5 things to remember when using price per sq ft in real estate

Using price per sq ft can be very dangerous. I know that sounds odd because price per sq ft is about as common as anything in real estate. Home owners ask, “How much is the price per sq ft in the neighborhood?”, and real estate agents might say, “I priced this property based on the price per sq ft in the area.” But having a correct understanding about the way price per sq ft works can revolutionize the way we see the market and value properties. Let’s unpack five principles below, and I’d love to hear your take in the comments.

DOWNLOAD a more detailed version of this post to pass along to your office.

Image purchased by Sacramento Appraisal Blog from 123rf dot com and used with permission

5 principles to remember when using price per sq ft in real estate:

1) There is a price per sq ft spectrum in a neighborhood: There is never just one price per sq ft figure that applies to every property in a neighborhood. For instance, a neighborhood might easily see a price per sq ft range from $100 to $250 when looking at all sales.

2) Similar houses tend to have a similar price per sq ft: When homes are similar in size, location, bed/bath count, etc…, they tend to have a similar price per sq ft. That’s obvious, but the contrasting factor is that non-similar homes might have a VERY different price per sq ft that shouldn’t be used to value your home.

3) Property characteristics can quickly change the price per sq ft: When there are differences in condition, location, lot size, quality of upgrades, bed/bath count, size, etc… the price per sq ft can change dramatically. We might see a small remodeled home selling at $250 per sq ft, a model match fixer selling at $175 per sq ft, a short sale model selling at $185 per sq ft, and a home with an adverse location selling at $215 per sq ft. Thus even for one model there could be a price per sq ft range from $175 to $250.

4) Smaller homes tend to have a higher price per sq ft: It costs more to build smaller homes, so smaller homes tend to have a higher price per sq ft than larger homes. This is why it’s dangerous to use a price per sq ft figure from a smaller sale to value a larger home. A smaller home might sell at $250 per sq ft, but a larger home might be closer $150 per sq ft. Here is a quick video below (or here):

5) Price per sq ft provides a valuable context: When you can talk through price per sq ft figures in a neighborhood, and explain the above points, you are an incredible resource. Appraisers, pay close attention to the price per sq ft range in a neighborhood. Some appraisers treat price per sq ft as a meaningless metric, but it’s actually valuable. If your value does not fall within the range (especially the competitive price per sq ft range), it’s important to be able to explain that.

CONCLUSION: Be careful about using price per sq ft to price a property because sometimes it’s like putting the cart before the horse. I recommend starting a valuation with an “apples to apples” approach where you first and foremost try to find other similar sales and listings in the neighborhood, and then subtract and add value based on any differences with your property. After you have a grasp of similar sales, research price per sq ft figures for the entire neighborhood as well as competitive properties. Ask yourself if your value makes sense in light of price per sq ft figures.

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

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What do appraisers look for during an FHA inspection? (free download)

What do appraisers look for when doing an FHA appraisal? These days it’s important to be in tune with FHA appraisal standards so your home can be FHA-ready or so you can know what to expect if accepting an FHA offer. Let’s talk through some of the most common FHA issues below. You can also download an FHA checklist to study or share with clients. This checklist has all the information from this post as well as one additional page.

what appraisers look for during an FHA inspection

DOWNLOAD an FHA checklist HERE (pdf)

The Main Idea with FHA: FHA is primarily concerned that everything in the house functions properly and that there are no health and safety issues. The basic concept of meeting FHA minimum requirements is that everything must work as it was designed to work. For example, a window that is supposed to open must open, and a built-in appliance should do what that appliance is supposed to do. If you have a sliding glass door with a lock on the handle, the lock should work.

FHA requirements - from sacramento appraisal blog

What do FHA appraisers look for?

