How can 3 appraisers give 3 different values for the same property?

Imagine 3 appraisals on one property, and all of them have a different value. How can appraisers have any credibility when there is so much difference? I hear this question all the time, so I wanted to pitch in some thoughts to hopefully strike a balanced conversation for home owners, agents, and appraisers. Here are three points to consider for perspective. Any thoughts?

why are appraisals so different in value - by sacramento appraisal blog

  1. Range of Values: We like to think value is incredibly precise, but one of the best things we can do is realize there is a range of value in real estate. This means realistically buyers might be willing to pay anywhere between $330,000 to $340,000 for a particular property instead of such an exact figure of $334,568. The same is true when we buy a new car or even buy something on Craigslist. Rather than being tied down to one exact figure, we often recognize there is a price range we’d be comfortable paying. We might think of a Camry as having a value anywhere from $21,500 to $23,000 or a used bookcase being a deal between $55 to $65. Real estate works very similarly, though since appraisers have to put an exact number in an appraisal report for lending purposes, we are stuck with that exact figure.
  2. If I asked 3 Agents: Since appraisers give a written value for a property, it’s easy to criticize the value (rightly so). But if I asked three real estate agents to give a precise written and supported value for a property, chances are I would get three different values, right? This would be especially true for a custom home or something that is unique or lacking decent comps. I bring this up because it takes real skill and time to nail a value, and there is going to be a difference in opinion even among qualified and respected professionals throughout the real estate community – whether appraisers or agents. When speaking in real estate offices and this point arises, I often ask, “If I asked 10 different agents for a value on a property, what do you think the result be?” While it sounds like a cop out to gloss over bad appraisals, there is a valid point here.
  3. Quality Spectrum of Appraisers: Lastly, it’s worth noting there is sometimes a difference in values because some appraisers simply do a better job. Remember, an appraisal is about two things: 1) Comps; and 2) Adjustments. When comps or adjustments are out of sync with the market, it’s easy for value to be out of line. This is the part where the appraisal industry has a black eye, and it certainly deserves criticism when an appraisal is not what it should be (whether too high or too low).

The Pain of 2 Appraisals: While it’s perfectly reasonable to see a minor difference in value among appraisers (or any real estate professional), the reality is lenders sometimes require two appraisals when a property has been flipped or even when a property is very unique. We all know this can lead to turmoil for a transaction if one value is at or above the contract price and the other is below. This is why it’s best for a transaction to have just one appraisal, and better yet, to have a lender who understands the above issues and can be reasonable when there are two different values on one property (hopefully the values are somewhat close).

I hope these points are helpful for framing the conversation next time this issue comes up. I’d love to hear your take in the comments below.

Question: Any thoughts or stories to share? What other points would you put in here?

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How to avoid one of the biggest value mistakes made with square footage

Let’s look at one of the most common value mistakes made with square footage in real estate. This error is extremely easy to make if we’re not careful, and it’s something that happens quite a bit in the real estate community. I’d love to hear your thoughts in the comments below. I hope this is helpful.

big value mistakes made with square footage - by sacramento appraisal blog

Here’s how the error works:

  • A property sold for $205,000.
  • The house is 1164 sq ft.
  • $205,000 / 1164 = $176 price per sq ft
  • Now apply $176 to any difference in square footage with other properties. For instance, if a house is 100 sq ft smaller, the value difference between the two houses is $176 x 100 = $17,610.

The Big Error: When we apply $176 for the square footage adjustment, we make a huge mistake. Why? Because $176 represents everything about the property from the structure, lot size, upgrades, driveway, layout, landscaping, sewer connection, bedrooms, garage, etc…. So when we apply a figure that encompasses the entire property to only one little part of the property (square footage), it’s very easy to get an off-base value adjustment.

what is the extra square footage worth - sacramento appraisal blog

A market-based methodology: If you want to know how much square footage is worth, it all comes down to comparing homes in the neighborhood. In this case we need to find other similar-sized homes to the 1164 sq ft model. What type of price difference is there? Why is there a price difference? Is it the square footage? Condition? Upgrades? Location?

