraisal and what the appraiser is actually getting (this point was added thanks to an appraiser who emailed me).

After the Appraisal Order:

  • The appraiser is thanked profusely and lauded with praise by everyone involved in the transaction (kidding).
  • An AMC’s review department will look over the appraisal and ask the appraiser for any clarification or additional comps if needed. Appraisers typically are asked to complete revisions in 1-2 days.
  • If deemed necessary, the lender may hire a second appraiser to do a second appraisal when a house is complex, the value is suspicious, or the house has been flipped recently.
  • Most lenders have a rebuttal process, and the appraiser will typically be given 2 days to look at any new information or data that is submitted for the appraiser to consider.
  • Appraisers are usually given a 2-3 day turn-time for a re-inspection.
  • Appraisers are often paid between 30-60 days of doing the appraisal. It depends on the client.

Three Important Considerations:

  1. Backed-up AMC Communication: Appraisers are often blamed for a slow escrow, but in reality an appraiser might hit all deadlines that were given without being tardy. The problem is that a loan officer might submit an order to the appraisal department, but the appraiser might not actually see the order for a few days if the ordering department is backed up. Moreover, if the appraiser is dealing with a complex issue and reaches out to the AMC for conversation or direction, but it takes the AMC four days to respond to the appraiser, it can certainly delay things. The same thing happens when appraisers request documents that should be easy to get, but they end up taking many days.
  2. Remembering the Past: I remember working in an appraisal office in 2002 and at the peak of the busy season we had a 4-week turn-time, and we would do 2 or 3-week “rushes”. The turn-time was simply longer because that was the market at the time. It seems right now we are locked into a much faster turn, which is nice, but when the market gets hot, that may need to change.
  3. Picky Appraisers: When appraisers are overloaded with work, many appraisers might say NO to appraising a complex property. This means an AMC might have to reach out to many appraisers before finding someone willing to take on the assignment (hint: pay the appraiser for the additional complexity as money tends to talk). For instance, a 7-day turn time in the beginning of the year was actually not enough time for many appraisers because they were backed-up with so many other appraisals. Thus when both an easy order and a very challenging order would come into the appraiser’s pipeline, the obvious choice was to take the easier route because the hourly rate would be far better than how much more time it would take to complete the complex appraisal (that makes sense, right?).

My Interview on CBS:

Questions: Any thoughts, stories, or points to share? Agents, does anything surprise you here? Appraisers, did I miss anything? I’d love to hear your take.

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5 reasons why appraisers call for repairs to be made

Repairs are required. Those can be scary words during an escrow, yet they’re fairly common. Why do appraisers call out some repairs? Is there some sort of list or manual that tells appraisers what to do? Why do some appraisers mandate repairs, but others won’t? Let’s kick around these questions a bit.

reasons why appraisers call for repairs to be made

Five main reasons why appraisers call for repairs:

  1. The End-User: If an appraisal report is geared toward Fannie Mae or FHA, the appraiser ultimately is consulting Fannie Mae’s Seller’s Guide or FHA’s housing handbook to be sure the property is appraised according to their specific standards. If something is not up to par, the appraiser needs to call for repairs to be made so the property is acceptable to Fannie Mae or HUD.
  2. Health & Safety: If there is something blatantly unsafe about a home, an appraiser can call for that item to be fixed. Sometimes we like to think “heath and safety” is only an FHA issue, but if something is unsafe even in a conventional loan, the appraiser can call for it to be repaired.
  3. Lender Overlays: Some lenders have requirements above and beyond what Fannie Mae or FHA would require. These requirements are referred to as overlays. An example might be requiring smoke detectors in each bedroom even though they might not be required by local code. Another example would be requiring the appraiser to verify there was no fracking on site (no, I’m not kidding).
  4. Unknown Issues: Appraisers specialize in value, so when they see something like potential mold or huge cracks, the appraiser doesn’t have to try to be a mold or crack expert or guess if there is a real issue at hand or not. The appraiser is not trying to kill the deal, but might need to call in someone who specializes in those areas to offer insight. The appraiser might say in the report: “The appraised value is subject to further inspection of the cracks on the eastern side of the house by a qualified professional to determine there are no issues with structural integrity. The value is based on there being no issues. The appraiser reserves the right to adapt the opinion of value in this report based on new information.”
  5. Different Appraisers: This is where we get more subjective. Some appraisers might call for certain repairs to be made that other appraisers aren’t calling out. This might be due to the way the appraiser was trained (whether good or bad), or simply the reality that some appraisers do a better job than others. For instance, a friend just bought a house with FHA financing, and there was very clear chipping paint and severe wood decay all over the covered patio (this will be a weekend project that we’ll fix together eventually). The appraiser absolutely should have called for repairs, but that didn’t happen for whatever reason. Ten years ago everyone said, “Hey, can you just ignore that one issue in the appraisal report? Just don’t mention it because it will kill the deal, okay.” Well, appraisers are supposed to describe the property and point out any physical deficiencies. The appraiser is supposed to be the eyes of the lender so to speak (which is what the lender says they want…..theoretically).