  • Utilities should be turned on so the appraiser can test systems and appliances.
  • Appliances must function properly.
  • fha-logoThere should be proper drainage around the perimeter of the house.
  • The heating unit must be in working order (and AC if applicable).
  • Water pressure must be adequate for the house. Appraisers flush toilets, turn on all faucets and ensure that both hot and cold water are working.
  • The water heater must be in working order and strapped according to local code.
  • Attics and crawlspaces are to be viewed at minimum from the shoulder up by the appraiser. When viewing the attic, appraisers make sure there are vents, no damage, no exposed or frayed wires, and that sunlight is not beaming through. When inspecting the crawl space, appraisers make sure there are no signs of standing water or any other foundation support issues. Excessive debris in the attic or crawl space should be removed.
  • Paint must not be chipping, peeling, or flaking on homes built before 1978 because of the danger of lead-based paint (lead was used in paint prior to 1978). However, there must be no defective paint or bare wood for properties built after 1978 because defective paint impacts the economic longevity of the property. Defective paint should be scraped and re-painted (with no wood chips on the soil).
  • Electrical outlets must work (outlets should have a cover plate also).
  • Toilets must flush and be mounted.
  • Any active termite infestation needs to be cured.
  • Minor cosmetic issues such as stained carpet or a need for interior paint are okay. The house does not have to be perfect, but if there are issues that impact health and safety or the long-term economic viability of the property, then those issues must be cured.
  • Windows must open and close and they cannot be broken. Minor cracks can be okay so long as there is not an issue with safety, soundness and security.
  • No dangling wires from missing fixtures or anywhere else.
  • FHA doesn’t require air conditioning, but if present the system should work as intended.
  • Smoke detectors & carbon monoxide detectors are required insofar as required by local code
  • The firewall from the garage to the house should be intact. Missing sheetrock, a pet door installed in the door, a lack of self-closing hinges, or a hollow door could pose a safety issue.
  • A roof should not be leaking and needs to have at least two years of economic life left.
  • A house will be rejected if the site is subject to hazards, environmental contaminants, noxious odors, or excessive noises to the point of endangering the physical improvements or affecting the livability of the property (this isn’t an issue for the vast majority of properties).
  • A trip hazard is a subjective call to make by the appraiser and not necessarily an automatic repair, but if there is a legitimate safety issue it should be called out by the appraiser.
  • There are things any appraiser will call out in an FHA appraisal, but there are times when appraisers have to consider how the spirit of FHA might apply in a situation. FHA is black and white on many issues, but other times appraisers simply need to use good judgment.

Reminder About Difference in Locations: Appraisers in different parts of the country may require some items in their appraisals that might not be required elsewhere. For instance, carbon monoxide detectors are required in most residential homes in California, but this is not the case in many other states. An FHA appraiser in a different state might not even mention a CO detector, but in Sacramento it is commonplace.

DOWNLOAD an FHA checklist HERE (pdf)

I hope this was helpful. If you’re looking for more information on FHA appraisal standards, you can check out other FHA appraisal articles I’ve written.

Questions: Anything else you’d add to the list? Any FHA questions? Appraisers, if you have any stories to share about properties that were rejected, speak on.

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A normalish start in 2015 for Sacramento’s regional market (and Placer County)

How did the real estate year begin in Placer County? What about the entire regional market in Sacramento? Let’s take a good look today so we can better understand how things are moving and how to explain trends to clients.

Longer on purpose: If you’re new to subscribe (thank you), know that twice a month I break down the trends so we can better see the local market. Most of my other posts are general enough to apply anywhere in the United States. Is your market similar though? I’m curious.

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.

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

Email me if you want 20 graphs: If you would like all the graphs in this post (and 7 more), send me an email (make sure to write “I want the market graphs” in the header). You can use some of these in your newsletter, on your blog, and in other social spaces. See my sharing policy for 5 ways to share.

PLACER COUNTY:

1) The median price saw a dip in January (which is normal):

Placer County median price and inventory - by home appraiser blog

Placer County median price since 2012 - Fall season - by home appraiser blog

The median price cooled in Placer County, but as you can see in the graph above, it often cools off toward the latter part of the year and the beginning of the year. The seasonal market is a reality, and it’s important to consider what the market typical does during different seasons of the year.

2) It took an average of 68 days to sell a house in January:

days on market in placer county by sacramento appraisal blog

number of listings in PLACER county - January 2015 - by home appraiser blog

Last year it took 58 days to sell a house in January, and this year it took 68 days to sell a house (a 17% increase). When it takes longer to sell, it’s a sign that the market is overall slowing down. It’s actually a good thing for properties to take longer than just 30 days or so to sell because it evens the playing field and slows down rapid appreciation in value. Remember though that well-priced properties are still moving quickly (and even receiving multiple offers). At the same time, buyers are not quickly pulling the trigger on overpriced listings or properties with an inferior condition or adverse location (unless priced correctly).

3) Monthly sales volume was just about the same as last January:

Placer County sales volume - by sacramento appraisal blog

Monthly sales volume in January was virtually identical to last January. Sales volume tends to hit a low point in January, and that’s exactly what happened again this year.