In this case I found a property that sold for $197,000, but it had 100 less sq ft and one less bathroom. Assuming there are other sales out there like this too (we need more than just one example), we now see the combined value difference for the extra 100 sq ft and one bathroom is only $8,000. In other words, buyers were really only willing to pay about $8,000 for the extra square footage and bathroom. That’s a far cry from the $17,610 figure we came up with above, right? We could take more time to figure out how much the bathroom contributes to the $8,000 and how much the square footage contributes to the $8,000, but let’s not make this post too long.

The Point: Be very careful about making a square footage adjustment by using the entire price per sq ft of a property. This is applicable for any price range too – not just the lower end of the market. How much are buyers actually willing to pay for the extra square footage? The best way to know is to start finding some sales that are a bit larger and others that are a bit smaller. Assuming all else is fairly similar, what is the price difference? For more information, check out how appraisers make square footage adjustments and choosing comps like an appraiser.

Questions: Do you have anything else to add? Any stories or points to share?

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Aggressive demand but modest value appreciation in Sacramento

Is it just me, or has the market felt a bit funky? On one hand demand has felt very aggressive, but actual value appreciation has been fairly modest overall. Let’s take a look at the latest trends in the Sacramento housing market below. If you’re local, I hope the 10 quick trends help give you some talking points with clients. If you’re not local, what are you seeing in your area?

the big picture in real estate

One Paragraph on the Market: More listings came on the market last month, but buyers readily absorbed them. Pendings are still a good 20%+ higher than last year in the Sacramento area, and clean and well-priced properties are getting into contract very quickly. As aggressive as demand has felt though, we haven’t seen the rapid appreciation this Spring that we saw in 2013. Values more or less have experienced a normal seasonal increase, though when compared to sales during the Fall of 2014, prices are clearly MUCH higher since there was a lull in the market last Fall. Overall price levels now generally seem to have recovered back to the height of last Summer (or even a bit higher depending on the area). Well-priced listings are getting into contract VERY quickly, and there have been multiple offers. But at the same time buyers are tending to overlook properties that are overpriced and anything with an adverse location or a lack of upgrades. As housing inventory presumably begins to increase over the next few months, keep an eye out for more price reductions, unrealistic expectations from sellers, and buyers gaining more power from sellers. Remember too the market does not behave the same at every price level or in every neighborhood.

Two ways to read my big monthly market 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 52 graphs HERE for free (zip file): Please download all 52 graphs here as a zip file (or send me an email). Use them for study, for your newsletter, or even some on your blog. See my sharing policy for 5 ways to share.

Sacramento County Market Trends for April 2015:

  1. The median price in Sacramento County is $280,000.
  2. The median price is 5.6% higher than one year ago (April 2014).
  3. It took 42 days to sell a house last month.
  4. Cash sales were only 16.5% of all sales last month.
  5. FHA sales were 27% of all sales in Sacramento County last month.
  6. Sales volume was 9.2% higher this April compared to last April.
  7. There is 1.5 months of housing inventory (1.8 months last April).
  8. The average price per sq ft is 182 (7% higher than last April).
  9. The average sales price is $310,000 (5.7% higher than last year).
  10. It took 3 days longer to sell a house this April compared to last.

CDOM in Sacramento County - by Sacramento Appraisal Blog months of housing inventory by sacramento appraisal blogprice metrics since 2014 in sacramento countyinventory during fall and winter 2 - by sacramento appraisal blog

median price and inventory since 2013 - by sacramento appraisal blog

layers of the market in sacramento county - by sacramento appraisal blogPlacer County Market Trends for April 2015:

  1. The median price in Placer County is $391,500.
  2. The median price is 6.9% higher than one year ago (April 2014).
  3. It took 41 days to sell a house last month.
  4. Cash sales were 17% of all sales last month.
  5. FHA sales were 20% of all sales in Sacramento County last month.
  6. Sales volume was 27.5% higher this April compared to last April.
  7. There is 1.9 months of housing inventory (2.5 months last April).
  8. The average price per sq ft is 200 (3% higher than last April).
  9. The average sales price is $441,163 (3.8% higher than last year).
  10. It took 10 days shorter to sell a house this April compared to last.

