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A high-voltage tower INSIDE the backyard

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Have you ever seen a high-voltage tower INSIDE a backyard? I’ve seen towers behind backyard fences, but never something inside until my appraiser colleague Dawn Foucault shared a couple images of a brand new neighborhood in Sacramento. What the? Can you believe it? Let’s kick around some thoughts.

The PG&E tower is operational AND is located inside the parcel lines of the subject property. By the way, Dawn gave me permission to share these images.

Here’s some initial thoughts on my mind. Anything to add?

1) Surprise: Anyone who works in real estate sees some odd stuff, so I’m not all that surprised at most things. But with so much conversation around the safety of electromagnetic fields in recent years, I’m a bit taken aback to see something like this. I’m sure there is a technical reason why the building department allowed this to happen, but that doesn’t replace my shock. Can you relate?

2) Resale value: Properties like this tend to struggle in the resale market. They might be able to command a decent price when selling directly from the builder, but in the future after the allure of a brand new home has worn off, many buyers will simply pass on properties with adverse or odd issues. This is especially true in markets with higher housing inventory. 

3) True Comps: We can’t assume the house next door is a perfect comp because there is likely a value difference between a property with a high-voltage tower INSIDE the backyard vs being located NEXT DOOR to a tower. In an ideal world we’d find other sales with high-voltage towers inside the backyard (or maybe something equally adverse) to help tell the story of value for the property. In this case there was actually one other sale in the neighborhood a year ago with a backyard tower, so my appraiser friend lucked out to say the least. 

I hope this was interesting or helpful.

Questions: What do you think after seeing these photos? Would you ever buy a house like this? Why or why not? I’d love to hear your take.

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Does paying off Mello Roos early increase value?

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What happens when an owner pays off Mello Roos early? Does that mean the property can sell for more? Let’s talk about that. If you’re not in California, just know Mello Roos are taxes imposed on newly constructed communities to help pay for infrastructure like streets, schools, and parks. So over a period of usually 20 years, the owner might have an extra $1,000 or so in taxes to pay each year.

Scenario: Imagine an owner has $20,000 in Mello Roos taxes over the next 20 years and decides to pay them off right now instead of waiting. Is the house now worth $20,000 more?

Things to consider about value & paying off Mello Roos:

1) Expecting the full $20,000: When sellers do something to their property, they often expect buyers to pick up the tab of whatever the price was. This is true for kitchen remodels, landscaping, bathrooms, and even Mello Roos. In this case the seller would expect a buyer to pay $20,000, but that’s probably not realistic.

2) Logic & 20 years of payments: Buyers often stay in homes for less than 10 years, so it’s unrealistic to think most buyers are going to pay for the future savings of 20 years worth of tax payments in one instant. That’s disappointing to sellers, but doesn’t it make sense? It’s just not logical for someone to fully reimburse the seller for a bill they might not actually be paying for the next 20 years. Side note: This reminds us of solar a bit because buyers probably aren’t going to pay the full cost of the system in one instant either.

3) Comps & adjustments: A property with no Mello Roos payments is going to have a marketing edge at the least because it’s essentially less expensive to buy the house compared to others. At best there could be some value there too, though it’s going to be hard for an appraiser to support a Mello Roos adjustment because it’s not easy to find comps where sellers have paid them off. In an ideal world we’d have three model match sales without Mello Roos so we can analyze whether these homes really sold for more or not. If we don’t have sales, but it seems clear the market is willing to pay more based on the number of offers, price level of offers, feedback from agents, logic, data from other neighborhoods, etc…, we can always look at the range of value in the neighborhood for similar homes and choose to reconcile the subject at a higher tier of value. Thus it’s important to realize appraisers might not always give a specific adjustment, but they can still recognize an asset by reconciling the final value to a higher level (if there is support to do that). It would be nice if there was one quick formula we could apply to spit out a perfect adjustment here, but formulas wouldn’t work in every neighborhood, price range, or market. Like all things in real estate, we have to know how to think through issues and then look to the market for the answers.

I hope this was interesting or helpful.

Questions: Would you recommend paying off Mello Roos? Have you seen a value increase because of Mello Roos being paid off? Anything to add to the conversation?

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How does a reduced agent commission impact the appraisal?

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How does a reduced commission from a real estate agent end up impacting the appraised value? Does it matter? Let’s talk about that.

1) Comps vs contract: We have to remember value is found in the comps rather than the contract price. Thus imagine if both agents gave up their commission because they were feeling generous (and wanted to work for free). Does this mean the subject is now worth 6% less? Not at all because we find value from the comps rather than what the subject property is in contract for.

2) Add back in the reduction: When choosing comps and I read in MLS, “Buyer’s agent reduced commission”, it’s a tell I need to call for more information and find out what went on. In the case to the right the buyer’s agent was the buyer and waived the commission. Being that this $850,000 home sold about 3% lower than other sales, it was prudent for me to give an upward 3% adjustment to account for the commission that normally would’ve been padded into the contract price. Otherwise if I blindly used this comp without accounting for the reality that it closed lower for a reason, I could have undervalued the subject property.