4) Monthly inventory increased in January (not a surprise):

Placer County housing inventory - by home appraiser blog

months of housing inventory in placer county by sacramento appraisal blog

Monthly housing inventory has been flirting with 2.5 to 3.0 months for the past year in Placer County. Last month inventory shot up to 3.16 months, which means there are 3.16 months worth of houses for sale on MLS. However, this is a weak figure since it is calculated by dividing the number of current listings as February 1 by the number of sales last month. Since there were very few sales last month, this actually means there really aren’t very many listings right now (not yet, but they are starting to come as the spring market unfolds). As you can see, the higher the price, the more inventory there is.

5) Layers of the market at work:

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

I like this graph because it’s a beginning to help show there are many different “layers in the market” so to speak. It’s never just about supply and demand. There is so much that goes into driving the market.

PLACER COUNTY SUMMARY: Stats for January showed just what was expected. The median price softened (which almost always happens in January), sales volume was just about the same as last January, it took longer to sell compared to the previous month, and inventory increased. The market is bound to feel more competitive to a certain extent because of lower interest rates, but sellers must remember to price according to this market instead of the very aggressive market in 2012 and 2013.

SACRAMENTO REGION:

1) Comparing Sacramento, Placer, and the Region:

Regional market median price - by home appraiser blog

It’s easy to get so focused on data from one county or neighborhood that we lose sight of the big picture. What are values doing in the overall regional market? When we take a wider look with far more data, we can sometimes get a better sense of the trends. Remember of course that not every neighborhood, price range, or property type is experiencing the same trend.

2) The regional median price took a dip last month (normal):

median price and inventory in sacramento placer yolo el dorado county

Sometimes people react with fear when they hear prices softened at the end of the year and beginning of the year, but that’s a very normal part of the real estate cycle. The market as a whole is still definitely slowing down, and we’ll watch that trend, but a slowness during this time of year was to be expected. Keep in mind there are almost 3000 pendings in the region right now, which represent more sales in coming months. It’s also normal to see a high volume of pendings right now because the spring sales spike in March happens because of all the listings that got into contract in January and February.

3) It took 65 days to sell a house in the Sacramento region:

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

On average in January it took 65 days to sell a house. Last January it took 53 days to sell a house, which means it took 22% longer this year to sell.

4) Monthly inventory is now at 2.9 months:

months of housing inventory in region by sacramento appraisal blog

Right now housing inventory is at 2.9 months, which is slightly above where it was last year at the same time at 2.7 months. Since there is more data to consider for the regional market, it really helps show the way the market works: The higher the price, the more inventory there is.

5) Layers of the market at work:

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

Just as I shared for Placer County above, here is a graph with different “layers in the market” so to speak. There is so much that goes into driving the housing market.

SACRAMENTO REGIONAL MARKET SUMMARY: Stats for January were  not a surprise at all. The median price softened, it took longer to sell this January, and housing inventory increased. This is usually what happens with January stats.

I hope this was helpful.

Share: Please feel free to share this link with clients, and see my sharing policy for 5 ways you can share my content so we’re on the same page about sharing.

Questions: What are you seeing out there? How does the market feel to you? Anything you’d add?

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The slowish real estate market in January

January is usually a slow real estate month. That’s nothing shocking. Yet it’s always interesting to see how the market begins to maybe get a sense for where it might go during the year. Today let’s take a look at 6 specific areas of the market in Sacramento, which will help us understand and explain the way things are moving.

Longer on purpose: If you’re new to subscribe (thank you), most of my posts are not this long. But twice a month I break down the trends so we can better see the market. Most of my other posts are general enough to apply anywhere in the United States. Is your market similar though? I’m curious.

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.

the story of the market in january

Email me if you want the graphs: If you would like all the graphs in this post (and 15 more), send me an email (make sure to write “I want the market graphs” in the header). You can use some of these in your newsletter, on your blog, and in other social spaces. See my sharing policy for 5 ways to share.

1) The reality of the slower seasonal market right now:

seasonal dip in sacramento

It’s easy to freak out this time of year when values take a dip. It can feel the market is falling apart when we see price figures decline. Yet the market almost always softens at the end of the year and in the very beginning of the year. Knowing this can help you communicate well with clients and even plan for business. Remember that sales stats usually see a huge uptick in March, and this signifies the Spring market. Technically most of the sales in March actually get into contract in February though, which reminds us the Spring market hits its stride in February.

2) The median price softened by 3% last month:

price metrics since 2014 in sacramento county

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

median price and inventory since 2013 - by sacramento appraisal blog

The median sales price took a 3% dip in January to $256,000. It might sound extreme to see the market soften this much, but last year saw the same exact 3% dip as you can see in the image above.

