How much value does an extra bedroom add?

How much value does an extra bedroom add? The bad news is there isn’t a one-size fits all answer that makes sense for every neighborhood. But the good news is we can think through some of the key issues to respond intelligently. On that note, let’s kick around some ideas below. I’d love to hear your take in the comments.

value of a bedroom - sacramento appraisal blog

Things to consider about the value of an extra bedroom:

  1. More is often better: Let’s be realistic. More bedrooms is usually a better thing for value because a home with more bedrooms is more marketable to buyers. That’s obvious, though there comes a point when there are too many bedrooms, right? (like Evander Holyfield’s old house with 12 bedrooms and 21 bathrooms).
  2. Diminishing value with each bedroom: Generally speaking the added value of extra bedrooms tends to diminish with each additional bedroom. It’s sort of like how you pay less for each ounce of Starbucks coffee the more you buy. In other words, the value difference between a 1-bedroom home compared to a 2-bedroom home could be far more substantial than the value difference between a 2-bedroom home and a 3-bedroom home (or 3-bedrooms vs. 4-bedrooms).
  3. Canned adjustments: It’s tempting to give a token value adjustment for bedroom count differences. Maybe we heard it somewhere or learned from a “mentor” the value adjustment should be $10,000 for each bedroom. So we give this adjustment any time we see a bedroom difference. But does this amount really make sense if we are talking about 2 vs 3 bedrooms and 5 vs 6 bedrooms? Don’t you think the value variance could be huge for 2 vs 3 bedrooms but maybe minimal at best for 5 vs 6 bedrooms?
  4. Layout:  At times a 3-bedroom home may sell on par with a 4-bedroom home because of a stellar layout. Imagine a 1400 sq ft 3-bedroom house compared to a 1400 sq ft 4-bedroom house. One house obviously has more bedrooms, which on paper makes it sound more valuable, but the 3-bedroom house very likely has a larger Living Room, which could help it compete well with the 4-bedroom home. This is a good reminder to be careful about blindly letting bedroom count have the final say.
  5. It’s easy to adjust twice: If we adjust a comp for both square footage and bedroom count, we might actually double-dip on our adjustments. I’m not saying both adjustments are not needed, but at times it may suffice to adjust one or the other instead of both.
  6. The story of the comps: At the end of the day we need to find similar sales and let those sales tell the story of value. This means if we are valuing a 4-bedroom house, let’s use some 4-bedroom comps. Or if we are valuing a 3-bedroom house, let’s be sure we are using at least some 3-bedroom comps. Of course it’s okay to use sales with a different bedroom count and make value adjustments if needed. As a closing example, it’s easy to claim there is a huge price premium for that 5th bedroom, so it’s tempting to give an automatic canned adjustment. But have other 5-bedroom homes really sold at a premium? Let’s look closely at sales and try to find the answer.

I hope this was helpful.

Questions: What is point #7? Did I leave anything out? I’d love to hear your take.

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If the real estate market did shift…

The new buzz word in real estate is SHIFT. Everywhere I go I hear this word, and it seems like every other article is about a coming change in the market. Thus the question becomes, how would you recognize if the market did begin to shift? What signs would you look for? Let’s kick around some ideas below and I’d love to hear your take in the comments. Any thoughts?

change sign - purchased by sacramento appraisal blog by 123rf dot com

Key points when considering a market shift:

  1. Markets go up and down: Just like the stock market, gold, or any other commodity, at some point real estate values will go up and at some point they’ll go down. Bottom line.
  2. See it first in the listings: When the market does eventually “shift”, we’ll see the change in the listings before the sales. This means properties will begin to struggle to sell at the same level as the “comps”, which will lead to price declines. This underscores the importance of paying close attention to pendings and listings to see the current market. Granted, every year someone says, “the market is declining” when the fall season begins to unfold because values begin to soften. Just be aware there is a difference between a normal seasonal softening and a definitive declining trend.
  3. Word on the street: One of the ways we’ll know the market has changed is the real estate community will feel it in the number of offers, feedback from buyers and sellers, more credits being given to buyers, etc… We can always look at stats, but there is something powerful about the word on the street from real estate insiders.
  4. The previous peak: It’s always interesting to see how close or far prices are from their high point ten years ago, but there isn’t any rule that says prices have to get back to their height for a decline to happen.
  5. Watch higher & lower prices: The market isn’t always doing the same thing at every price range or in every neighborhood. When it comes to values declining, watch the top and bottom carefully because one of them might change direction before the other. Which one?
  6. Other metrics: I included an image below to talk through some of the metrics we might watch to know the market is softening. Again, these things all tend to happen during the fall months every year, but no matter what time of year we are not likely to get to full-fledged value declines without passing through a softening stage. Be sure to watch the sales to list price ratio too (I forgot to include that in the image).
  7. The power of lenders: Values have increased these past four years, but wage growth has been more or less stagnant. This means some buyers will now begin to struggle to afford higher prices. The temptation for lenders is to develop more creative financing to help buyers keep playing the game. Does anyone else think Kenny Loggins’ Highway to the Danger Zone would be good background music for this point?
  8. Future clients: This conversation can feel stressful for those who work in real estate because a change in the market can lead to a change in clients. Yet markets always change, so that’s something we can be prepared for, right? Blockbuster Video had a lucrative operation until they didn’t adapt to the way the internet changed the DVD rental landscape. When it comes to business we can spend so much time holding on to the way things have been that like Blockbuster we don’t take steps to adapt and position ourselves to be Redbox or Netflix so to speak. Here are two questions to continually ask: Who are you clients going to be in the future? What are your clients going to need in the next few years?