days on market in placer county by sacramento appraisal blogmonths of housing inventory in placer county by sacramento appraisal blogPlacer County median price and inventory - by home appraiser blogPlacer County sales volume - by sacramento appraisal bloginterest rates inventory median price in placer county by sacramento appraisal blog

Regional Market Trends for April 2015 (Sac, Placer, Yolo, El Dorado):

  1. The median price in the Sacramento Region is $325,000.
  2. The median price is 9.4% higher than one year ago (April 2014).
  3. It took 44 days to sell a house last month.
  4. Cash sales were 16.9% of all sales last month.
  5. FHA sales were 23.7% of all sales in Sacramento County last month.
  6. Sales volume was 10.5% higher this April compared to last April.
  7. There is 1.7 months of housing inventory (2.1 months last April).
  8. The average price per sq ft is 192 (7.2% higher than last April).
  9. The average sales price is $360,351 (6.9% higher than last year).
  10. It took the same amount of time to sell in April 2015 and April 2014.

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

months of housing inventory in region by sacramento appraisal blog

median price and inventory in sacramento placer yolo el dorado county

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

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

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

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Why no value adjustment is sometimes the best adjustment

It has to add value, right? It’s tempting in real estate to make upward adjustments in our valuations whenever we see a feature that is remotely positive. Our thinking is that buyers have to be willing to pay something for that special feature, so we should give it a little value boost. But sometimes making no adjustment is the best thing to do. Let’s look at three quick examples.

no value adjustment given - sacramento appraisal blog

Three examples where no adjustment could be the best move:

  1. Duplex with Large Lot Size: We get used to giving value premiums for larger lot sizes for single family homes, but a larger lot size for a duplex is often not a positive gain for the property. Assuming the lot cannot be built on or divided, the extra space really costs more for the owner to manage, and that can actually diminish cash flow for the property. Imagine a duplex on 0.75 acres, while every other similar duplex is on a postage stamp lot. If there is no difference in the rent between all the duplexes, and the larger lot is not useful for building, there probably isn’t a value premium for that extra lot size. In fact, the larger lot may be a nuisance because of the cost of extra landscaping maintenance or even illegal dumping.
  2. Location Across from a Park: It’s always worth more to be located across from a park, right? Not necessarily. While a park location might feel like an asset, if it’s also located on a busy street, the negative of the busy location might balance out any positive gain for the park location. Or if a park is known for loitering or criminal activity, it might not be desirable at all to live across the street from it. This is why it is telling to hear home owners talk about their park location. At times they love it and wouldn’t trade it for the world, but other times it’s a clear negative. Of course market value is not just about one owner’s perception, but the entire market. How would most buyers respond to the location? This is where we have to look at neighborhood sales over time to see if there is any price difference between park sales and non-park sales.
  3. Condo with a View of a Lake: Imagine a condo with a view of a lake. We would all assume the lake view is worth more than a non-lake view, but what do the neighborhood sales and listings tell us? Is there any price difference at all? If the vast bulk of properties in the condo development are all rentals, and there is no difference in the rental value for the lake view vs. the non-lake view, then the lake view is not an asset. This real life scenario came from a conversation with a mentor recently.

The Point: Sometimes it’s tempting to give a positive value adjustment because we feel there simply has to be one. But there actually might not be one. Maybe the market doesn’t behave the way we think it should, or maybe the market in one subdivision trends differently than a nearby subdivision. This underscores the need to watch neighborhood sales and listings closely to try to let the data speak to us rather than let our assumptions trump the data.

Marketing to Millennials Event: Locals, I wanted to invite you to an event I’m moderating at the Sacramento Association of Realtors on May 6 at 12pm. It’s called Marketing to Millennials, and it’s all about how to connect with Millennials in your real estate business. This generation too often gets a bad wrap from so many sources, but how can you connect with them and serve them best in business? There will be a guest speaker and four panelists. Make sure to say “hi” if you can make it. Read more here (pdf) or sign up here.