appraisal repairs verbiage - example from sacramento appraisal blog

cracks example by sacramento appraisal blog

NOTE on Private Appraisals: These points are relevant for appraisals for loans, but appraisers may or may not make the same call for repairs when appraising something for a divorce, estate settlement, litigation, a pre-list appraisal or some other private matter. The vast bulk of my work is for private appraisals, and I don’t remember the last time I called for repairs to be made during a private appraisal. I do still have to use what’s called an extraordinary assumption or hypothetical condition though sometimes.

Fun Class: By the way, here are a few images of my class last week at the Sacramento Association of Realtors. Thank you everyone for coming.

How to think like an appraiser class at SAR

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

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Packing a market punch in Sacramento

It’s easy to say things like, “The market is on fire” or “Buyers are hungry out there”. Yet I find vague statements don’t pack much of a punch. It’s far more powerful when we get specific. For instance, did you know sales volume is up almost 10% this year so far? Or FHA buyers were 28% of all sales this past quarter in Sacramento County? Those stats carry some weight and bring me pause.

sacramento appraisal blog - image purchased and used with permission from 123rf dot com

Goal of the Big Monthly Post: The goal of this big market update is to help highlight what the market is doing and help us describe it a bit better. If you’re local, absorb what is here and share some of the talking points below with your contacts. If you’re out of town, I’d love to hear about your market also. Email subscribers, I recommend reading this post on the blog instead of email.

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.

One Paragraph to Describe the Sacramento Market: The first half of 2015 is now over, and all year buyers have expressed a huge appetite for the market. Sales volume is up about 10% in the region, and pendings have routinely been 20%+ higher each month this whole year. Sales volume in June was actually higher than it’s been in about three years. More sales has led to inventory declining, though it’s important to note more listings have definitely been hitting the market (and there have been more price reductions too). While many properties are generating multiple offers and selling very quickly, buyers are also finicky about pulling the trigger on anything that is not well-priced or with an adverse location or condition. Some sellers are severely overpricing their homes too. The median price stayed about the same last month compared to the previous month. One of the biggest factors shaping this market is the power of FHA buyers who now represent 23% of all sales in 2015 in the Sacramento region (and 27.5% of all sales last month in Sacramento County). The byproduct of more FHA buyers is stiff competition at the lower end and higher offers too (this makes overall housing stats look more impressive). As housing inventory presumably begins to increase over the next few months (as it did last year), watch out for price reductions, unrealistic expectations from sellers, and buyers gaining more power.

DOWNLOAD 64 graphs HERE (zip file): Please download all graphs in this post (and more) here as a zip file (or send me an email). Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share.

Sacramento County Market Trends for June 2015:

  1. The median price at $290,500 is 7.5% higher than one year ago (June 2014).
  2. It took an average of 30 days to sell a house last month (35 in May).
  3. Cash sales were 16% of all sales during Q2 2015 (31% in 2013).
  4. Short sales were only 5.1% of all sales in Q2 2015.
  5. REOs were only 5.3% of all sales in Q2 2015.
  6. FHA sales were 27.9% of all sales in Sacramento County in Q2 2015.
  7. Sales volume is 17.5% higher this June compared to last June.
  8. There is 1.6 months of housing inventory (2.1 months last June).
  9. The average price per sq ft is 186 (8% higher than last June).
  10. The average sales price is $323,082 (9.8% higher than last year).

price metrics since 2014 in sacramento county

inventory - June 2015 - by home appraiser blog

REOs and short sales in sacramento county - by sacramento appraisal blog

CDOM in Sacramento County - by Sacramento Appraisal Blog

cash sales - sacramento appraisal blog

cash and fha under since 2009 - sacramento appraisal blog

sales volume in Sacramento County

Median price and inventory since 2011 by sacramento appraisal blog

Sacramento Regional Trends for June 2015 (Sac, Placer, Yolo, El Dorado):

