Ryan Lundquist

When 1,000 square feet doesn’t count

September 25, 2019 By Ryan Lundquist 27 Comments

One of the most interesting homes I’ve seen just sold. It was brand new, four stories, and a halfplex. Oh, and on paper it was 3,000 sq ft, but about 1,000 sq ft didn’t count in the square footage. This is definitely a conversation piece, so I’m thankful Realtor Brian McMartin agreed to do a Q&A. I hope this will be valuable and interesting. Any thoughts?

Quick points:

This house has 1,000 sq ft that is not permitted as square footage.
The “non-conditioned” space looks just like square footage.
Understanding permits really does matter.
We discuss how to value a home like this.
This is ripe for lawsuits if square footage is misrepresented in the future.

Q&A with BRIAN McMARTIN

Ryan: First off, how many stories did this property have? And how wide was it?

Brian: This halfplex has a total of 4 stories, including the ground floor where the garage is located. It is 17’ wide with a 3’ setback on the side.

Ryan: Tell us about the non-conditioned space.

Brian: Ok – this can get a little confusing. This house has 2,065 sq ft as permitted living space, but the building has over 3,000 sq ft of usable space. It is hard to tell the difference between space that is permitted as square footage and other areas because the quality of construction is the same throughout (besides central heat and air not being present in the non-conditioned space).

Basically, the “conditioned” spaces that had permanent heat and air were on floors 2 and 3. On the first floor building plans show a non-conditioned “workshop”, but the sellers had it finished very nice and it presented like a huge game room or large living room. The 4th floor is described as a “sundeck” from the building plans, but again the sellers had the room presented nice with the same carpeting and fixtures as the rest of the home.

Ryan: This sounds like a situation where someone is going to use the extra space as square footage.

Brian: Even though it was not on the building plans, the sellers thought it would be okay to install separate wall mounted “mini-split HVAC systems”. However, during the final inspections the city made them remove these units as the building was not designed for habitable “conditioned” spaces on the 4th floor.

Ryan: How did you treat this space in terms of giving it value?

Brian: This was a huge challenge. The building has over 3,000 sf of usable space, but the property only has 2,065 of “conditioned” space. The room behind the garage and the 4th floor consisted of over 1,000 square feet of “non-conditioned” space. So, even though these rooms presented just like the rest of the home, they did not have heat and air. They have value, but I could not include these “non-conditioned” spaces in the square footage of the building any more than I could include a garage. These are permitted spaces, but not permitted for living area. Additionally, each floor of this property had two balconies, so I had nearly 600 square feet of balcony space to consider as well.

I previewed every new home on the market in Midtown to review the competition. In the end, I came up with an estimated value based on the “conditioned” square footage and then added a range based on what value I felt the additional “non-conditioned” square footage added to the value. I had other challenges in marketing this property, but essentially we decided to “test” the market a little with a high range to see how the market would respond.

Ryan: How did you report the non-conditioned space in MLS?

Brian: I did not report the “non-conditioned” space in the MLS where you show the square footage of a home as this is not considered habitable square footage. However, I did mention the additional space in the marketing comments.

Ryan: This was incredibly smart of you to do. I can see someone not doing this in the future because this area looks just like square footage. It sounds like a lawsuit waiting to happen when the new owner finds out about 1,000 square feet not being permitted as living space.

Ryan: Anyway, this is a unique layout to say the least. What sort of feedback did you get from buyers and agents about this one?

Brian: Despite my best efforts to explain the difference between the “conditioned” and “non-conditioned” spaces, it was confusing to most agent and buyers which is understandable as this was very unusual. It was easiest to explain when I was at the property and was able to show people the building plans and answer their questions in person.

Ryan: How did you pull comps on a property like this since there wasn’t really anything out there?

Brian: You are correct – there were no comparables in Midtown with this type of issue. In the end I used new construction comparable sales in Midtown and relied primarily on the “conditioned space” to come up with a base value.

Ryan: What did you learn through selling this one?

Brian: I learned a few things from this experience. In doing my homework on this property I learned that the there was a reason the builder did not have some of the areas as “conditioned” areas, especially on the 4th floor and it had something to do with the city requirements for having a habitable living area on a 3rd or 4th floor. I did not find out exactly what the conditions are with the city, but I was told that it had something to do with needing to install a separate egress when you build above the 3rd or 4th floor. Since the 4th floor was considered a “sundeck” and was not a habitable area, this requirement did not apply. This made sense to me later when I learned that the city made the builder remove the split HVAC systems from the 4th floor as it could not be considered habitable living areas and changed the nature of the intended use of that floor. Despite these area presenting as beautiful well-appointed rooms, it just created confusion for the buyers as to what the rooms could be used for and how it would benefit the homeowner. This confusion caused many difficulties in marketing this home.