Question: What other examples can you think of where a positive value adjustment wasn’t needed (even though it seemed like one should be given)?

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5 reasons why median price increases don’t translate dollar for dollar to actual value

If the median price goes up by 2% in one month in a zip code, does that mean you have 2% more value for your property? Should you add that 2% to a new listing or appraisal? Or since the median price rose by 75% from early 2012 in Sacramento County, does that mean you have 75% more value? Not necessarily.

NOTE: Understanding how the median price works is important for valuing properties and communicating with clients.

Image purchased and used with permission by Sacramento Appraisal Blog

What is the median price? If you lined up all sales in a county or zip code from lowest to highest price, the median price would be the sale in the middle. Over time this figure can help us see how a market is moving, but applying median price increases from a zip code to a particular home can get us into quick trouble.

5 reasons why median price increases don’t translate to actual dollar for dollar increases:

  1. what-is-the-median-price-by-Sacramento-Appraisal-BlogSales Volume: The monthly median price is based on how many sales there were in a given month. If there are few sales in a market, the median price could see a huge swing, which means it can go up and down very quickly (which means we should be very careful about applying the increase or decrease to our property’s valuation).
  2. Less junk sales at the bottom: In 2012 and 2013 cash investors gutted the distressed market (low-priced short sales and foreclosures), and then flipped many of these low sales at higher levels. This essentially means the bottom of the market was removed. Now imagine the median price again, which is the sale in the middle of all sales if you lined them up by price. All of the sudden the sale in the middle got much higher because the bottom distressed part of the market was removed in a short period of time. Thus the market on paper shows very significant median price increases, but that’s really because of the bottom disappearing, right?
  3. Seasonal Moods: The median price tends to see a huge uptick during the early Spring.. For instance, imagine the median price increased by $25,000 from January to March. Does this mean values increased by $25,000? Not necessarily. It’s just the stale sales from Fall were much lower in price, and now current values are in high gear for the Spring (which is normal for Spring). Sometimes values in the beginning of the Spring are aggressive and they seem incredibly high, but in reality they might be picking up where the market left off at the end of Summer (or maybe slightly above). This is why we need to look at sales well beyond just the past 90 days.
  4. Larger Homes: Imagine there were larger-sized homes that sold last month compared to the previous month. We might look at the median price and say, “Wow, look how much the market increased last month”, but in reality there were simply bigger homes that sold at higher levels that made the median price increase.
  5. Zip Code vs Neighborhood: Not every neighborhood is experiencing the same trends as the entire zip code, and not every price range behaves the same way either. The zip code might show a 2% monthly increase in median price, but are neighborhood listings being priced higher or lower than recent sales? Are listings spending longer or shorter times on the market? Are sellers getting what they ask for? We have to be sure to take a hyper-local look at sales and listings in the immediate neighborhood before blindly applying zip code trends. The zip code might show a 2% median price increase, but maybe after looking at the numbers in the neighborhood itself, values in the neighborhood increased very modestly by maybe 0.50 to 1.0% in actual value over the month.

I hope this was helpful. As always, thank you sincerely for reading.

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

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How do appraisers come up with value adjustments for a busy street?

We all know most buyers are going to pay less for a home on a busy street. But how much less? Is it really only something minimal like $5,000 or $10,000, or is it much more substantial? Knowing how to come up with adjustments is critical for anyone working in real estate, so let’s walk through a two-step example below to shed some light on how appraisers might approach a busy location.

busy street in real estate appraisal

The Temptation: It’s easy to use the same adjustments in every neighborhood and in every market, but there is no one-size-fits-all adjustment that will work in every case. This is why we need to know how to research the market.