3) It took an average of 60 days to sell a house in January:

DOM in Sacramento County

On average it took 60 days to sell a house last month in Sacramento County. This is up from 48 days one year ago in January 2014, but down from about 90 days in January 2012.

CDOM in Sacramento County - by Sacramento Appraisal Blog

It’s important to realize the market is not the same at every price range. In other words, some price ranges tend to take longer to sell than others. Generally speaking, the higher the price, the longer it takes to sell. Keep in mind there were only 9 sales at 750K-1M and two above 1M, so take those stats with a grain of salt.

4) Sales volume hit its lowest point in 8 years:

sales volume in Sacramento County

Sales volume was at its lowest point in 8 years last month. On one had that sounds alarming, but it’s really the story of the market these days. Last year saw slightly more sales at this time, so this year isn’t anything out of the ordinary for the current market. Volume is simply down right now as a whole, and we can look at this as the new norm for a while until the market can handle more inventory and more demand (when the economy improves).

january sales in sacramento county

It’s easy to get sensationalistic about having such a low volume of sales last month, but the graph above shows 15 years of January sales in Sacramento County. What do you notice? January almost always comes in last place for sales volume. In short, don’t freak out.

sales volume in fall and winter through 2015 - by sacramento appraisal blog

Lastly, remember to consider what usually happens in February. Sometimes February is right in sync with January, but other times there is slightly more volume. We’ll see what this year brings, but knowing how the market works makes you an asset to clients.

5) Housing inventory increased last month (technically):

inventory in sacramento county  Since 2013 - by sacramento appraisal blog

Inventory increased last month to 2.61 months of housing supply. This is slightly higher than it was one year ago, and exponentially higher than 2013 when there was only one month’s worth of homes for sale. Remember that inventory is the relationship between the number of active listings as of the first of the month divided by sales from the previous month. This means if there are VERY few sales in a month, inventory will actually sound much higher than it actually is. In short, an inventory at 2.61 months sounds like it’s on the higher side, but being that sales volume was really low last month, this figure at 2.61 doesn’t really mean the same thing as it would in the summer when there are far more sales.

months of housing inventory by sacramento appraisal blog

Housing inventory is never the same at every price range. This reminds us yet again there are many markets within a market. In this case, the higher the price, the more inventory there is.

inventory during fall and winter 2 - by sacramento appraisal blog

number of listings in sacramento - January 2015 - by home appraiser blog

6) Interest rates continue to decline:

interest rates by sacramento appraisal blog since 2011

Low interest rates are like fuel for the housing market since they create more demand by drawing buyers into the market. That is what happened in 2012 when rates went below 4% (for the first time ever), and it’s likely going to get some buyers off the fence right now.

interest rates by sacramento appraisal blog

Real estate is never just about supply and demand. There are so many “layers of the market” that are working to impact the direction of values. I hope this was helpful to create some context and conversation.

Share: Please feel free to share this link with clients, and see my sharing policy for 5 ways you can share my content so we’re on the same page about what it means to “share”.

Questions: What are you seeing out there? How does the market feel to you? Anything you’d add?

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Real estate is about location, location, and __________.

It’s been said many times that real estate is about location, location, and location. This is basic stuff, and we all know where a home sits can be about as defining a feature for a property’s value than anything. This is why a home on “the other side of the tracks” can have a far different value than an identical home in a nearby subdivision. But sometimes it’s not even about crossing something obvious like train tracks, but simply crossing the street within the same neighborhood. Maybe the other side of the street is located in a different school district, has a different type of architecture, larger lot sizes, or there are more commercial properties. Whatever the case, let’s look at one particular street in the Curtis Park neighborhood of Sacramento to help show how real estate values are definitely about location.

Question: What is the first street or boundary you can think in your market that makes a huge difference in value if you cross the street? I’d love to hear about it.

Curtis Park Neighborhood

A Neighborhood Example: This graph shows all Curtis Park neighborhood sales over the past 6+ years (not newer homes in Curtis Park Village).

Curtis Park Neighborhood Sales Since 2008 - by Sacramento Appraisal Blog

Franklin Blvd: Now let’s separate values by Franklin Blvd. This street is a north/south “line of demarcation” so to speak for neighborhood values. Of course Sacramento locals know there is a different feel between the east and west side of Franklin Blvd, but it’s still interesting to see this difference on a graph. For non-locals, both the west and east side are within the neighborhood boundaries, but as you can see, there is a huge change in value once Franklin Blvd is crossed.

