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How much is that new roof & AC unit worth?

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“I paid $25,000 for a new roof and AC unit. How much is that worth in an appraisal?” I get questions like this all the time and my answer can be frustrating as I say, “It depends.” Here’s my thought process though and why I can’t just rattle off a quick number. Anything to add?

The full amount: A new roof and AC unit are costly, and sellers often want to pass on the full cost to buyers. The idea is, “Hey, I spent twenty five grand, so the buyer is going to reimburse me.” But cost doesn’t always equal value, and it’s not so common for buyers to pay “dollar for dollar” either.

Boring & bling: A roof and AC unit are definitely important, but they’re sort of boring maintenance items instead of bling. What I mean is buyers don’t tend to visit a property and say, “Oh my gosh, did you see that epic new roof? I’m in love.” Nope, they tend to be more impressed with the latest trendy features instead of the age of the roof or AC unit.

Bare minimum: Buyers expect a working roof and AC unit as a minimum. Lenders definitely expect a roof with a minimum of two years of life also. This is why buyers aren’t always willing to pay big bucks for these features because on some level they simply expect them to be adequate already.

Long-term improvements: A roof and AC unit are going to be an advantage for decades, but a buyer might only be in a house for 10 years. So it probably doesn’t make logical sense to pay for the benefit of the entire lifespan of these items in one instance. In other words, the seller has added marathon improvements, but buyers may not pay that during their sprint to purchase.

Location: An AC unit in Antarctica probably isn’t too valuable, so on some level we have to consider location. On a related note, the higher-end of the price market might react differently compared to the lower end of the market. The truth is buyers in some locations or price points are going to be more informed or picky about certain features. Let’s remember energy efficiency can be a factor here too in light of extra savings.

The comps: At the end of the day we have to look to the market for the answers. I tend to consider all the things above, but I also have to be careful not to impose any of my general thinking on the appraisal. Here’s the key. What have buyers been paying for these features? As we look at comps, what seems to be a reasonable amount that buyers would pay? Let’s study comps to begin to get clues about value. 

I know, I didn’t actually answer the question. But that’s not my goal here. My goal is to highlight some important thinking as we try to find the answer.

I hope that was helpful or interesting.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on May 28th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: What point stands out to you the most? Anything to add?

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It might not be an appraiser at the inspection due to new “hybrid” appraisals

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It’s happening. It might not be an appraiser who shows up for the appraisal inspection. I’ve been talking about the potential of “hybrid” valuations like this, and now they’re here.

The gist is somebody besides the appraiser inspects the property and then gives the inspection details to the appraiser to do the “value part” (without seeing the property). Last week Chris Little, a Realtor friend, was talking to me about his first experience with a non-appraiser inspecting one of his listings, so I asked him some questions.

Ryan: What gave it away that this person wasn’t an appraiser? 

Chris: When he called and asked for an appointment to access the property he identified himself as a property inspector working on the appraisal. I asked if he had a lockbox key (every appraiser I know has one) and he said he did not. We agreed to meet at the property. At the house he gave me his card which said he was a project manager for a company in upstate New York. There was no mention of appraiser on his card.

Ryan: What did the inspector do at the house? Did he measure it?

Chris: He came in and took a bunch of photographs which he said he would upload to their portal so the appraiser could look at them. He went outside and measured the home.

Ryan: What price was this house? 

Chris: The home was listed in the low $800,000’s. The buyers sold their former home and were renting on a short term basis. They were putting down 55% of the purchase price.

Ryan: Did the inspector say he would pass along information you gave?

Chris: Yes, he asked a few questions and said he would include that in his report.

Ryan: What are your concerns about this new process?

Chris: My overarching concern is the validity of the “appraisal.” The buyer was charged less than a traditional appraisal and in my view received less. The proper valuation of a property is essential for many reasons. Inaccurate or incomplete information can effect value and that can effect a transaction, both during the transaction and later on if there is ever a question about value resulting from loss bankruptcy, foreclosure.

Ryan: Anything else to add?

Chris: In my view, this “hybrid” appraisal is meant to streamline the lending process yet puts homeowners and lenders at risk. I don’t think there is a lender out there who would use a discount Cardiologist or Oncologist if they had heart problems or cancer. Why would you underwrite a loan based on an unlicensed individual snapping pictures and taking measurements? One thing that particularly concerned me about the house in question was at almost 4,900 square feet it was more than twice as large as any other home so developing comps would take someone with real knowledge of the market to develop the appropriate value. This unusual Sacramento home doesn’t seem like a good fit for a watered-down process like this.

Ryan: Thanks so much for your time Chris. 

Now a few quick things.

MY CLOSING THOUGHTS:

1) This is a move that diminishes the role appraisers play in the housing market for the sake of so-called convenience. Banks are saying, “Don’t worry. Trust us. It’s all good…” While there is a place for big data in real estate, let’s not forget the crucial role appraisers play as a systems of checks and balances. Do we really trust banks to do the right thing?

2) Value isn’t just about size or bedroom and bathroom count. There is so much more an appraiser observes while walking through a house and talking with the agent. To be fair it seems like this would less of an issue on a cookie cutter house, but on something unique it could be a disaster waiting to happen.

3) If the inspector does not have adequate training, there could be a legitimate issue measuring the house accurately (and we know how important that is).

4) Could this become risky for the rest of the market if inflated appraisal waiver or “hybrid” sales become the new comps? 

Communication advice for Realtors: It’s going to be key to ask for a business card and be sure you know who you are talking to. My advice? Show up with my appraiser info sheet filled out so an “inspector” can hopefully pass along relevant details to the appraiser. Remember though, the appraiser is getting paid very little do this type of report (I hear $100 to $150), so the “hybrid” system is not designed to encourage appraisers to spend lots of time on the appraisal… 

I hope that was helpful or interesting.