Here are a couple key points and steps:

1) The best comps don’t need adjustments:

Freeport Blvd Sales in Sacramento

The first thing we want to do is look for sales and listings on the same street. When we have similar sales with roughly the same location, these properties tell us exactly what the market is willing to pay. There is no guessing and no need to use many other sales because we essentially have the best examples of properties that have already been vetted by the market. If we pull sales or listings from a superior street, it’s easy to minimize the adverse location. But if all the sales on the busy street are coming in substantially lower than surrounding sales, the market has spoken. If you don’t have recent sales, you can look at much older sales on the same street, and study other nearby sales at the time to see how much of a value impact there was. If there are zero sales on the subject street, find a competitive busy street in the market area (or maybe even a commercial location or something quasi-similar). There has to be something out there. Also be sure to look at actives, pendings, expired listings and withdrawn listings since they can sometimes give clues on value.

2) Comparing busy vs. not busy:

freeport 2

This is where we take a good look at any potential price difference between sales and listings on busy and not busy streets. We have to make sure we are comparing “apples to apples” so to speak, so pay close attention to size, condition, upgrades, lot size, layout, garage space, etc… The goal is to match up several sales instead of just one example because this helps us have a better context of support. In truth we might end up coming up with a range of value for what we think the adjustment should be too. That’s okay. Just ask yourself where your property realistically fits on the range of value spectrum.

freeport 2b

The Verdict: There haven’t been many recent sales in the immediate area lately, which makes it a more involved process to establish value. But even with these older sales, the value difference is fairly large, right? When looking at sales on Freeport Blvd vs competitive sales on typical streets, it looks like the value range is easily anywhere from 25-50K+. If we spent more time on this, we could hone in on a tighter range, but you get the point, right?

NOTE: I am not saying this is the adjustment to give. This is simply a quick snapshot of the market right now for the sake of illustrating a methodology. Remember that these properties on Freeport Blvd also back to public transportation too.

I hope this was helpful. I’d love to hear your take in the comments below.

Questions: Any further insight or stories to share? How have you seen an adverse location impact the value of a property?

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The big problem of low fees in the appraisal industry

There is so much conversation about the appraised value coming in too low, but let’s turn the tables to talk about appraisal fees being too low. I know, who cares, right? But if you are a home owner or work in real estate, it’s good to know what’s going on. Is this happening during your escrows? Is it fair to pay so much for an appraisal when a huge chunk of the fee gets skimmed off the top by a management company?

Low appraisal fees - image purchased by Sacramento Appraisal Blog and used with permission

Why This Matters: 1) Low fees for purchase and refinance appraisals are crippling to the longevity of the appraisal industry. If fees are too low, appraisers simply cannot stay in business. Also, if you think it’s taking too long to get an appraisal back to you right now, just wait until the industry shrinks more as appraisers leave because they can make better money elsewhere; 2) Consumers are likely not keen to pay good money for an appraisal only to have Appraisal Management Companies (AMCs) scrape a substantial amount of the fee off the top.

Here are three real life examples of low fees offered to appraisers:

EXAMPLE 1: Low fees with the promise of bulk business

low feesComment: It’s shocking to see marketing emails like this because fees haven’t been this low for decades. Of course the consumer is probably paying at least $450 to $500 for the appraisal. The ironic thing too is the word “reasonable” in the last line. This word is used strategically because AMCs are mandated under Frank Dodd to pay customary and “reasonable” fees.

EXAMPLE 2: Cheap fees with a quick turn-time:

need a 4-day turn time at $250

Comment: Most local lenders easily pay the appraiser $400-500+ for an FHA appraisal, so $250 is definitely low. The kicker is the appraisal was ordered on a Thursday and due by Monday morning at 10am. When is the appraiser going to have time to do the report?

EXAMPLE 3: A blast order sent to MANY appraisers

field review

Comment: This was a blast order to who knows how many appraisers. A massive blast email is one way for an Appraisal Management Company to get the quickest and cheapest appraisal fees because someone is going to accept it (which is a different issue). Some AMCs use a blast email system like this with a link. Whoever clicks “accept” first gets the order. This lender is wanting to do “quality” control, yet they are reaching out to pay an appraiser only $200 for a field review of a complex property. Do you think they can get quality for such a low fee?