Signs of a soft market

I hope this was helpful.

Questions: What is point #9? What other metrics can we watch to see the market change? Anything I left out? I’d love to hear your take.

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Advice for an increasing real estate market (and Sacramento trends)

When the market is flat, it’s easy to impress clients and look like a guru because of how accurate your values are. But when inventory shrinks, demand is off-the-hook, and the market shifts, it’s not always easy to nail value because things can change quickly in a short period of time. In light of the market increasing in value lately in many areas of the country, I thought it would be useful to offer some quick advice for dealing with increases. Then at the bottom of the post I have my ridiculously long Sacramento market update. I’d love to hear your take. Any thoughts?

increasing market advice for agents and appraisers - sacramento regional appraisal blog

Advice for Agents: When values are increasing, it’s crucial to pay careful attention when pulling comps before a listing. The tricky part in a “hot” market is it can be possible to get into contract at much higher levels than what is reasonable, so in a sense the agent has to really spend time weighing what a realistic value looks like before the listing hits the market. Keep in mind a lender’s appraiser is going to need to come up with a value that is supported by market data, reasonable for the neighborhood, and representative of the market. It’s easy to say, “The market is ‘hot’ and inventory is low, so I priced it higher,” but there really has to be support for the higher value. I recommend asking yourself the following questions and then talking clients through the answers.

  1. Is there support for value at the list price? (sales, pendings, listings, data)
  2. Is the list price reasonable? Does it make sense for the neighborhood?
  3. Would the market pay this price or would only one buyer pay this amount?

Advice for Appraisers: In an increasing market appraisers need to spend time figuring out how much the market has changed in recent time. In other words, if there has been upward value movement since the most recent sales got into contract, it could be very reasonable to give upward market adjustments to the comps. I suggest paying careful attention to competitive pendings, making market graphs in each report to help see the market, and keep an eye on competitive neighborhoods too in case data is sparse in the subject neighborhood. Lastly, let’s remember value increases might look more aggressive in some areas than others, so adjustments won’t look the same in every neighborhood or price range. Moreover, a typical canned market adjustment might be 1% per month (because that’s what a mentor taught us to do), but that might not be legit at all (like most canned adjustments). What does the market say? Let’s do our best to listen and then adjust if needed.

Questions: Any thoughts? What other advice would you give?

—————– For those interested, here is my big market update  —————–

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

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

DOWNLOAD 77 graphs HERE: 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 (please don’t copy verbatim). Thanks.

Quick Market Summary: The market has been showing value increases. Whether looking at the median price, average price, or average price per sq ft, all the numbers sound “hot” so to speak. This isn’t a surprise though because it’s what normally happens in April. It’s worth noting it took 8 less days to sell last month compared to the same time last year, and the median price is up in the region by nearly 8% from last April. FHA sales were roughly 25% of all sales last month in Sacramento County, though they are down slightly from 27-28% of the market in past quarters (this is a stat worth watching over time). Sales volume for the entire year is down slightly, but not by much. In short, the stats are glowing overall because there has been upward growth with most metrics. However, buyers are still exhibiting price sensitivity. If properties are not priced correctly they are sitting instead of selling. Moreover, under the umbrella of a “hot market”, some sellers are simply pricing WAY too high for the market. They hear the word “hot”, but that doesn’t mean you can sell for anything. Lastly, just because the market has increased in value in some neighborhoods and the entire county doesn’t mean values are increasing for every property type or in every price range.

Sacramento County:

  1. It took an average of 31 days to sell a home last month.
  2. It took 6 less days to sell last month that the previous month.
  3. It took 11 less days to sell this April compared to last April.
  4. Sales volume is down slightly from last year by 3%.
  5. There is only 1.3 months of housing supply in Sacramento County.
  6. Housing inventory is 15% lower than it was last year at the same time.
  7. The median price increased by 1% last month.
  8. The median price is 10% higher than the same time last year.
  9. The avg price per sq ft increased by 2.8% last month.
  10. The avg price per sq ft is 8.8% higher than the same time last year.