  1. Sales volume was up 17% in June 2015 compared to June 2014.
  2. Sales volume for the year is up 9.6% compared with 2014.
  3. The median price at $332,250 is 7.1% higher than one year ago (June 2014).
  4. FHA sales are up 31% this year so far.
  5. Cash sales were roughly 16% of all sales last month.
  6. It took an average of 33 days to sell a house last month (37 days in May).
  7. FHA sales were 23.7% of all sales in the region last month.
  8. There is 1.85 months of housing inventory (1.92 months in May 2015).
  9. The average sales price is $370,013 (7.9% higher than last year).
  10. It took 4 less days to sell a house this June compared to June 2014.

median price and inventory in sacramento placer yolo el dorado county

volume cash and conventional in region by sacramento appraisal blog

months of housing inventory in region by sacramento appraisal blog

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

median price and inventory in sacramento regional market

interest rates inventory median price in sacramento regional market by sacramento appraisal blog

Placer County Market Trends for June 2015:

  1. The median price in Placer County is $401,000.
  2. The median price is 5.5% higher than one year ago (June 2014).
  3. It took 36 days on average to sell a house last month.
  4. Cash sales were 14% of all sales last month.
  5. FHA sales were 17.8% of all sales in Placer County last month.
  6. Sales volume was 31% higher this May compared to last May.
  7. Sales volume is up 18% in 2015 compared to last year.
  8. There is 1.88 months of housing inventory (2.76 months last June).
  9. The average price per sq ft is is 200 (up from 184 last June).
  10. The average sales price is $454,643 (8% higher than June 2014).

Placer County sales volume - by sacramento appraisal blog

months of housing inventory in placer county by sacramento appraisal blog

days on market in placer county by sacramento appraisal bloginterest rates inventory median price in placer county by sacramento appraisal blog

Placer County median price since 2012 - by home appraiser blog

Placer County median price and inventory - by home appraiser blog

I hope this was helpful. Thank you so much for being here.

DOWNLOAD 64 graphs HERE (zip file): Please download all graphs in this post (and more) here as a zip file (or send me an email). Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share.

Home Office Progress: I’ve been sharing some progress on my new home office. It’s been so much fun to build and now customize. Last week I finished some cork boards and hung crown moulding. Yes, I know I need to upgrade my chair (coming soon) and have multiple monitors (coming soon).

my home office

Questions: How do you think sellers and buyers are feeling about the market right now? What are you seeing out there?

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Does a $20,000 solar system really add $20,000 in value?

Would you pay $20,000 for a solar system if you knew it added $20,000 of instant home value? That’s exactly what a solar salesman told the client of a real estate friend. Is that legit though? What advice would you give someone talking to this salesman? This is a timely scenario, so I wanted to share my friend’s question and my response. I’d love to hear your take in the comments below.

solar panels in real estate - sacramento appraisal blog - image purchased and used with permission from 123rf - 2

Real Estate Friend: I have a client that wants to add solar to his 1989 house and was quoted a price of $20,000. The solar guy told my client that it would add value dollar for dollar…doubt that. Let me know your thoughts.

My Thoughts: Where is this SALESMAN getting “dollar for dollar” from? Is he a real estate value expert? Could he prove the value actually? Would the system add $20,000 in value regardless of the neighborhood, state, or price range? What if the system cost $40,000 or $80,000? Would that add $40,000 and $80,000 respectively? It’s a great sales claim, but achieving dollar for dollar is not something that happens in real estate in every case. For example, a kitchen remodel might cost $50K, but that doesn’t automatically mean buyers are going to line up to pay $50,000 more for the house. Or a built-in pool could run $35,000, but we all know buyers don’t expect to pay full price in the resale market (sometimes they’ll go for $10-15K or so, right). Thus the cost of something doesn’t necessarily translate dollar for dollar to the value. When it comes to solar, it’s more of a marathon of value so to speak because there will be value recognized over time as savings happen (as opposed to an instant rush of full value at the present time). I am not saying the house could not be worth $20,000 more, but my BS alarm is beeping I am skeptical. Appraisers and the real estate community have to consider what buyers are actually presently willing to pay for the system. Granted, we have limited data, and solar is still an emerging field, but we have to study homes with and without solar. What sort of price difference is there? Also, how much money will the system actually save the owner each month? Moreover, when considering monthly energy savings, how much more home could a buyer effectively afford because of the savings? If I were your contact, I would read this solar Q&A I did, but I would also do the math. Will the savings from solar far outweigh the cost of the system? If not, what energy conservation steps might your client’s household make instead? Lastly, if the solar system is leased, it won’t actually add anything to the value because it’s more or less considered personal property.