UPDATE: I’ve received some grief from a few appraisers over point #2. Fannie Mae does not allow positive adjustments for concessions (though are my examples financing or sales concessions since the seller really didn’t give anything to the buyer?). Here’s the thing. If a sale legitimately sold too low because the agent waived a commission, appraisers have to consider if there was any impact to the price. Bottom line. I find many agents waive their commissions when they are buyers, so these “comps” may need to be given less weight in the overall value (or maybe adjusted up somehow). Ultimately we have to know the story of the comps so we can tell the story of value for the subject property. Don’t lose sight of that in the midst of my example – even if you disagree with the methodology.

3) No impact: There are times when I read in MLS that one of the agents waived or reduced a commission, but the property really closed right where it should have. In a case like this it can be frustrating that an appraiser doesn’t give an upward adjustment, but there’s not really one to give if the property sold on par with everything else. The truth is some agents who are buyers waive a commission without really getting a price discount. It happens.

4) Rubber stamping: Appraisers have to be cautious to not “rubber stamp” a lower contract price when there is a waived commission on the subject property. For instance, a property was listed around $950,000 and had multiple offers at that level. A cash buyer ended up getting into contract at $900,000. However, the real price would have been $960,000, but the buyer paid $60,000 of commissions and fees outside of escrow so the sales price would be lower (smart move to get a lower tax base). Anyway, as an appraiser I have to be careful to be objective and weigh the market in the comps rather than “rubber stamp” a property like this at the contract price at $900,000.

Advice to real estate agents:

1) Make it clear in MLS: Be clear in MLS when a commission has been waived or reduced. This helps appraisers when they are choosing comps.

2) Tell the story: When you’re talking with appraisers about critical neighborhood sales during a listing, I would definitely recommend pointing out any commission reductions in important comps because at times it’s easy to miss the fine print in MLS about waived commissions. In point #2 above I was appraising something for a cash buyer and I was told, “The buyer’s agent was actually the buyer on the house a few doors down and she waived the commission. You can definitely call to verify.” I appreciated the heads-up – especially since this detail was not in MLS.

I hope that was helpful.

How to Think Like an Appraiser: I’m teaching a class at SAR on May 18th from 9-12pm called How to Think Like an Appraiser. Click here for details.

Questions: What point above stands out to you most? Anything else to add? I’d love to hear your take.

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Cherry-picking comps & being connected to the neighborhood

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On paper it looked like value was going to be so much higher. Why? Because comps to the north were easily 10-20% higher, and even Zillow came in $100,000 above the appraisal (ahem). The big cause of such a legitimately lower appraisal boiled down to one thing. Location. Today I want to show a situation where a small section of the neighborhood was blocked off from the rest, and it was a big deal for value. Have a look below and let me know what you think. Anything to add?

land park neighborhood sacramento

The value issue: As you can see, this pocket of housing in the Land Park neighborhood isn’t accessible from the rest of the neighborhood besides a frontage road next to I-5. In other words, this section is disconnected. What sort of impact is there (if any) for being cut off from the rest of the neighborhood?

land park neighborhood sacramento 3

Methodology when only 5 sales in 5 years: When appraising something in this section, there were zero sales over the past 2 years and otherwise only 5 sales in the previous 5 years. This means I had to really study older sales to understand how value works. Here are the five sales:

land park neighborhood sacramento 4

What I ended up doing was comparing sales in this small pocket with similar sales at the same time in other areas of Land Park. Also, my goal was to find other patches of housing in the expanded neighborhood that seemed to sell at the same level. If I could find other areas selling at similar price points through the years, then current sales in those areas are probably my best comps for today.

land park neighborhood sacramento 5

land park neighborhood sacramento 6

Conclusions: After looking through all five sales I observed the following:

1) Some of the lowest prices: This small housing patch has some of the lowest prices in the neighborhood as shown with the yellow dots in the graph below.

Land Park trends by Sac Appraisal Blog

2) 10-20%+ easily: If I were to cherry pick “comps” directly to the north, there is easily a 10-20%+ price difference for otherwise similar houses. The truth? Location matters. So does being connected to the rest of the neighborhood. In some cases a few streets that are disconnected might not sell differently than the rest of the market, but it could also be a big deal like the example above. The truth is if we cherry-picked nearby higher sales, the value would’ve been inflated by $60-80K+. 

3) Limited by 90 days: It’s tempting to only look at the past 90 days of sales, but that can be far too limiting – especially in a situation like this. Also, a 5-minute comp check isn’t realistic. At times we might spend hours researching before beginning to understand how the immediate neighborhood compares to the rest of the market. We might even call colleagues and seek out other opinions too.

4) True comps: Other patches of housing in Land Park that tended to command similar prices were very busy streets or homes having a huge influence from nearby commercial properties (or heavy fixers that would have otherwise sold at much higher levels in average condition). I don’t say this to be negative about any of Land Park, but only to be objective as an appraiser trying to explain how value works in some areas compared to others.

I hope that was helpful.

Two classes I’m teaching in May: By the way, I’m teaching a class at SAR in a few weeks called How to Think Like an Appraiser. I’m also doing a blogging class. Click here for details.

Presentations - sm

Questions: What point above stands out to you most? Anything else to add? I’d love to hear your take.

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