Some of my Favorite Graphs this Month:

inventory - April 2016 - by home appraiser blog

CDOM in Sacramento County - by Sacramento Regional Appraisal Blog

Median price since 2013 in sacramento county

price metrics since 2015 in sacramento county - look at all

median price and inventory since 2005 - by sacramento appraisal blog

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

fha and cash in sac county - sacramento appraisal blog

seasonal market in sacramento county sales volume 2

SACRAMENTO REGIONAL MARKET:

  1. It took 6 less days to sell last month compared to the previous month.
  2. It took 8 less days to sell this April compared to last April.
  3. Sales volume was 4.6% lower in April 2016 compared to last April.
  4. Short sales were 3% and REOs were 3% of sales last month.
  5. There is 1.6 months of housing supply in the region right now.
  6. Housing inventory is 9.5% lower than it was last year at the same time.
  7. The median price increased 3% last month from the previous month.
  8. The median price is 7.7% higher than the same time last year.
  9. The avg price per sq ft increased 2.5% last month.
  10. The avg price per sq ft is 6% higher than the same time last year.

Some of my Favorite Regional Graphs:

median price sacramento placer yolo el dorado county

sales volume 2015 vs 2016 in sacramento placer yolo el dorado county

sacramento region volume - FHA and conventional - by appraiser blog

Regional Inventory - by Sacramento regional appraisal blog

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

median price and inventory in sacramento regional market

PLACER COUNTY:

  1. It took 6 less days to sell a house last month than March.
  2. It took 2 less days to sell this April compared to last April.
  3. Sales volume was 6% lower in April 2016 compared to last April.
  4. FHA sales were 17% of all sales last month.
  5. Cash sales were 21% of all sales last month.
  6. There is 1.8 months of housing supply in Placer County right now.
  7. Housing inventory is 6.7% lower than it was last year at the same time.
  8. The median price increased 5.6% last month (take with a grain of salt).
  9. The median price is up 9.2% from April 2015.
  10. Short sales were 2.7% and REOs were 1% of sales last month.

Some of my Favorite Placer County Graphs:

days on market in placer county by sacramento appraisal blog

Placer County housing inventory - by home appraiser blog

months of housing inventory in placer county by sacramento appraisal blog

number of listings in PLACER county - 2016

Placer County price and inventory - by sacramento appraisal blog

Placer County sales volume - by sacramento appraisal blog

I hope this was helpful and interesting.

DOWNLOAD 77 graphs HERE: 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 (please don’t copy verbatim). Thanks.

SacBee: By the way, the second article I wrote for the SacBee real estate section went live. It’s called “One size does not fit all when talking about the housing market.”

Questions: Any advice you’d give to clients right now about pricing? Is there any other market insight you’d like to add? I’d love to hear your take.

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The big deal about rising rents in real estate

Values have been rising and so have rents. Across the country we’ve been hearing of rent increases in many cities (including Sacramento). Why does this matter? If you work in real estate, how do you plan to communicate this trend to clients? Let’s talk through some key points. I’d love to hear your take in the comments.

rising rents in sacramento - by greater sacramento area appraisal blog

Things to keep in mind about rising rents:

  1. Low Inventory: Rents are rising in large part due to low inventory. There has been population growth over the past decade, but very few new housing units have been built since the housing “bubble” burst. This essentially means we have a shortage of housing units. Keep in mind this isn’t an easy issue to solve since building a large number of units won’t happen overnight.
  2. Squeezed Savings for Tenants: Wage growth has been more or less stagnant in the Sacramento area at least, which means rent increases are coming directly out of a tenant’s savings account. Remember, if a tenant is saving up to buy a house, it’s going to now take longer to make that happen.
  3. Investors Holding: There are investors enjoying higher rents, and many will hold on to their properties for now instead of selling. Unless an investor is looking to diversify outside of real estate, an investor’s money is probably parked well right where it is. After all, why would an investor trade in great rentals only to buy something else at a much higher price today (and get the same rent)?
  4. Investors Selling: Not everyone is going to hold on to their properties though. There are many investors who purchased at lower prices from 2009 to 2012 especially, and it’s now time for them to cash out. Quite a few investors are actually selling directly to their tenants off MLS (agents, be there to write up the contract and help guide the process).
  5. Old Numbers: When rents rise quickly, sometimes the rents we see published online from a few quarters ago are simply old. Just like with rising values in the resale market, we have to ask whether the rental market has changed since the most recent data was published. Ultimately it’s important to look to a number of sources to get fresh numbers. Here are some suggestions: Craigslist, Hot Pads, Zilpy, Rent-O-Meter, & Zillow.
  6. Not Every Neighborhood: Like any trend, it’s easy to hear “rents are rising” and think that applies everywhere. Let’s remember some rental markets are hotter than others though. Apartment rents are said to have increased 10% last year in Sacramento and are projected to increase by another 10% this year. A similar dynamic is happening with single family units too, though NOT in every neighborhood.

I hope that was helpful.

Rental Event: By the way, I am helping put together a “Show Me The Money” event at SAR about the rental market. On May 18th from 12-1:30pm a property manager will talk through rental trends and give tips to agents for turning tenants into buyers. This is hosted by the Housing Opportunity Committee (which I chair this year).

Questions: What is point #7? Did I miss anything? What source do you use for rental data?