Questions: What do you think of the solar salesman’s claim? How would you respond? Any thoughts, stories, or further insight? I’d love to hear your take as an agent, appraiser, or home owner.

Home Office Update: By the way, I’ve been building a new home office these past few weeks, and it’s been fun to make progress. Shoutout to Keith Klassen for helping me with the framing. If all goes well, crown moulding will be up this weekend.

home office

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5 reasons why an appraiser CAN appraise a property above the highest sale

Can a property be appraised above the highest sale in the neighborhood? A real estate agent friend was told recently by an appraiser that the house could not be appraised above the highest sale because that is what Fannie Mae says. Is that true or not? Let’s consider some of the following points.

Curtis Park neighborhood in Sacramento - Sacramento Appraisal Blog

5 reasons why a house CAN be appraised above the highest sale:

  1. The Horse’s Mouth: Fannie Mae does not say appraisers cannot appraise a property above the highest sale. I’m not sure if the appraised value in this case was on point or not, but the appraiser was simply not correct regarding the supposed rule by Fannie Mae. Whenever someone states, “Fannie Mae says….”, I recommend asking the person what page of the Seller’s Guide he/she is referring to.  :)
  2. Increasing Market: If a market is increasing in value, there is going to be a legitimate time where buyers are simply willing to pay more than most recent sales or even the highest sale. This is especially true when inventory is sparse and interest rates are low. This reminds us too that appraisers don’t make values increase, but rather measure when the market changes.
  3. Lower Sales: Recent sales may have closed at lower levels, but there is no rule that says appraisers have to use the newest sales. In fact, even Fannie Mae states the appraiser may need to use older sales rather than newer ones. Sometimes lenders tell appraisers to use sales within the past 90 days, but that type of rule is not consistent with Fannie Mae, and it might stand in the way of a good appraisal too. For instance, if two distressed short sale models closed last month, but there are ample model match sales from prior months (and current model match listings at higher levels too), it’s probably best to ignore the two recent lowball sales since they don’t represent the market. Remember also that one or two sales do not make or break a market.
  4. Zero Sales: The appraiser in this case said Fannie Mae prohibited the appraised value from being above the highest sale. But what if there were zero sales over the past year? Would that mean current value is bound to where sales were at last year? Nope. It can be tricky to see the market when there are no recent sales, but it can be done with time and skill.
  5. The Best: The house being appraised might be the best on the block or have a feature that pushes it over the top of recent prices. Thus it can make reasonable sense to see a home appraise for more than the others. Of course just because someone thinks a home is the best thing ever does not mean the market is willing to pay the highest price ever. Also, keep in mind every neighborhood has a price ceiling, which means buyers will inevitably only pay so much in that neighborhood before moving on to a different area.

BRACKETING: Please know I’m not trying to give the appraiser a hard time or throw any appraiser under the bus (I love my fellow appraisers), but I did want to offer the above points because there is space for some conversation. While the appraiser was incorrect about Fannie Mae’s rule, I do appreciate the appraiser being aware of the concept of bracketing. Bracketing is basically when appraisers will use some superior sales and some inferior sales to help establish value for a property. This can be a good practice when choosing potential comps because it helps us see the higher and lower ends of a competitive market. Bracketing is not always possible (see points 2-5), but it can help support a value or adjustments. For instance, if valuing a fixer property, we would want to use at least one fixer comp so we know what the market was actually willing to pay for a fixer. Otherwise if we only use remodeled homes for comparison, we are left sort of guessing what the downward adjustment should be for condition. Is it $20,000, $30,000, $50,000, $100,000, etc….? The best way to know what the adjustment should be is to find actual fixers in the market. How much of a discount for condition is there between remodeled homes and fixers? The same holds true for figuring out the value of a built-in pool. Rather than guessing at the value (say $10,000), if we look at competitive home sales with and without pools, we can begin to extract a price buyers have been willing to pay. In other words, if we bracket sales with and without pools, it helps us begin to see the market.

how to think like an appraiser biggerHOW TO THINK LIKE AN APPRAISER (class I’m teaching): Locals, if you are around on July 16th, I’d love to have you come by the Sacramento Association of Realtors for a class I’m teaching called “How to Think Like an Appraiser”. This will be three hours of relevant conversation (and we’re going to have some fun). This is perfect for new agents as well as veterans. My goal is to leave you with insights to apply to your listings and tips for working with appraisers. Register here.