Curtis Park Franklin Blvd - by Sacramento Appraisal Blog

2-Bedrooms on the East & West: Even when we look at 2-bedroom units on the east and west side of Franklin Blvd, we see a big difference in value.

Curtis Park 2-Bedroom Sales

Key Takeaways:

  1. Be a Student: Study neighborhoods so you know the boundaries where values change. This can only happen by talking with real estate professionals, reading articles, asking questions, studying trends, and working in a neighborhood over time. It takes time to become an expert.
  2. The Right Comps: Avoid “cherry picking” sales from across the street to boost value. Or if you do use higher-priced sales, be sure to make a value adjustment downward as needed. Remember that it’s okay for appraisers to use much older comps in the immediate neighborhood rather than finding newer ones in superior areas.
  3. Sales vs. Comps Distinction: If you are listing a home, price according to the market instead of borrower higher prices from the market across the street. Help the seller understand that nearby sales might not necessarily be “comps” either. In other words, just because it sold does not mean it’s a comp.
  4. No Little Black Book of Value: Remember there is no such thing as a book of value adjustments that can be applied to every neighborhood or property type. After all, buyers in one location may be willing to pay substantially higher premiums for certain features, but these same features might not command much of a premium at all in a different location.
  5. Let History Paint a Context: If you’re not sure if values are softer or higher in the immediate part of your neighborhood, look back at sales over the past few years to get a better idea about how the market has moved over time. The previous sales will help paint a picture of the market. What have buyers been willing to pay over time compared with other surrounding areas? This may be a clue into how value works in the neighborhood.

I hope this was interesting to you. I sure enjoyed putting it together.

Questions: What advice would you give others about the role location plays in real estate? What is the first street or boundary you can think in your market that makes a huge difference in value if you cross the street? I’d love to hear about it.

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How to use a CMA to gauge the temperature of the real estate market

Temperature changes all the time. It’s a reality whether we’re talking about a cup of coffee, the weather, or even the real estate market. Today I want to show you one of the ways I use a CMA to take the temperature of a neighborhood real estate market. This helps me communicate well with clients, and I hope it will do the same for you.

Image purchased by sacramento appraisal blog from 123rf dot com - neighborhood market

NOTE: “CMA” stands for “Comparative Market Analysis”, and it’s a tool real estate agents (and others) use to communicate about the market to clients.

Three steps to gauge the market with a CMA:

1) Draw Neighborhood Boundaries:

rosemont neighborhood

All your data is going to come from the boundaries you choose, whether you draw them with a polygon tool in MLS or pick an MLS area (you choose since you are the market expert). I don’t recommend using a radius search because you’ll probably pick up sales from other neighborhoods that could skew the accuracy of what you are trying to present to a client.

2) Run a CMA in your MLS system:

Now run a CMA in MLS so you have access to current listings, pendings, and sales over the past 90 days. The final product may look something like this. I truncated the images below, but you can see the total count of listings and sales in yellow.

Active Listings:

listings in rosemontPendings:

pendings example

Sales over Past 90 Days:

sales example

Compare listings, pendings, and sales: As you can see, actives have been on the market for 103 cumulative days, it took pendings 61 days to get into contract, and recent sales took 49 days to sell. In other words, buyers have been pulling the trigger in about 50-60 days, but at the same time a whole host of homes in the neighborhood are not selling.

BIG POINT: If listings have been on the market for longer than sales, something has changed in the market. Maybe it’s the real estate season, or sellers are trying to “test the market” at higher prices. It could also be that inventory has increased, buyers have become more picky, or maybe current listings consist of different types of homes that take longer to sell. This is key to communicate with clients since clearly some properties are selling and others are definitely not.

3) Figure out Monthly Inventory:

You can quickly figure out monthly housing inventory in the neighborhood. There were 61 sales over the past 90 days, which means the market absorbed about 20 sales per month (61 divided by 3 months = 20.33). Note there are currently 47 active listings. If you want to figure out monthly inventory, all you need to do is divide the number of current listings by the number of sales over the past month. In other words, 47 listings divided by 20.33 sales equals 2.31 months of housing supply.

how to calculate monthly housing inventory

WHAT TO SAY TO CLIENTS: Here is an example of what you might be able to tell clients about this neighborhood:

Right now there are about 2.5 months worth of houses for sale in the neighborhood. This isn’t very many listings, BUT when houses aren’t priced right, they are sitting instead of selling. Most homes are taking 50-60 days to sell, but overpriced homes are literally on the market for over 100 days. These homes will probably sell for even less than they would have had they been priced right from the beginning. 