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Hot Pockets & adjusting for an increasing market

Hot Pockets. Yep, I’m about to use them to explain the housing market. That either makes me deeply creative or really immature. I’ll let you decide. On a serious note though, let’s talk about this analogy and consider the importance of giving value adjustments to comps during an increasing market. As always, I’d love to hear your take in the comments below.

Hot Pockets and real estate - Greater Sacramento Region Appraisal Blog

Hot Pockets analogy: The real estate market is like a Hot Pocket taken out of the microwave a tad too early. Some portions are blazing hot while others are only warm or frozen. Like a Hot Pocket, we can say the real estate market is “hot” overall, but it’s definitely not the same temperature in every neighborhood or price range.

Thoughts on making adjustments in an increasing market:

  1. Changing Market: If the market has changed since the most recent sales got into contract, a value adjustment may be needed. In other words, if the market is now higher or lower than the sales, we can account for that in an appraisal (or listing) by making an up or down value adjustment to the comps. Of course there needs to be support for making such an adjustment. We can’t just say, “There’s no inventory, so value must be higher”. We need to rather find support in the market (see #2 and #3).
  2. Pendings vs. Sales: There are many signs of an increasing market, but one of the best things to do is compare competitive pendings and sales. Are pendings getting into contract at higher levels? The other day I appraised something where pendings were about 3-4% higher than similar sales from December, so I ended up giving a 3-4% upward adjustment to a couple of sales I used from November and December. I didn’t have many recent sales to work with unfortunately, but comparing a few older sales with a few current pendings helped me see the current market. Remember, the entire county might show certain trends, but we have to look in each neighborhood to find neighborhood trends (which could be different).
  3. Contract Date: When making adjustments we need to look at when the comps got into contract. One comp may have a contract date four months old, while another is from 40 days ago. The change in the market could easily be different for each comp, which means it’s okay to give big adjustments to some comps and smaller ones to others (or no adjustment).
  4. The Real Price: In an increasing market it’s very helpful for appraisers (and agents) to know the exact price of pending “comps” where possible. After all, we might see something listed as “pending” in MLS, but the real contract price could be higher or lower. On one hand appraisers might give less weight to pendings because we don’t know the precise dollar amount in many cases, though when agents divulge the exact contract price and terms, it can help appraisers give even stronger weight to pendings in the neighborhood.
  5. Imperfect Data: It would be nice if all neighborhood data was perfectly aligned, but sometimes it’s conflicting, which means we have to use good judgement. Does that one high sale or pending really reflect the market or not? Is it reasonable? Do those two lower pendings mean the market is starting to soften? Did the hefty credit to the buyer in that one comp inflate the sales price? At the end of the day we have to spend time weighing both sales and listings to see the market, which means sometimes we end up throwing out certain sales because they’re outliers more than anything.

I hope that was helpful.

Questions: When was the last time you ate a Hot Pocket? Anything else you’d add to this post? I’d love to hear your take

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Starbucks cups and price per sq ft

I was in line at Starbucks and then it hit me. The perfect analogy for price per sq ft in real estate. While ordering my Grande drip with no room, I began to wonder how much I was paying for each ounce. Maybe that means I’m a geek, but was I really getting the most bang for my buck to buy a Grande (medium)? Or should I go with a Venti (large)? Take a look at the image below to see how price per ounce works at Starbucks, and then let’s consider a real example of this principle in real estate.

Starbucks cups and real estate - by sacramento appraisal blog

Big Point: The larger the cup, the less you pay for each ounce of coffee. Or we could say it a different way. Smaller cups of coffee tend to cost more per ounce. This is interesting, but it’s not really surprising because it’s merely an example of economies of scale, right? We see this principle all the time when buying bigger or smaller items, yet it’s easy to ignore when it comes to housing. So let’s take a look at all residential home sales from last month in Sacramento County. Do you see a similarity with the coffee?

image purchased from 123rf by sacramento appraisal blog - price per sq ft example

Big Point: The larger the house, the less you tend to pay for each square foot. Or we could say it a different way. Smaller homes tend to have a higher price per sq ft compared to larger homes. This is a principle we see when looking at county-wide data, but it’s also something we tend to see by neighborhood (assuming we have enough data). Just like coffee costs less per ounce the more you buy, it tends to cost less per sq ft for the more house you buy. That’s the big idea.

Be a Great Explainer: I love this analogy. Maybe it’s partly because I’m a coffee fanboy, but in truth talking through price per sq ft is hands-down one of the most relevant conversations to master in real estate. I hope the next time the topic comes up with a client, maybe you’ll think about using Starbucks cups to explain how price per sq ft tends to work in a neighborhood. For a refresher post you can read 5 things to remember about using price per sq ft in real estate.

Question: What drink do you order at Starbucks?