Ryan: What about the layout and interior?

Brian: We had some design issues with this home and they were difficult to overcome. The exterior presented more of an industrial modern look, whereas the inside reflected more of a suburban contemporary look. Additionally, the floorplan was clunky and inconsistent. So, despite having a brand new home, nearly every buyer was considering how much it would cost to redesign the home to fit their needs and tastes.

Ryan: Anything else you’d like to add?

Brian: Yes, over the years I’ve noticed there is some general confusion over permitted structures and permitted habitable structures. For instance, I had a client once that had a small apartment in the back yard that they were renting to tenants. The sellers informed me it was built by a previous owner (and permitted). However, upon reviewing the apartment, it was apparent that modifications were made to the unit to add a small kitchen. Long story short, upon investigation we discovered and found that there were indeed permits for the structure, but it was not built as a habitable unit and at some point someone had added the kitchen to make it work for an apartment. The sellers were naturally upset as they purchased this property as a duplex or 2 homes on a lot and were not happy to discover that I could not market the home this way.

Ryan: Any closing thoughts for real estate agents?

Brian: Just because tax records shows a property as a certain size or having an additional unit does not always mean it is correct. I had a property in East Sacramento once that showed as a duplex but the downstairs unit was never properly made into a habitable unit. Additionally, I’ve found that the existence of separate meters on the property does not always mean the additional unit is permitted. In closing, if something doesn’t quite seem right about a unit or an additional space, be sure to ask more questions of your clients to make sure you are marketing the property correctly.

Ryan: Thank you Brian for doing this interview. You killed it. Everyone, you can check out Brian’s website here.

Closing appraisal thoughts: There is so much I can say, but the thing that stands out most is it’s really easy to include non-permitted space as square footage if we’re not careful. My advice? Don’t just ask an owner if it was permitted. What was it permitted as? That’s the better question. Moreover, if you see a huge discrepancy between Tax Records and what seems to be at the property, find out why there is a difference.

I hope this was interesting or helpful.

BEER & HOUSING CONVERSATION: Do you want to hang out at Yolo Brewing? On Saturday October 5th from 2-5pm we’re going to have a get-together. No presentations, agenda, secret handshakes, or geeky stats. This event was born on Twitter with Erin Stumpf. Hope to see you there. Details here.

Questions: What stands out to you most about the interview? Any thoughts on the house? I’d love to hear your take.

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Low appraisals, weed, & rent control

September 19, 2019 By Ryan Lundquist 30 Comments

I’ve been getting lots of phone calls and emails about low appraisals over the past couple months. Is something in the water? What’s going on? Let’s talk about this briefly. Then I have some quick thoughts on weed and rent control.

5 things to remember about “low” appraisals:

1) This is common when the market slows.
2) This is even more common in a declining market.
3) It should happen if the contract is too high.
4) It can spur negotiation instead of kill a deal.
5) The value of course is too low sometimes.

The problem: During the housing “bubble” we expected appraisers to always “meet value” so to speak. Yeah, that wasn’t good. But it seems like the residue of that expectation still exists today. So when an appraisal comes in lower than the contract price, it’s often treated like a grave market sin when in fact this should be something that happens from time to time. I know this sounds a bit Pollyanna to say, but I’d like to see the real estate community view appraisals this way instead of thinking appraisers should “hit the number” all the time. Appraisers have an important role to play in the market and if they’re doing their job correctly it won’t always lead to smooth escrows.

Botched appraisals and what to do: Of course we don’t live in a perfect world and appraisers legitimately miss value at times. I’m not glossing over that frustration and I realize there are horror stories out there. When this happens it’s reasonable to go through the lender’s process of asking the appraiser to reconsider the value. I don’t think any appraiser looks forward to this, but it’s part of the business, which is why I advocate for data-informed conversations and ethical protocol. In fact, here’s some tips and a form I suggest using if the lender will allow it (otherwise you’ll need to use the lender’s form).

Note to appraisers: I know this post will not sit well with some colleagues, but this is a part of the business and my goal here is to elevate the conversation (and hopefully only see rebuttals when they need to happen).