ACTION STEPS:

  1. Agents Find Out: Real estate agents, be aware what your recommended lenders are paying appraisers and how they order appraisals. I’m not talking about what your buyers are paying, but what are appraisers actually getting? If you are concerned about appraisal quality as well as reasonable turn times, choose lenders who build a relationship with appraisers and pay them well. There are many local mortgage companies (and some national companies) with in-house appraisal departments who hand-pick a group of local appraisers and pay them a reasonable fee. I tend to like this system the best, though there are also some larger AMCs that I hear are okay overall. Remember, what happens to one group in the real estate community can end up impacting everyone else.
  2. Appraisers: Work for Reasonable Fees: Appraisers, are you working for clients like the examples above? Or maybe you are approved with several AMCs that seem okay overall, but their fees are still too low. Hey, we all need to feed our families, and there is no fault in getting paid. But why not start looking for better clients and then begin dropping the bad ones? Heck, start an appraisal blog to share your voice and expertise. It may take many months or even years to diversify your clientele, but go for it. Who do you want to work for? What type of work do you want to do? What does it look like to be intentional about finding great clients over these next 1-2 years?

I hope this was helpful. I’d love to hear your take in the comments.

Questions: What do you think of the examples above? Does it surprise you to see these real life examples? Any stories or insight to share?

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High demand persists in the Sacramento real estate market

What is the real estate market doing? That’s not always a quick 10-second answer you can give someone while standing in line at Starbucks. Yet here’s the scoop: Demand is very high, values are up, and inventory is down. We are seeing exactly what we would expect to see in a Spring market, and I’d like to invite you to unpack the market with me in this post so you can share specific trends with your clients.

buyers are ready to pull the trigger - image purchased by sacramento appraisal blog and used with permission

One Paragraph to Explain the Market: The market is having a normal Spring so far. Prices are up, sales volume is increasing, and housing inventory is down. Buyers are hungry out there, which is seen with pendings being 25% higher in the regional market in March 2015 compared to March 2014. Cash sales continue to decline in volume, while FHA buyers are gaining a greater share of the market. Short sales and bank-owned sales are still hovering at very low levels, though there was a slight uptick in volume this past quarter (nothing to sound the alarm about). It took an average of 51 days to sell a house in the region last month, which is 4 days longer than it took last year (thus while the market feels hot, we can also see the market is slowing down too). Well-priced listings are going quickly and experiencing multiple offers, but properties with adverse locations and/or a lack of upgrades are tending to sit on the market. There is a huge demand for quality inventory, yet at the same time the market is price sensitive since buyers are showing discretion. Many neighborhoods over these past few months experienced a seasonal increase in value (not all areas though). Remember in coming time that inventory historically sees a huge increase from April onward, and that can very easily change the tone of the market.

NOTE: This post is longer since it is my big monthly market update. I am experimenting with more graphs and less text. Do you miss the numbers and bullet points? I’d love some feedback.

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

DOWNLOAD 62 graphs HERE for free (zip file): Please download all 62 graphs here as a zip file (or send me an email). Use them for study, for your newsletter, or even some on your blog. See my sharing policy for 5 ways to share.

SACRAMENTO REGION (Sac, Placer, Yolo, El Dorado):

median price and inventory in sacramento placer yolo el dorado county

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

months of housing inventory in region by sacramento appraisal blog

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

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

SACRAMENTO COUNTY:

Median price and inventory since 2012 by sacramento appraisal blog price metrics since 2014 in sacramento county

cash in sacramento county

fha and cash in sacramento county - by sacramento appraisal blog

Volume and cash since 2009 - by Sacramento Appraisal Blog

reo and short sales in sacramento county

months of housing inventory by sacramento appraisal blog

CDOM in Sacramento County - by Sacramento Appraisal Blog

sales volume through feb 2015 in sacramento county

sales volume in march in Sacramento County since 2001

PLACER COUNTY:

Placer County median price and inventory - by home appraiser blog

days on market in placer county by sacramento appraisal blog months of housing inventory in placer county by sacramento appraisal blog

Placer County median price since 2012 - by home appraiser blog

Placer County sales volume - by sacramento appraisal blog

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

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

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Does knowing the contract price give the appraiser a target value?