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No man’s land & the aggressive real estate market

It’s easy to explain what the market did, but what is it doing now? Everyone and their Mom can sound like an expert with the benefit of hindsight, but how do we see the current market? Do we give more weight to recent sales or listings? Do we have to wait for sales to close to know how the market is unfolding? Let’s consider a few thoughts below. I also have my big monthly market update at the bottom of this post for those interested. Any thoughts?

aggressive market in sacramento - sacramento appraisal blog

Four points to consider:

  1. Sales show us the past: A sale might close escrow today, but does it really tell us about the market today? Not necessarily. A closed sale on April 12, 2016 probably got into contract in early March, so it likely tells us more about the market 30-45 days ago rather than today. The current market in April could actually be higher or lower, so it’s important to ask how value has changed if at all.
  2. Pendings help us see the current market: The current market is often better seen in the pendings and listings rather than the sales. This assumes we have enough solid data of course. One of the most practical questions we can ask is whether properties are getting into contract at higher levels or not. Simply put, if pendings are higher than the most recent sales (and they’re not padded with concessions), they helps us see the current market has probably increased in value. Other questions to consider: Are properties getting into contract more quickly? Is inventory going up or down? Is the sales-to-list price ratio increasing or declining in the neighborhood? Are sellers offering incentives to buyers or not? It’s easy to be so fixated on sales that we don’t ask these questions, but the answers help us gauge current trends. Remember though, sales might tell us about the past, but we still give them strong weight because they actually closed at that level. After all, pendings might not end up selling. In that sense we have to “appraise” the pendings too. Are they reasonable? Do they reflect the market? Or are they outliers?
  3. Getting bid up to “no man’s land”: Sometimes in a frenzied market, properties can easily get into contract for more than they are worth. Yes, the market has been aggressive and values have been increasing (see trends below), but sometimes properties are simply getting bid up to “no man’s land” so to speak. In other words, there just isn’t any support for a value that high based on all market data. Remember, even when housing inventory is incredibly sparse like it is right now, there still has to be support for the value. We can’t just list at an astronomical level or let offers get bid up way beyond what is reasonable and expect a magical appraisal to meet the contract price.
  4. Making or not making market adjustments: If the market has changed since the sales went into contract, appraisers may need to account for that with a market conditions adjustment. If you didn’t know, appraisers can give an up or down adjustment to the comps if the market has changed since the comps went into contract. In fact, if an adjustment is not given when it should be given, the appraised value could easily reflect the market in the past rather than today. Appraisers need to consider what a real market adjustment for time might look like. For instance, last week I used a comp that was nearly one year old since recent sales were sparse, and I gave an 8% adjustment up since the neighborhood market has increased in value by that much. I could have given a small token adjustment that I just made up, but 8% was very reasonable based on more recent sales and current pendings.

Any thoughts? I’d love to hear your take below.

—————– For those interested, here is my big market update  —————–

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

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

DOWNLOAD 87 graphs HERE: 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 (please don’t copy verbatim). Thanks.

Quick Sacramento Market Summary: It’s been aggressive out there. This is why many real estate professionals are comparing the current market with the beginning of 2013. There are certainly similarities, though the market three years ago had very rapid appreciation and all the metrics show it was hands-down more aggressive than it is today. We can talk about the differences in the comments if you’d like. Values overall saw a healthy uptick last month, it took 12 less days to sell a house compared to the same time last year, and housing inventory is currently over 25% lower than it was last March. Sales volume was up about 4% last month compared with the same time last year, and interest rates declining has certainly helped draw more buyers out (which doesn’t help with the low inventory problem). FHA had been increasing in the Sacramento market, but in light of how aggressive the market is out there, FHA buyers have begun to get squeezed out. FHA buyers were still 23% of all sales last month, but that’s down from 25-28% for multiple months in a row. It’s worth noting bank-owned sales are up very slightly. Some REO brokers have said they are starting to see more action in their REO pipelines, though so far there really isn’t any big change as REOs were only 5% of all sales the past quarter.

SACRAMENTO COUNTY:

  1. It took an average of 37 days to sell a home last month.
  2. It took 9 less days to sell last month that the previous month.
  3. It took 10 less days to sell this March compared to last March.
  4. Sales volume was up nearly 4% this March compared to March 2015.
  5. There is only 1.2 months of housing supply in Sacramento County.
  6. Housing inventory is 26% lower than it was last year at the same time.
  7. The median price increased by 2% last month.
  8. The median price is 8.7% higher than the same time last year.
  9. The avg price per sq ft increased by 2.3% last month.
  10. The avg price per sq ft is 8.3% higher than the same time last year.

Some of my Favorite Graphs this Month:

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

inventory - March 2016 - by home appraiser blog

fha and cash in sac county - sacramento appraisal blog

sales volume and cash in sacramento - by home appraiser blog

CDOM in Sacramento County - by Sacramento Appraisal Blog

REO and short sale trends - sac appraisal blog 3

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

price metrics since 2015 in sacramento county - look at all 2

SACRAMENTO REGIONAL MARKET:

  1. It took 9 less days to sell last month compared to the previous month.
  2. It took 9 less days to sell this March compared to last March.
  3. Sales volume was 2.5% higher in March 2016 compared to last March.
  4. Short sales were 3.5% and REOs were 5.2% of sales last month.
  5. There is 1.5 months of housing supply in the region right now.
  6. Housing inventory is 19% lower than it was last year at the same time.
  7. The median price increased 3% last month from the previous month.
  8. The median price is 7.2% higher than the same time last year.
  9. The avg price per sq ft increased 1.6% last month.
  10. The avg price per sq ft is 7.6% higher than the same time last year.