Rent control: I have an upcoming interview about rent control with an appraiser colleague in the Bay Area (and I’ll likely do others too). We’ll talk through rent control dynamics and some things to consider for value. In the meantime, here are two quick thoughts. One, rent control is a huge deal, but we’re going to need some time to really understand the fine print as well as its effect on the housing market. The temptation is to look for an immediate impact, but we might need years to fully understand the effects. Secondly, rent control will change the way properties are advertised. Gone are the days of saying things like, “Rents are below market and you can raise them to X amount after buying.” The problem is market rent isn’t so straightforward any longer because not all units can be legally rented at the same level. Remember, rent control does not apply to single family homes. My advice? Be careful with assertions about market rent.

Landlords getting huge weed fines: There was an illuminating piece by Capital Public Radio on Sacramento fining landlords when tenants turn rentals into “grow” houses. We’re talking big money too as the story highlights an example of a $137,000 fine. The author of the piece states the City of Sacramento has issued almost $100M in penalties over the past two years. I’ll let lawyers figure out if this is legal or not, but from a market perspective this is something to watch. What are the positives and negatives of this type of enforcement for the housing market? How will this affect investors?

I hope this was interesting or helpful.

BIG MARKET UPDATE: I’ll be giving a deep market update at SAR on September 24th from 10:30-12:00pm. My goal is for everyone to walk away with an understanding of how the market is moving, ways to describe it, and some ideas for business in 2020. Sign up here.

Questions: What is the sixth thing to remember about low appraisals? Any stories to share? Any thoughts on rent control or the weed dynamic right now?

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Peaking prices & rosy real estate narratives

September 13, 2019 By Ryan Lundquist 10 Comments

People tend to freak out when prices slow down. What’s going on? Is the market crashing? But every year around this time we start to see the market soften. Let’s talk about this, and then for those interested I have a big market update.

1) Slowing is normal: Prices have likely crested for the season in many areas of the country. What I mean there’s a good chance we’ve more or less seen the highest prices we’re going to see for 2019 as the market is starting to show its descent from the high-altitude spring season. This happens EVERY. SINGLE. YEAR. It doesn’t mean it’s not competitive either. It just means it starts to take longer to sell, the number of sales begins to shrink, and prices tend to taper.

2) The rosy real estate narrative: It can be a struggle for many people when hearing the market is slowing. It’s like we are only allowed to talk about real estate in glowing terms and our talking points must fit into a rosy narrative. So when there’s any hint of news that sounds even slightly negative, it feels like something is wrong. What do you mean prices aren’t going up? Wait, they’re softening? Does that mean the market is about to turn? Remember, just as it’s not always sunny outside, real estate isn’t always burning hot either.

3) The mistake of misinterpreting slowness: On the other side of the coin we tend to see lots of doom and gloom conversations around this time of year as the market softens. My advice? Know what is normal for the fall season so you can assess whether it’s a normal seasonal slowing or something more. In other words, let the stats speak to you and inform your real estate narrative. Otherwise you may be swayed by sensational headlines or get sucked into a real estate culture that sometimes struggles when things aren’t ultra-positive.

Any thoughts?

—–——– Big local monthly market update (long on purpose) —–——–

Now for those interested, let’s talk about Sacramento trends. If I had to sum up the market I’d say things have felt a little more normal lately. Granted, low mortgage rates are like a steroid helping the market feel normal, but nonetheless stats have been about what we’d expect for this time of year – which is unlike the dark season we experienced last year at the same time.

DOWNLOAD 80+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

THE SHORT VERSION:

Stats feel mostly normal
California will now have rent control
Year-over-year price growth is stronger
Don’t be like Michael Jordan
Volume was down slightly in August
Listings are seriously anemic
Pendings are strong right now
Sales volume is down 9% this year
The market is slowing for the season

THE LONGER VERSION:

Here are some of the bigger topics right now:

Normal and cresting prices: We’re seeing about what we’d expect to see right now with prices starting to soften. I’d say prices have likely crested for the season. It’s possible we could see some price metrics bounce up slightly due to low mortgage rates, but that usually doesn’t happen beyond August much. Besides, any sales from September really reflect older pendings from July and August anyway.