Questions: What do you think of “hybrid” valuations? What are the positives and negatives? Any stories to share?

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Tips for choosing comps on a unique home (straw-bale house)

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It almost sounds like the big bad wolf story, but there really are homes built from straw. Literally. Today I want to mention a few things about this type of construction, share some photos of a local straw-bale house, and then talk briefly about how I approached appraising this one.

What’s a straw-bale house? It’s a type of construction that uses stacked bales of straw for the exterior walls. I know, it sounds really cheap, but check out the pictures. The exterior usually has stucco or plaster, so unless you knew where to look, you probably wouldn’t even know about the bales. Read more here.

Thank you Realtor Steve Evans for permission to share these photos.

Truth window: This is a truth window on the inside of the house. It’s basically a way for the builder to prove the house was indeed made from bales of straw. Of course the walls are also two feet thick, which is also a clue. 

Energy efficiency: These types of homes are incredibly energy-efficient, so beyond their aesthetic we have to consider the savings in energy here too. By the way, I’m not aware of any other straw-bale homes in Sacramento County, so speak up if you know of something.

I loved seeing this house in person. I hope you enjoyed the photos.

How the “hay” do we value something like this? (sorry)

Here’s some things I kept in mind during my appraisal. By the way, my appraisal was done for the owner prior to the property listing on the market.

1) Three model match straw-bale comps: In an ideal world we’d have other straw-bale homes for comparison. That might be more realistic in outlying rural areas where this type of construction is a little more common, but not so much for the ‘burbs. In short, I studied some other sales in outlying areas, but they really weren’t similar enough to justify using them as comps.

2) Too unique or not: One of the things I like to keep in mind is whether there is a market or not for a unique home. In this case the house had vibe and there was a good chance the market was going to respond positively to the Southwestern feel. In my mind this property really just felt more like a custom home rather than something a particular owner built that nobody else would want. By the way, here’s a local house called “The Shipwreck House.” Is there a huge market for something like this?

3) Location, location, location: I gave strong weight to the actual location of the house in the 95841 zip code. I asked myself what would be a reasonable price for a custom and unique home of this size for the location (it was on 0.55 acres too, which helped).

4) Other unique homes: I didn’t have other straw-bale comps in the local market, but I did consider other interesting properties. In fact, some Realtor friends on Facebook definitely came through in pointing me toward adobe homes and ICF block homes. One of the strongest comps in my mind was this house below that was located three miles away in a different zip code.

5) Price position in the market: When something is unique I consider all neighborhood sales, anything that is remotely comparable, and definitely where the top and bottom of the price market is. Then I ask a big question. Where does the subject property fit in the context of the price market? 

I hope that was helpful or interesting.

Questions: What do you think of this house? Any other tips? Any stories about when you valued (or listed) a unique home?

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The problem of giving too much weight to previous sales (or not enough)

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It must be worth more than it sold for in the past, right? In many cases, YES. But sometimes NO. Let’s talk through some things to consider when pulling comps and noticing a previous sale. I find many of these points coming up lately in conversation, so I hope this is helpful.

Here’s some things I keep in mind about previous sales:

1) Context: Previous sales can be powerful sometimes because they help us see how a property has historically fit into the market. In other words, we get to see context. What were the comps at the time of the sale? Here’s an example where a home sold three times at a very similar price position in the market. When I see something like this I can get clues into comps and where this one might fit into the market today. Click thumbnail to see larger image.

2) Unique property: Sometimes when a property is unique though a buyer might have been willing to pay more than what current buyers will pay. Thus a prior sale doesn’t always paint the perfect picture for value. For example, a home in Granite Bay sold for $4.7M in 2013 and then $4.2M in 2018 despite the market showing hefty increases over the years. Thus we have to be careful not to give too much weight to a previous sale while ignoring current comps.

3) Unicorn buyer overpaid: Buyers overpay sometimes – especially if they’re paying cash. I can think of a property that sold at a lofty level a few years back and it’s been re-listed for a while now without any bites. In this case I wouldn’t give any real weight to the previous sale because it looks like it represented a unicorn buyer at the time rather than the market.

4) Appraisal waivers: One thing I’m watching is appraisal waivers. If there was no appraisal on a property and it ended up selling too high, the previous sale likely means very little for value.

5) Inflated & distressed: When a sale took place in an inflated market (like 2005) or a distressed market (like 2007-2009), I tend to give very little weight to these sales. I’m going to look at them and probably even graph them, but I might take them with a major grain of salt.

6) Neighborhood change: One of the things we need to consider is how neighborhoods have changed over time. In other words, it’s possible the market would look at a property differently today than the past. This is especially true with gentrifying neighborhoods, so I better be careful about giving too much weight to older sales.

7) Slower market: Previous sales sometimes remind us the market is slower. I find owners today often expect massive value increases from two years ago, but comps might not be astronomically higher since price appreciation has been slowing. We just haven’t had recent 20% increases like we did in 2013.

8) Not penalizing because it sold too low: If a property sold too low in the past, it shouldn’t penalize the value for today. This is why appraisers have to take a previous sale with a grain of salt and not give too much weight to it. Let’s remember value is found in the comps – not in a previous sale.

CLOSING ADVICE: I recommend paying close attention to previous sales to get clues to understand how a property fits into the market. But don’t get so stuck that you don’t see the most important thing – current comps.

VIDEOS: If you need some background noise, here’s two videos. The first is a presentation to Realtors and the second is a Q&A after a talk I gave to investors.

10 things to tell your clients about the market (or not) – 30 min
Q&A after a presentation I did to investors – 20 min

Questions: What point stands out to you the most? Anything to add?

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