What does the market expect? (a critical question to ask in real estate)

What does the market expect? That’s one of the best questions we can ask ourselves in real estate. Why? Because it helps us keep the focus on what buyers actually demand in certain neighborhoods and price ranges. In other words, what are buyers really willing to pay more or less for in a neighborhood? Being in tune with that is definitely one of the key aspects of coming up with a credible value.

Market expectations - Sacramento Appraisal Blog

Pool Example: Take a look at the table below to see how some areas and price ranges in Sacramento have far more built-in pools than others.

Market expectations pool example by Sacramento Appraisal Blog

Key Point: When built-in pools are more common in some neighborhoods and price ranges we can probably say the market expects a pool, right? This is especially true at the higher end of the price spectrum where over 70% of homes have a pool. In contrast, some areas of town have less than 1% of homes with a built-in pool, and it’s safe to say the market doesn’t expect a built-in pool in those areas. This doesn’t mean the pool is worth nothing in those places, but if anything it’s a reminder to really consider that a pool might be worth far less or more in some areas than others. While it’s tempting to always give a token $10,000 adjustment for a pool, based on the data above alone, that adjustment probably doesn’t make sense for every neighborhood because of differing expectations.

Not Just About Pools: This conversation isn’t just about built-in pools because we have to ask what the market expects for things like upgrades, square footage, condition, lot size, architectural design, bedroom count, garage spaces, landscaping, etc… As much as we’d like instant answers, there really isn’t a quick guide to understand what the market expects without immersing ourselves in comparing sales, talking with buyers and other real estate professionals, and crunching numbers.

Two Mentions: I’m honored to share a couple of recent media mentions. I was quoted in Inman SF Bay Area in “Sacramento housing boosted by Bay Area refugees” and in RealtyTrac’s June Housing News Report (PDF – pg 17-21).

Blackstone: One more thing. A recent article talked about the private equity fund Blackstone (Invitation Homes) selling off some of its homes directly to tenants. As you probably know, Blackstone purchased thousands of homes in the Sacramento market several years ago. They continue to buy today, but their purchase volume is minimal and nowhere near what it used to be. Anyway, the article states they would likely sell about 5% of their inventory this year directly to tenants. Whether that’s true for the Sacramento market or not is to be seen, but it’s worth watching closely. Keep in mind many landlords are selling straight to their tenants right now instead of listing on MLS. In short, this isn’t just a Blackstone thing.

Questions: How do you get a sense of what the market expects in a neighborhood? Any advice you’d give on how to better understand market expectations? Did I miss anything? I’d love to hear your take.

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Comments

  1. says

    Great post Ryan. My favorite line is, “This doesn’t mean the pool is worth nothing in those places, but if anything it’s a reminder to really consider that a pool might be worth far less or more in some areas than others.” I’ve heard many real estate experts fall into the trap of saying certain features or items are worth nothing. However, in my experience, there are few things that are worth nothing. For example, if someone has an old pool that they think is worth nothing, it is probably a negative to the property because the typical buyer will need to clean it up or remove it at a significant cost.

    • says

      Great point Gary. Thank you sincerely. I suppose sometimes it’s easier to say “It’s worth nothing”, when in reality it could be more accurate to say, “It actually detracts from value.” Well said.

      The interesting part for me with this conversation is that new trends begin and spread to the point where eventually a certain something becomes accepted in the market (or even sought after). But at a beginning stage there is a first time for that certain something to spring forth. If there is nothing else like it at the time, it doesn’t mean it is worth nothing or even worth less. It does mean it can be challenging to gauge and really support the value in the marketplace though. I think of the growth of modern architecture in recent time as an example or “McMansions” in certain neighborhoods where they are more acceptable. I’d love to hear what others have to say about these examples as well as others.

  2. says

    The stats on pools by neighborhood is interesting. Do you think it’s ever worth it for a homeowner, let’s say in El Dorado Hills for instance, to put in a pool and get the value back in resale? Congrats on the media exposure! I’m curious to know more about how landlords can sell to tenants… Seems potentially fraught with legal issues, like disclosure etc.

    • says

      Hi Patrick. Thanks for the comment. It’s hard to say. The pools at the higher end of the market are going to be a good 50K or so to install. Will buyers pay the full cost in the resale market? Maybe. Maybe not. The value of a pool is often more personal and seems to be realized over time rather than in an instant. At least that’s my take (sort of like the value of solar panels in my mind as buyers don’t tend to pay the full cost of the system in an instant (though that’s not a perfect comparison)). Some friends in other parts of the state though have told me a pool can be worth as much as $100,000 in some very luxurious markets, and that’s actually more than the cost of the pool. Thus it is theoretically possible to have a pool add more value than the cost, though it is not very common in my mind, and I’m not sure I’ve seen that yet in Sacramento. This is why I have never told someone to put in a pool if they were going to sell their home. Still though, at the high end of the market, it might actually be worth considering after running some deep numbers. If the market expects a pool and the house is going to struggle to sell (after really looking at the numbers), it could actually be worth it to increase marketability. Of course, the key would be how much value it really adds though. What have pool-less homes sold for? That would be my biggest question.

      I very much agree about the liability with landlords and tenants. Sometimes the owner will draw up a contract and that can be dangerous if the owner does not know what he/she is doing. However, many times there is one agent involved who might double-end the deal or realistically only write up the contract to help guide the owner and tenant. If only writing up the contract there is a severe discount in the commission in these cases from what I can tell and what friends have told me. Selling like this can make great sense in the right situation because it saves money (especially for Blackstone). However, there is absolutely liability involved if it is not handled properly, and I would definitely not recommend doing this without a reputable agent. Moreover, when a property is placed on the open market it may actually end up selling for more – especially when there is low inventory. This is something owners need to strongly consider.

  3. says

    Great article Ryan. Going with your pool theme, when agents ask me how much a pool is worth I tell them that is hard to say because it varies by neighborhood but you can get a good idea of how important pools are to the people living in this area by going to Google maps and pulling up an aerial view of the neighborhood. You’ll be able to see from there the number of houses with pools. The more pools, the more important this feature is to them and the less pools the less important. While this doesn’t give them an exact dollar amount it can give them some context as to the general demand for pools.

    • says

      Thanks Tom. I love the pro tip on using Google Maps too. That can definitely be telling. I think you’re right that if something is common, it’s probably says something about market expectations. Of course there is always the first time for something in a market, and that’s where it gets tricky. As a related example, I would guess in places like Arizona (where you can cook an egg on the ground), a pool is probably a big deal. Not every market is the same as this though.

  4. says

    Great post, Ryan. Pools are a great example to show how each market differs for different features. Your chart depicting the number of pools is great. We recently completed an appraisal on a home that had just installed a pool. It is in a neighborhood that has a nice community pool. Of the 236 sales within the planned community, not a single sale had a pool. The pool has some value but less in this neighborhood as many in this community do not want the additional maintenance and liability that comes with having a pool.

    • says

      Thanks Shannon. I appreciate the kind words. I’m excited about the chart. I hope others like it too. Great example. That’s a striking example. Wow. There is a planned community here with a large community pool. There are not many pools in the surrounding neighborhood, but still some people install them because they can and sometimes the community pool is shut down for maintenance or a “code brown”. 🙂

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