General Tips:

  1. Don’t make sweeping interpretations because of one CMA.
  2. Be sure you have enough data since few sales can lead to skewed results.
  3. Remember that trends for a larger county or even an entire neighborhood may not reflect trends for the property you’re trying to value. This is why it might also be worthwhile to run a CMA for competitively-sized properties instead of the entire neighborhood.

Keynote Speaker on Friday: By the way, I will be the keynote speaker on February 6 at the Masters Club Roundtables event at the Sacramento Association of Realtors. My 30-minute talk begins at 9am and is called “How to tell the story of the market to your clients”. I’ll focus on unpacking what the market did last year, where it is right now, and how to talk with clients about trends. Swing by if you can.

SAR roundtables

Questions: How do you use a CMA? How else do you gauge the temperature of the market?

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The tallest real estate graph ever in Sacramento

Did you hear about the 100 million dollar condo sale in New York recently? It’s hard to grasp just how much money that is for only one residence. For context, $100,000,000 is about a 19% ownership of the Sacramento Kings, a 10% share of the San Francisco Giants, or a 20% ownership of the Oakland A’s (Forbes). After reading about this sale from New York appraiser Jonathan Miller, and seeing his “tall” graph of the New York market, I was inspired to do something similar.

The Tallest Real Estate Graph Ever in Sacramento: From what I can tell, the image below is the tallest real estate graph ever in Sacramento. This is a unique view of the residential housing market from 2012 through 2014. What do you see?

sacramento county sales from 2012 to 2014 - residential only - sales on mls only - by sacramento appraisal blog

The Small Version of the Graph Above:

The small version of sales in sacramento county since 2012 - sacramento appraisal blog

Sales Above $1M in Sacramento County Since 2008:

Sales above 1M in Sacramento County since October 2008 - sacramento appraisal blog

When we look at the market in different ways, sometimes we can better understand it and then explain it to clients. I hope this was helpful and interesting. As always, feel free to share this post with your contacts, and if you plan to post a graph on your site or in your newsletter, please see my sharing policy (it’s an honor when people share – thanks).

Question: What do you see in the graphs above?

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How do you value an attached unit when there are no recent sales?

I get quite a few calls from the real estate community about pricing attached units. The conversation tends to go like this:

Agent: Ryan, I’m working on pricing a halfplex, and it’s not easy.
Me: I feel your pain.
Agent: There aren’t any recent halfplex sales in the neighborhood, and my unit is larger than others too. What should I do?
Me: You should probably just guess and hope you’re okay on value.
Agent: What??
Me: I’m kidding. Let’s talk about it.

What is a halfplex? If you are located in another part of the country, you might call an attached home something else, but in the Sacramento area we say “halfplex” (sort of like half a duplex). The home below is a halfplex because it is connected to the house next door by the garage and a wall inside. Moreover, the parcel line runs through the center of the connecting wall in the garage, so each unit is individually owned and has its own lot.

tips for valuing a halfplex

It’s not always easy to value certain properties – especially when sales are sparse. This is why it’s important to have a solid valuation methodology clipped to your real estate utility belt so you can apply it as needed.

Tips for Valuing a Halfplex (Attached Home):

1) Apples to Apples: An attached home should be compared to other attached homes because a buyer looking for a detached unit is usually NOT simultaneously in the market for an attached one. It’s just a different type of house. Moreover, there can be a huge value difference between attached vs. detached.

2) Start in the Immediate Neighborhood: You’ll want to find halfplex (attached) sales in the immediate neighborhood so you are sure what buyers have been willing to pay in the area. If you go out too far looking for “comps”, it’s easy to miss the immediate market by assuming that values are similar in other tracts. I recommend using the Polygon tool in Sacramento MLS so you can actually draw exact neighborhood boundaries in the immediate subdivision to be sure you are only getting data from those boundaries. You might want to start looking at sales over the past 6 months and then go back to one year. In an ideal world you will have a ton of sales, but we all know that doesn’t always happen.

TIP: In addition to sales, be sure to look at both listings and withdrawn listings in the immediate neighborhood to get a fuller picture of neighborhood values.

start small before searching further away for comps - sacramento appraisal blog

3) Look at Older Sales in Immediate Neighborhood: Be sure to look back over the past few years or so in the immediate neighborhood so you can see gain a better context for the halfplex market. You probably won’t use these oldies as comps in a listing presentation (or appraisal), but they still might provide a fantastic context because you can either add or subtract value to older sales based on what the market has done over time.