Rent control: Statewide rent control in California was just passed by the legislature. There is going to be a learning curve for the real estate community on how to deal with this from a value perspective too. We may need years to really understand the effect on the housing market. Keep in mind this only applies to 2-unit+ properties built prior to 1995 (it does not apply to single family homes). Also, this doesn’t mean rents won’t increase either because landlords can legally raise rents 5% plus inflation each year.

14th bubble anniversary: The real estate “bubble” popped fourteen years ago in Sacramento in August 2005. In other parts of the country the market started to turn in 2007, but we started to tank in 2005. So happy anniversary, I guess.

Michael Jordan’s house: In 2012 Michael Jordan’s house was put on the market for $29 million and after seven years it still hasn’t sold. It’s now listed for about $15M. This just goes to show buyers aren’t willing to pay any price – even if the owner is famous. This is a great object lesson for sellers today who are prone to think they can command whatever price they want since inventory is low. Nope. Buyers are extremely sensitive to paying the right price and they’re more informed than ever. If you want to sell you need to price it right. Bottom line.

Slowing doesn’t mean it’s cold: The market isn’t slow, but it’s starting to show signs of slowing for the season as it’s taking longer to sell, most price metrics declined from July to August, and sales volume looks to be starting to slough for the year as it normally does. This doesn’t mean the market is cold though. Not at all. It’s just not as hot as it was during the spring. Over the next month I’d expect the market to heat up a bit though since kids are back in school and vacations are done. There is usually a last run on the market before the holidays arrive.

Almost 8 years of price increases: In the current real estate price cycle we’ve had about eight years of price growth so far. When I say eight, some people correct me with seven, but that’s not accurate if you count every year since 2012. I also have a chart like this for Placer, Yolo, & El Dorado County in my monthly download.

Stronger price growth: Prices are up about 4-5% from last year, which is a change from a more subtle 2-3% we’ve been seeing for most of the year. What’s going on? Part of the growth could stem from low mortgage rates fueling buyers to play the game, but let’s remember too last year was a dull time in the market, which means it’s going to be easier on paper this year to see glowing stats (more on that below). Let’s not make too much of one month of data.

Really sparse listings lately: The number of listings has been noticeably down. I mean, we’re seeing multiple hundreds fewer per month these days. Technically housing inventory as a metric is on the lower side of normal these days, but there have been fewer listings hitting the market (remember, inventory as a metric measures the relationship between listings and sales rather than the number of actual listings). I’ve been thinking about what’s going on here for a number of months and I’ll admit I don’t have it all figured out. Part of it of course is pendings have been stronger, which naturally means there’s fewer available listings. And maybe some would-be sellers refinanced into a lower rate rather than selling. I don’t think this is the byproduct of the iBuyer model with so many listings selling privately instead of coming to the market, but some properties certainly sold this way. Mostly I would guess this is related to sellers feeling uncertain about the market. Just as buyers had their moment last year where they backed off the market a bit, maybe sellers are feeling it’s their turn? There could be other reasons. This is something I’ll keep watching to understand over time. I’d love to hear your take here.

Warning about glowing stats ahead: Hey stat nerds, this is important. Over the next few months if we have fairly normal numbers they could end up looking glorious since last year the market was in a slump. If you remember, when mortgage rates shot up in 2018 buyers began to put their foot on the brakes and it felt like there was a dark cloud looming for about six months. Anyway, when you’re pulling stats over these next two quarters, just remember the numbers might technically look glowing this year compared with last year. My advice? Take stats with a grain of salt and compare multiple years of data rather than give laser focus to last year.

I could write more, but let’s get visual instead.

FOUR ISSUES TO WATCH:

1) SLOWER GROWTH: The market continues to show price growth, but the rate of change is slowing. This sounds offensive to some because the narrative in real estate is often that the market is always blazing hot. But let’s remember “slow” is not a dirty word in real estate.

2) A QUICK RECAP: All year prices have shown a modest uptick at about 1-3%, but this past month the stats look a bit sexier. Part of this could be due to lower mortgage rates, but some of it could be due to the market showing weakness last year (which helps pad today’s stats).

3) VOLUME SLUMP: Volume was lower last month compared to August 2018, but not by much. The bigger story though is volume is down in the region by 9% over the past year. Moreover, volume has been down in the region for 14 out of the last 15 months. Overall despite a lower year of volume, it’s still not outside of a normal low range (see 2014 and 2015).

4) PRICES SOFTENED IN AUGUST: The market generally slowed in August in terms of price growth. This is why I’m saying prices feel a bit flat (even though they’re up from last year). This is fairly normal for the time of year, and sometimes we see prices bounce up and down as summer comes to a close. Stay tuned. Let’s keep watching.