Why do appraisers get a copy of the contract? Doesn’t this set the value stage? Someone asked me this recently, and I wanted to respond with a few thoughts. I’d love to hear your take in the comments too.

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

Things to Remember about the Appraiser Knowing the Contract Price:

  1. Fannie Mae Requirement: If you didn’t know, the Fannie Mae appraisal form requires appraisers to analyze the purchase contract. Fannie Mae wants appraisers to list the contract price, date of contract, whether the seller is the owner (a safeguard against fraud), and if there are any concessions offered to the buyer. Moreover, if the contract cannot be analyzed, the appraiser has to explain why. See the text below straight from Fannie Mae.
  2. Valuable Data: Purchase contracts can provide valuable information to the appraiser. Sometimes there are listed repairs, credits offered, personal property given, or other incentives that might be influencing the agreed upon price. Other times there are a series of counter offers that help tell the story how a contract price was negotiated.
  3. MLS: Even if Fannie Mae did not ask appraisers to analyze the contract, appraisers would likely have MLS data during a sale, and then the complaint would be that appraisers are using the MLS pending price as a target value. Thus the issue is appraisers need to be objective about the value regardless of the information they have (and having more information is a good thing when valuing a property).
  4. The Bad: Appraisers can use a contract price as a target, but it shouldn’t be the goal to meet a certain value since appraisers are supposed to be objective and unbiased. We all know properties get into contract too high and too low at times, so appraisals shouldn’t “hit the number” every single time.
  5. The Good: There is nothing wrong with reconciling the appraised value to the contract price if the contract price represents a reasonable and supported value for the neighborhood. When doing this, an appraiser might say the following: “The contract price falls within the range of values indicated by comparable properties and represents a reasonable value for the subject property. Therefore the opinion of value in this report was reconciled to the contract price.” Or in layman’s terms, “Yep, the buyer and seller nailed it. Value is solid right where they agreed. How can I argue with that?”

Straight from Fannie Mae (p. 564 of the Seller’s Guide): All appropriate financing data and sales concessions for the subject property that will be or have been granted by anyone associated with the transaction must be disclosed to the appraiser. Typically, this information is provided in the sales contract. Therefore, the lender must provide, or ensure that the appraiser is provided with a copy of the complete ratified sales contract and all addenda for the property that is to be appraised. If the contract is amended, the lender must provide the updated contract to the appraiser to ensure that the appraiser has been given the opportunity to consider any changes and their affect on value. If the lender is aware of additional pertinent information that is not included in the sales contract, the lender must provide this information to the appraiser.

Questions: Do you think it makes a difference in the appraisal when the appraiser knows the contract price? Appraisers, what do you like or not like about analyzing the contract as a part of a purchase transaction?

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How do you know when a real estate market is increasing?

If a client asked you how to know when a real estate market is increasing in value, what would you say? Prices going up is the first and obvious answer, but what else? There are a number of different metrics to watch, and the image below helps hit on some of the main issues. Anything else you’d add?

Signs of an increasing market - 530

Markets tend to change over time rather than in an instant, so it’s important to know which metrics to watch. It’s also helpful to listen to what buyers are saying. After all, there is something about consumer confidence and the mood among buyers that cannot always be captured in one neat little metric. The other big question we must ask is: Why are values increasing? Remember that an increase in housing supply or interest rates can change the direction of the market in a heartbeat too (especially after the Spring seasonal market fades). This is why it’s also important to know the signs of a softening market.

think like an appraiserHow to Think Like an Appraiser: I’m excited to be teaching a class in a couple days at the Sacramento Association of Realtors. The class is called “How to think like an appraiser”, and we’ll hit on how to choose comps, how to make adjustments, and tips for working with appraisers. This will be very practical, and we’ll have many case studies to talk through in the class. See the image and register online here.

Question: What other signs do you watch to know if the market is increasing?

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