Some of my Favorite Regional Graphs:

median price and inventory in sacramento regional market 2013

months of housing inventory in region by sacramento appraisal blog

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

sales volume 2015 vs 2016 in sacramento placer yolo el dorado county

sacramento region volume - FHA and conventional - by appraiser blog

Regional market median price - by home appraiser blog

PLACER COUNTY:

  1. It took 14 less days to sell a house last month than February.
  2. It took 9 less days to sell this March compared to last March.
  3. Sales volume was 11% lower in March 2016 compared to last March.
  4. FHA sales were 18% of all sales last month.
  5. Cash sales were 20% of all sales last month.
  6. There is 1.8 months of housing supply in Placer County right now.
  7. Housing inventory is 3% lower than it was last year at the same time.
  8. The median price declined 2% last month (take with a grain of salt).
  9. The median price is up 6.5% from March 2015.
  10. Short sales were 3.2% and REOs were 2.4% of sales last month.

Some of my Favorite Placer County Graphs:

Placer County housing inventory - by home appraiser blog

Placer County price and inventory - by sacramento appraisal blog

number of listings in PLACER county - 2016

months of housing inventory in placer county by sacramento appraisal blog

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

Placer County sales volume - by sacramento appraisal blog

I hope this was helpful and interesting.

DOWNLOAD 87 graphs HERE: 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 (please don’t copy verbatim). Thanks.

Questions: Any other points to add about sales vs. listings? How else would you describe the market right now? I’d love to hear your take and what you are seeing in the trenches.

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Four things to remember about the value of a larger lot

The lot is huge, so it must be worth more, right? But how much is it really worth? Let’s look at four quick points to consider when it comes to lot size. Don’t miss the two images at the bottom of the post too. I’d love to hear your take in the comments.

larger lot size in real estate - sacramento appraisal blog - image purchased from 123rf and used with permission

Four things to remember about the value of a larger lot:

  1. It’s about what the market will pay: The best way to know what a larger lot size is worth is to start comparing similar homes with and without larger lots. What is the price difference? If we can line up a few examples, we’ll probably begin to see a reasonable range of value emerge. Keep in mind there might not be any recent larger lot sales, but you can easily look at the past few years of neighborhood sales as well as sales in a competitive market. Value could be exponentially higher for the larger size, but then again it might be less than we’d think. At the end of the day we have to look to the market for the answer though since it all comes down to what buyers are actually willing to pay for the difference in size.
  2. Usefulness: When dealing with a larger lot we have to consider the usefulness of the extra space. What if the larger lot size was located in the front yard? Could there be a difference in value between a huge backyard and a large front yard? What if the lot had a funky shape that made most if it unusable? What if the larger lot was located right next to the highway compared to the interior of the neighborhood? What if there was an easement running through the lot that essentially cut the usable space in half? From a value standpoint we have to consider the effective usable lot size and make sure we are choosing comps with similar utility.
  3. New construction: Remember, builders tend to charge more for a “lot size premium” or “lot elevation premium” when a house initially sells, but this premium may or may not exist in the resale market years down the road. The owner might expect to sell for more, but what are homes with similar features actually selling for in the resale market? That’s what our focus needs to be.
  4. The temptation to give an adjustment: It’s tempting to give a lot size value adjustment any time we see a difference in size. Thus when we see a lot that is 6534 sq ft and a lot that is 8000 sq ft, we automatically apply an adjustment. Or if we see something that is 4356 sq ft and a lot that is 6500 sq ft, we’re tempted to use a price figure we think makes sense. But we have to ask ourselves, would buyers really make the adjustment? (adjustments are supposed to be based on the behavior of the market (buyers)). It’s easy to be trigger-happy about giving adjustments like this, but we have to remember there is no such thing as an adjustment that is going to work for every single neighborhood, price range, or market. In short, if the adjustment is incredibly minor, maybe it’s better to just not give it in the first place.

I hope this was helpful. Now two quick images.

lot utility - sacramento appraisal blog

Example of Finding an Adjustment: Assume these two model match sales have a similar location, upgrades, and condition. Now how much is the extra lot size worth based on actual sales? Remember, it’s ideal to find a few examples instead of just one so our results are more meaningful.

lot size example - by sacramento appraisal blog

Questions: Anything else to add? What is #5? Did I miss something? I’d love to hear your take.

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How to challenge a low appraisal (and tips for agents and appraisers)

The appraisal came in low. Those are five very stressful words during a real estate transaction, right? We hear these words every now and then, but when a market begins to change in the spring especially, it seems like we hear them more. So what can be done when this happens? What is the best way to communicate with the appraiser? What are some things to do and not do? Let’s talk about what it can look like to work through this issue. I’ve included a template you can download to your desktop, but I’ve also included some communication tips. The goal here is not only to give a useful rebuttal format, but to spark conversation between agents and appraisers (see tips below).