4) Previous Subject Property Sale: Has the subject property sold previously? If so, look up sales at the time to see what it was comparable to in the neighborhood? Moreover, how has the market changed since it sold previously? Be sure to give more value weight to recent sales and current reasonable listings, but be aware of any previous sale to help create context. Remember the condition of the subject property might have changed over time, and pay attention to the nature of the previous sale (maybe it sold for too little or too much).

5) Competitive Sales in Other Tracts: In some areas of town there are simply few attached homes, so you may need to go out several miles to find comps. The problem of course is that if you travel too far, some neighborhoods might have higher or lower prices, so be aware of value adjustments that might need to be made. As a rule of thumb, try to look in areas where you think a buyer might realistically considering hunting for a home if the subject property was not available. You can double check how comparable other neighborhoods are by comparing older sales in the immediate neighborhood with older sales in neighborhoods that are further away. For instance, if you have an older sale that closed at $250,000 in the immediate neighborhood, how much did similar-sized halfplex sales in further places sell for at the time? If the neighborhood that is further away ends up being very similar in price when comparing historical sales, there is a good chance current sales in the further neighborhood could help tell you what the current market is willing to pay for your neighborhood.  Be careful to not just look at one sale though because one sale does not make or break the market. Having a few data points is best so you know you’re not just looking at an outlier.

what is a comp - sacramento appraisal blog

6) Detached Units in Immediate Neighborhood: Be aware of what other detached units are selling for in the neighborhood. If there are very few recent sales, I recommend going back in time to find out what the price difference was between halfplex (attached) sales and similar-sized detached sales in the immediate neighborhood. Then once you understand the price difference in the past neighborhood market, come back to today’s market. What are similar-sized detached sales currently selling for? This may help you see what attached units should theoretically be selling for. Remember, this is definitely a back-burner approach to value, and it’s not the first step, but it can still provide context.

7) Bottom of the Market: Where is the bottom of the market in the immediate neighborhood? There is a good chance that halfplex (attached) units tend to sell toward the bottom of the price range compared to similar-sized detached units. I’m not saying all halfplex units are going to sell for dirt cheap, but only that they tend to be marketed toward the lower end of the price ladder in many neighborhoods.

I hope that was helpful. If you’re interested in more details, see How to choose comps like an appraiser.

Photo Credit: The first photo is from Roseville & Rocklin Realtors Steve & Heather Ostrom (thanks).

Question: Anything else you’d add? I’d love to hear your take in the comments.

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Honored with the Affiliate of the Year award

I’m excited to announce I was honored with the Affiliate of the Year award a few weeks ago from the Sacramento Association of Realtors. This award is given to one non-Realtor each year, and this year it was given to me. This was not expected, and I’m really blown away. I’m very proud to hang this plaque in my office, and I hope you can join me in the excitement. Thanks everyone.

An award from SAR - this is me with Chris Clark

An award from SAR - what an honor

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What you need to know about Fannie Mae’s Collateral Underwriter

Have you heard of Fannie Mae’s Collateral Underwriter yet? It’s coming in a matter of days on January 26, and it’s been called an “appraisal time bomb” by some, while others say it’s no biggie. Today I want to give you the scoop on what it is as well as some of the potential impact it might have.

Fannie Mae is watching appraisers closely - by sacramento appraisal blog - image purchased and used with permission

What is Collateral Underwriter?

Collateral Underwriter (CU) is a property appraisal review tool created by Fannie Mae to help mortgage lenders manage risk.

What will Collateral  Underwriter do?

  • CU performs an automated risk assessment on appraisals geared toward Fannie Mae and returns a risk score, flags, and messages to the submitting lender. CU will provide a risk score for the appraisal of 1-5 (1 being the lowest risk and 5 being the highest).
  • CU will analyze comparable sales selected by the appraiser and recommend alternatives.
  • CU will compare adjustments the appraiser has given with what other appraisers have done in the same area (Fannie Mae has been mining data from over 12 million appraisals since 2011, so they definitely have some data at their disposal).
  • CU will use census block groups to analyze market trends.
  • CU will review specific information in each appraisal such as the sales price, lot size, bathroom count, bedroom count, age, location, size of the basement, condition, quality of construction, view, and GLA (gross living area). In 2011 Fannie Mae mandated appraisers to begin using UAD codes in their reports to describe all of these elements. You may have read a report and thought, “Why the heck is the appraiser saying the property is in ‘C4′ condition? What does that even mean?” Well, that is a Fannie Mae UAD code to describe a specific condition, and now that Fannie Maw has over 12 million appraisals in their system with these codes, it has allowed Fannie Mae to give birth to the CU review tool.