NOTE: Take El Dorado County data with a grain of salt. Stats change significantly month by month.

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Please enjoy more images now.

SACRAMENTO REGION (more graphs here):

SACRAMENTO COUNTY (more graphs here):

PLACER COUNTY (more graphs here):

EL DORADO COUNTY (more graphs here):

DOWNLOAD 80+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: What are you seeing out there? What do you think prices are doing? What are you hearing from buyers and sellers lately?

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The coming recession & the housing market

September 5, 2019 By Ryan Lundquist 31 Comments

The coming recession is a huge topic right now and lots of people are wondering about the effect on home prices. What’s going to happen to the housing market? Will we see another crash? Here are a few thoughts on my mind right now. Anything to add? Please comment below.

Last time isn’t the new template: The collapse of the economy during the last recession isn’t the new template for how every future recession and housing market will unfold. I’ve heard things like, “I’m so ready for this recession because I’m going to buy low after values tank.” But prices don’t always crash during a recession as you can see in the images below.

Severity matters: It’s hard to think the housing market is going to be swayed much if it’s a quick recession. But if buyers and sellers end up struggling financially and losing jobs, we can expect a greater effect on home prices (thanks Captain Obvious). The thing is we don’t know right now how severe of a recession we’re going to have, so that’s why we can’t say exactly what the housing market will do.

Consumer behavior: One thing we need to watch is consumer behavior. How will consumers think and act differently in coming time about their purchasing decisions? As I talked about last week, during a recession builders actually tend to build smaller homes since consumers tighten up their finances. This reminds us the way consumers think and act can certainly shape real estate.

Locations aren’t the same: It’s nice to see what national price metrics have done during various recessions, but national numbers can show a different trend than local data.

What do prices do during a recession? Sometimes prices have gone down and other times they’ve gone up during (or after) a recession. There’s not a one-size-fits-all answer. In Sacramento at least most of the time there’s been a price dip during or after a recession. If you’re looking for some historical data in your market, I suggest you check out the Freddie Mac Price Index.

During & After: I’ve seen some images that show home prices have appreciated during three of the past 5 recessions. That may be technically true on the national level, but we have to be sure to look at local stats. Moreover, let’s not narrow our focus to only ask what happens during a recession. What about afterward? What do you see in the images below?

UPDATE (OCTOBER 2019): I put together a quick presentation to download to help zoom in on various local recessions since these images show a more panoramic view. Enjoy if you wish.

UNITED STATES:

CALIFORNIA:

SACRAMENTO:

Don’t get too stuck on prices: When we think about a recession, let’s of course watch prices, but the bigger story will likely be found in what happens to the number of sales. Are buyers playing the market or are they backing off? In short, let’s not forget to watch sales volume because we’re so obsessed with prices.

The inverted yield curve (and hesitancy): Lots of people are talking about the inverted yield curve as an indicator of a coming change in the economy. For now I don’t hear buyers saying things like, “Maybe I shouldn’t buy because of the inverted yield curve…” Okay, I’m joking in part because most buyers aren’t going to be making a decision based on this metric. But to be fair there’s been a sincere hesitancy among some buyers because they feel uncertain about what the future market is going to do. By the way, thanks to Alex on Twitter for the “inverted” Top Gun reference. This is golden.

Hype: Everyone has a take right now and there is lots of hype about what the market will or won’t do when a recession hits. Some preach doom and gloom and others are doing their best to paint a rosy view of housing. My advice? Let’s do our best to let the actual market influence what we are saying about the market instead of getting caught up in someone’s talking points or agenda.

Making predictions: There are many predictions about a coming recession, and at some point one will happen. But predicting recession specifics is a bit like predicting housing market specifics. At the end of the day we might have ideas, but we don’t know the exact future until it happens.

I hope this was interesting or helpful.

BIG MARKET UPDATE I’M GIVING: I’ll be giving a deep market update at SAR on September 24th from 10:30-12:00pm. My goal is for everyone to walk away with an understanding of how the market is moving, ways to describe it, and some ideas for business in 2020. Sign up here.

Questions: What has been your experience with real estate and recessions? What are you hearing from buyers and sellers right now? Any stories to share?

If you liked this post, subscribe by email (or RSS). Thanks for being here.

Ryan Lundquist

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