I’d love to hear your take and insight in the comments.

Image purchased by 123rf dot com and used with permission by sacramento appraisal blog - target value

DOWNLOAD this format HERE as a Word document. I created this format to help foster better communication with appraisers and focus on the right issues when challenging an appraisal. You might notice the diplomatic tone and logical flow too. Use this format as a template to fill in the blanks for a specific property.

appraisal rebuttal format to use - sacramento appraisal blog

Example of the template filled out:

appraisal rebuttal example - by sacramento appraisal blog

DOWNLOAD this format HERE as a Word document. Use it as a template to fill in the blanks for a specific property.

TIPS FOR AGENTS:

  1. Be Reasonable: Be realistic about what a property is worth. Try to help the owner base the list price on actual similar sales and whatever the current market is doing in the neighborhood for similar properties.
  2. Communicate First: Sometimes real estate agents have a very hands-off approach about communicating with appraisers (until an appraisal comes in too low of course). When that happens, agents will often start communicating all sorts of things about the property and how the market responded to it. But why was this information not shared in the first place? If you aren’t using my “Appraiser Info Sheet“, please consider doing so because it helps you be intentional about answering questions appraisers tend to ask (before they ask). Remember, it’s easier to be proactive before the appraisal is finished rather than reactive afterward.
  3. Ask the Lender: Before launching into a rebuttal, first make sure to ask the lender what their process is for challenging an appraisal so you know you are spending your time wisely. They might have their own form. Remember, a reconsideration of value has to come to the appraiser from the lender.
  4. Wear your Data Hat: It can be emotional when a property appraises too low, so it’s important to remain objective and stick to the facts of the market when talking with appraisers. Focus on critiquing the meat of the appraisal, which is comp selection and adjustments given (or not given). Forget about minor issues or clerical errors that don’t really sway value.
  5. Price Per Sq Ft: I recommend giving most of your attention to similar sales rather than bringing up price per sq ft. At the end of the day price per sq ft can be a valuable metric, but during an appraisal rebuttal it’s important to focus on sales that are similar since that is probably what is going to be most useful for the appraiser.
  6. Be Humble: It’s easy to blast the appraiser because you think you’re right, but the appraiser might have nailed the value. Remember, some appraisals come in low because the appraiser did a bad job, but many times properties come in lower than the contract price because that’s really where value is.
  7. Novel: There is a better chance of being heard if you keep it short. Don’t write a novel (and it helps if you’re diplomatic and nice). This is why the format above is useful because it helps organize thoughts into a logical manner.
  8. No pressure: Remember to not pressure for a higher value (Dodd-Frank). Stick with the facts and try to help the market speak for itself. That’s the value of the sheet above because it helps focus the conversation on comps and adjustments. You are asking the appraiser to reconsider the value, not meet your contract price. In fact, don’t even suggest a target value for the appraiser to meet. With some focused communication, you can provide support for a higher value without saying, “it’s worth at least X amount”.

TIPS FOR APPRAISERS:

  1. Seasonal Market: When the market changes, the most recent sales may not yet reflect the change. This means if we use older sales, we might essentially undervalue or overvalue a property unless we give an adjustment for the way the market has changed. The most recent sales probably got into contract 30 to 60 days ago, which means they reflect the market at the time. This means we need to weigh carefully if we ought to be giving a “Date of Sale” adjustment to help sales conform to current trends.
  2. Correct Mistakes: I know some appraisers never budge on changing the value. I get that. Nobody wants to have different versions of a report out there. I’m not an E&O company, but if the value is wrong due to our mistakes, isn’t our professional duty to get it right? It’s okay to change the value in the report, and if you need to do that, I would recommend writing in the addendum what changes were made and why they were made. This happens to the best of us. Nobody nails value perfectly all the time.
  3. Professionalism: The market is complex and there is something humbling about putting a value on something. This ought to bring a sense of awe and evoke a deep respect for the way value works in a neighborhood. In other words, since it’s not always easy to interpret value, we ought to be careful to not be arrogant. Let’s rather find ways to reek of humility and professionalism.
  4. Use the Info Sheet: If you think it would be useful, feel free to use my Appraiser Info Sheet document to help train local agents in your area to give you the type of information that is valuable to you during a transaction (this makes for a great office presentation too). Many times agents are doing their best to give appraisers what they think is useful, but it’s actually not helpful at all. This is why appraisers can help educate agents on what type of information they are really looking for. I have a set of questions I always ask a listing agent, so this is exactly why I created the info sheet. Feel free to download the sheet and use it in your market. In fact, make it better. If you end up posting the document on your blog or online, please give me a link back to honor the original source (I’ll do the same for stuff you create).
  5. Be Neutral: There is often pressure to “hit the number” or make the deal work, but appraisers aren’t escrow helpers or deal-enablers. This point really could have been placed above for agents, but it’s always a good reminder for us appraisers too. If value isn’t there, it’s not there, and everyone else needs to be okay with that. Recently a file on my desk ended up appraising 4% below the contract price. In this case the seller was asking way too much in hopes of netting more money to buy a larger house. My job wasn’t to meet the contract price, but to be a neutral party to the transaction.