Fannie Mae Collateral Underwriter - Data Mining Image Purchased and Used with Permission - by Sacramento Appraisal Blog

5 things to know about Fannie Mae’s Collateral Underwriter:

  1. Fannie loans only: CU is only used for loans geared toward Fannie Mae, and not for divorce appraisals or any other private appraisals. CU is also not used on 2-4 unit properties or “drive-by” appraisals.
  2. Not FHA/VA: CU is not used for FHA and VA loans (I’d be shocked if they didn’t adopt it later though).
  3. Commentary: The CU tool does not read any of the commentary by the appraiser, which can be key to understanding comp selection, adjustments, and the final value.
  4. Neighborhood boundaries: CU uses census block groups for data analysis instead of specific neighborhood boundaries that may be readily understood in the market. Pulling data from the right neighborhood can make a HUGE difference in a valuation, don’t you think?
  5. Adjustments & comps: Fannie Mae has heaps of data to compare to any new appraisals that come into the system. Not only do they know about sales in the neighborhood, but they also know which comps other appraisers have used, and even value adjustments given by other appraisers. CU knows if an appraiser says a comp is in good condition (C3) in one report, but then says it is in fair condition (C5) in a different report. CU will pay special attention to comp selection, adjustments, and the final reconciliation of value.

Fannie Mae Collateral Underwriter - by Sacramento Appraisal Blog

Potential Impact of Fannie Mae’s Collateral Underwriter:

  1. Unknown: The truth is we don’t really know how CU will impact the market. It could be a game-changer for the mortgage industry and appraisal profession, or it could feel like the same old same old.
  2. Slower loan process: As CU is implemented, expect a learning curve, and thereby a slower loan processing time. It’s going to take some time for lenders, appraisers, and underwriters to work out the bugs.
  3. More conservative appraisals: One of the unintended consequences of CU may be more conservative appraisals.
  4. Headaches for appraisers: The fear among appraisers is that lender clients will now come back to say, “CU has identified 20 other comps in this census block. Why did the you not use these?” Hopefully that will not happen (assuming the appraiser did a good job of course), but increased scrutiny will be bound to cause appraisers to spend more time responding to CU.
  5. Higher cost for consumers: If CU does end up putting more work on appraisers, it may lead to higher appraisal fees. After all, more work requires more time (which is money).

Advice to the Real Estate Community:

  1. Real Estate Agents: Make sure your clients know how strict the underwriting process has become for appraisals. I’m not saying you need to sit down with your clients and watch Fannie Mae’s CU tutorial (that’s probably a quick way to lose clients). All I’m saying is this is one more reason to price properties correctly since the appraisal is going to be even more scrutinized now. Also, if you accept an offer that is clearly out sync with neighborhood values, the lender is going to have a ton of data at their disposal about neighborhood values – even if the appraiser happens to “hit the number” somehow.
  2. Appraisers: Many appraisers are gravely concerned about CU, though many lenders have been reaching out to say, “Hey, we’ve already been scrutinizing you, so don’t worry about this.” Only time will tell how this will impact business and the industry. All we can do is choose the best available comparables and make reasonable market-supported adjustments. There will be a learning curve to know how to avoid red flags so to speak, but explaining why we made adjustments and supporting those adjustments will be a big theme this year for lender work. The bottom line is appraisers will need to add more commentary in their reports. If you are making the same adjustments in every single report regardless of the location of the property, it’s time to stop that because adjustments vary depending on the neighborhood. If you are struggling to support adjustments, it may be a good year to find a mentor as well as take some quality continuing education. If you do not know how to graph sales, make that a top goal this year. On the other hand, if you are an experienced appraiser, find ways to be a mentor to other appraisers by answering their questions – whether on forums or in person. As I said in 10 things appraisers can do to improve the appraisal industry, “Too many appraisers think they are right about everything, but at the end of the day being right doesn’t help anyone grow. Find ways to share your knowledge and build others up.” Lastly, if it ends up costing you more time to do your work, it may be time to consider raising your rates.

Helpful Links:
Fannie Mae’s Collateral Underwriter Home Page
Collateral Underwriter FAQ (pdf)
Collateral Underwriter Fact Sheet (pdf)
Into to Collateral Underwriter Recorded Tutorial
CU Risk Score, Flags, & Messages (Recorded Tutorial)

Questions: How do you think Fannie Mae’s Collateral Underwriter will impact the market and/or the appraisal profession? Anything else you’d add? I’d love to hear your thoughts.

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