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

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The frog and kettle of real estate financing

Do you remember how easy it used to be to get a loan a decade ago? It was actually ridiculous how simple it was. Nowadays things are MUCH more stringent, yet at times it seems like we are gradually starting to head back to some more risky and creative loan products. It’s sort of like the frog and kettle, but with financing.

financing changes in real estate - by sacramento appraisal blog - image purchased and used with permission

Financing Moves Value: There are many reasons why home values go up or down in real estate, and financing happens to be one of the bigger layers in the market to make value move. This means when financing begins to change, we can ask why it changed, and also consider any future impact on values. A decade ago there were many options to finance 100% of a purchase, but those options disappeared from the scene for a few years. Yet as prices have skyrocketed in recent years, lenders have begun to equip buyers with more products to “afford” the higher market without putting any “skin in the game” so to speak (By the way, 29% of all sales last month in Sacramento County were FHA). There is certainly a time and place for diverse loan products, but new products can also help values continue to rise when it might be okay for values to cool.

I asked a group of loan officers what more risky products they are beginning to see or hear about coming back into existence. Here is what they said:

adrian petersen - loan officerAdrian Petersen – Loan Officer: It’s been a very interesting roller coaster ride in the lending world over the past decade. Some of the old products are beginning to surface again. Specifically the Fannie Mae My Community 97% for first time home buyers (no ownership in last 3 years) which only requires 3% down payment and can be gifted from family or employer. Also, the 85% Jumbo with no MI has also just re-entered the market. Although we have some very exciting products out there, it’s a good time to remember where we just came from…

stanfordSandy Donaldson – Loan Officer / Branch Manager: There are not a lot of risky products on the market per se due to many of the recent regulations. However, we have seen the conforming 3% down loan reappear. This is a conforming 30 year fixed rate product that requires only 3% down and that 3% can be gifted from a relative. We have also seen conforming loosen their standards on gift funds. It used to be that buyers needed 5% of their own money but now the entire down payment can be gifted on a standard conventional loan. We have seen FHA MIP premium go down substantially and mortgage insurance factors for conventional loans have also declined.

Matt the Mortgage GuyMatt Gougé – Loan Officer: Not only have I seen the increased advertising of ‘Stated Income’ loans in my social media news feed, but I have also heard discussions among some industry folks that there are Venture Capitalists pooling BILLIONS of dollars with the intention of buying up these alternative mortgage products. While these loans do carry extra risk and don’t have the same terms as conventional financing, there is a subsection of the market that will be well served by these products. In my humble opinion the area where people really get into trouble is when they start using loan products that adjust (either the rate or the fact that a certain term is ‘interest only’- or both) and/or have balloon payments. Signing up for a mortgage payment you can afford today that can increase 50%+ in 5 years is a recipe for disaster.

Brad YzermansBrad Yzermans – Mortgage Loan Originator: I think the reemergence of homebuyer assistance programs that require $0 out of pocket and allow a person to borrow up to 105% of the home’s value, along with higher qualifying income limits, is helping sustain home values and keep home ownership more affordable. Many people would consider these programs to be risky…..but they work!  In fact, 75% of all my buyers are eligible for one of the many different home buyer assistance programs we offer.

Dara Delgado Loan OfficerDara Delgado – Loan Officer / Mortgage Broker: In the last year, there have been several “niche” or non-QM loan products that have rolled out, that I have originated and closed. 1) 2 years seasoning from foreclosure, short sale, bankruptcies –allows a max up to 55% Loan-To-Value. 2) Self-employed borrowers allowed alternative documents (12 month bank statements) – adding all deposits, then dividing by 12 months = qualifying income –allows a max up to 65% Loan-To-Value. 3)  Asset Depletion loans (using substantial assets, to qualify, opposed to income). I have also seen various private money lenders roll out more aggressive product such as: Stated income for self-employed or wage earner borrowers – allowing a maximum of 75% Loan-To-Value. Private money lenders loan terms and costs, however are much higher than traditional or niche product loans.

People of Sacramento: By the way, I was featured in a series called “People of Sacramento Commenting on the News“. Nathaniel Miller of the Sacramento Bee is the brains behind this effort. Read more here. Photo: Kevin Fiscus.

People of Sacramento - Ryan Lundquist - Photo by Kevin Fiscus Photographer

Questions: What risky products do you hope won’t make it back? Any other insight or stories to share?

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