I hope this was helpful.

SacBee Article: By the way, I have some cool news to share. I’ll be writing a bi-monthly column in the weekend real estate section of The Sacramento Bee. My first article was published last weekend. I’m honored and excited for the opportunity. Now I just need to find more time to write.  🙂

ryan lundquist SacBee real estate article

Questions: Anything else to add? Did I miss something? I’d love to hear your take.

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10 tips for pulling comps on a tricky property

The cookie cutter properties are the easy ones. But have you ever felt like you were just guessing at the value when dealing with something unique? Or maybe it seemed like you were throwing darts at a dartboard to come up with a number. What do we do when properties are different from the rest of the neighborhood? Let’s kick around some ideas below. I’d love to hear your take in the comments too.

pulling comps on a tricky property - sacramento appraisal blog - image purchased from 123rf

Here’s what I tend to say for how to pull comps on tricky properties:

  1. Deep Research: If a property is challenging, how far back in time have you looked? Sometimes we say things like, “I’ve scoured everything,” when in fact we’ve only glanced the past 3 to 6 months of sales. If we are dealing with something funky, we might have to look at years worth of sales to find something similar. Finding older similar sales is important because it helps us see how a challenging property fit into the local market. You can thus use older sales for research or include them in a report or CMA (and make an adjustment up or down depending on how the market has moved).
  2. Previous Subject Sale: Has the subject property sold before? If so, what did the subject compare to at the time? Finding comps for prior sales might be a clue into how the subject property fits into the context of the market. Of course it’s important to remember the previous sale might have closed too high or low.
  3. That One Feature: Often a home might be fairly standard, but what makes it difficult to value is an extra feature that is less common for the neighborhood. Maybe it’s a huge barn, accessory dwelling, or a studio above a garage. This is where we have to try to find something that is similar enough so we can gauge what the market has actually paid for that feature (since the cost of the feature might be way more than the actual value it adds). Remember, we might not be able to find something exactly the same, so we’ll have to be okay with similar, which is alright as long as we are looking at two things that are truly competitive. As an example, we might be able to find four neighborhood sales with accessory dwellings over the past couple of years and then compare those sales with otherwise similar homes (but without an accessory unit). As we start to compare prices, we can try to extract a percentage or dollar amount for what the accessory unit contributed to the overall sale, and then apply that in today’s market.
  4. Competitive Areas: If sales are extremely sparse in the subject neighborhood, where else would a buyer consider purchasing? You might try looking there for recent sales. Make sure the neighborhoods really are competitive though, and the way you’ll know that is if prices have been similar over time in both areas.
  5. Bottom & Top: Sometimes when dealing with a really funky property, we have to ask ourselves where the top and bottom of the price market is in the neighborhood. At the least this gives us some context for where the value of the subject property is likely to fit (I know, that might be a wide range, but it’s better than nothing).
  6. Ask for Advice: One of the best things to do when valuing a tricky property is to ask for advice. Seek out others who have valued something like that before and ask for wisdom. What did you do? Who did you talk to? Where did you go for comps? What challenges did you face?
  7. Target Buyer: It’s often useful to consider who a target buyer might be so we can gauge how that representative buyer might approach the property.
  8. Range of Value:  When a property is out-of-the-ordinary, it’s useful to see value in a range. We like to be so precise about value, but the best thing we can do at times is to give a range of value based on research. Thus instead of saying, “The value is $550,000 exactly”, we might say “A reasonable value range is $530,000 to $560,000”. This can work well for agents to communicate value for a unique home, but it can also work well with appraisers for doing certain types of private appraisals or consulting work where a precise value is not needed (a lender is going to want an appraiser to select a specific value).
  9. Test the Market:  You can do all your homework on a property and still not be sure the value is where you think it is. Sometimes when a property is unique, it’s good to go in with research or maybe even hire an appraiser, but at some point the property needs to be exposed to the market. After all, the market will tell you what it’s worth.
  10. Walk Away: On occasion the best thing to do is walk away from a property. Appraisers get this because we know we are not 100% qualified to value all properties. For example, I am not qualified to appraise the Capitol building in Sacramento, sports arenas, The White House, or a few hundred acres of almond groves in the Central Valley (not at this time anyway). Recognizing our limitations keeps us humble and it’s key for building credibility with clients. This also underscores how the best answer to value can sometimes be, “I do not know what it is worth. I have some ideas, but I think we need to test the market.”

I hope this was helpful.

blogging classBlogging Class I’m Teaching: I’m teaching a class coming on April 12 at SAR from 9-11am. It’s called “Successful Real Estate Blogging“, and I’ll be talking through the nuts and bolts of effective blogging. This will be extremely practical, and my goal is for you to take action (rather than just listen to me talk shop). I’d love for you to be there. See the attached image for more info. Let me know if you have questions.

Questions: Anything else to add? Did I miss something? I’d love to hear your take.

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