Sacramento Appraisal Blog | Real Estate Appraiser

Real estate appraisals for divorce, estate settlement, loans, property tax appeal, pre-listing and more. We cover Sacramento, Placer and Yolo County. We're professional, courteous and timely.

Appraisal Stuff

The danger of overpricing & chasing real estate unicorns

By 22 Comments

Overpricing. It happens all the time in real estate – especially in today’s market. I get where sellers are coming from because we’ve had so much glowing real estate news for more than five years. But that doesn’t mean we’re in a market where you can command whatever price you want. 

Chasing the unicorn: Many sellers are pricing their properties too high. It’s as if they expect record-breaking prices and multiple offers every time because of how “hot” the market is. Homeowners get so fixated on the idea of a fiery market that they price for that one unicorn buyer who’s going to mysteriously pay more than anyone else. This “unicorn” will ignore all recent sales and listings and magically offer 10% higher than anything. In Sacramento the idea is a Bay Area “unicorn” will swoop in with fat stacks of cash and totally ignore similar comps that are selling for less. It’s nice when sellers get lucky like that, but in today’s market buyers are actually much more finicky about price. Despite a legitimate housing shortage we don’t have a market where buyers are willing to pay crazy prices that are totally disconnected from reality. In other words, we don’t have a market where pricing for the “unicorn” makes good sense (unless you want to sit on the market instead of sell). Take a look at the image below that shows price reductions over the past 24 hours in the Sacramento region. These 78 properties have been priced too high for the market.

My advice? Price for the real market instead of the unicorn. Give the most weight to similar sales and similar listings that are actually getting into contract.

Aspirational pricing: If you aren’t familiar with the term aspirational pricing, Jonathan Miller coined this phrase. It’s a great way to describe the phenomenon of sellers fixating on prices that are simply disconnected from the real market.

10 reasons why sellers overprice:

1) Hot headlines are imposed on the price instead of looking at comps. 

2) Dissimilar sales are used as “comps” to price the home.

3) Too much emphasis is put on price per sq ft instead of actual comps.

4) A property is priced like it doesn’t have a busy street or adverse location.

5) Sales from a higher-priced area are “cherry-picked” to price the property.

6) The seller is too subjective and feels “my house is better.”

7) The owner believes the cost of any upgrades should be paid for by buyers.

8) A more aggressive trend from a lower price range is assumed to be present at a higher price range.

9) It’s a tricky property and not easy to come up with a price.

10) What else?

My article in Comstock’s: By the way, I wrote an article in Comstock’s Magazine this month on the value of upgrades. Check it out if you want.

I hope this was interesting or helpful.

Questions: Are you seeing sellers price for “unicorns”? What reasons do you think sellers overprice? Did I miss something?

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

That place where fame & real estate meet

By 12 Comments

How does fame impact a home? Does it matter for value if a famous person lived there? What if something notorious happened at the property? Let’s talk about this and consider a few examples. Please note there are entire books written on this subject, so don’t expect an exhaustive dissertation here. Any thoughts? I’d love to hear your take in the comments.

Here are a few examples:

Breaking Bad: The house where the TV series Breaking Bad was filmed was all over the news last month because the owner is building a 6′ front yard fence to keep people out of her yard. According to Albuquerque KOB4 there is a constant stream of visitors and fans have even thrown pizzas on the roof to reenact the main character Walter White doing so in an episode. The owner is clearly not thrilled, and I can’t imagine neighbors are either unless they can somehow monetize the situation.

Kurt Cobain’s Baby House: Brandon Turner at Bigger Pockets is an investor and he accidentally bought a home where Kurt Cobain lived as a baby. The duplex was purchased as an investment without any knowledge of the lead singer of Nirvana’s connection to the property. But tenants began complaining about photos being taken of the front of the house, and that’s how the connection was discovered.

The Almost Governor’s Mansion in California: The State of California built a Governor’s mansion in the 1970s in Carmichael, which is about 10 miles from Downtown Sacramento. This mansion began construction under Governor Ronald Reagan’s leadership, but it was not completed until Jerry Brown took office. Brown actually refused to live in this house, which he dubbed “The Taj Mahal”. This home sold for 4.1M in 2004 and has 8 bedrooms, 8 bathrooms and is 11,984 sq ft. The mansion is still there today, but some of the site has been subdivided for a few custom homes. This is literally one of a few residential homes EVER in Sacramento County that sold above $4M.

Reagan House in the Fab 40s Neighborhood: Governor Ronald Reagan and his family chose not to live in the old Governor’s mansion in Downtown Sacramento back in the 70s, so they moved to East Sacramento on 45th Street to lease a home in the “Fabulous 40s” neighborhood. The home boasted over 6,000 square feet with six bedrooms and four bathrooms (according to Tax Records). The home last recorded for $1,765,000 in May 2000. Not everyone can say, “The future President used to live here when he was Governor”. Do you think that matters for value?

Here’s a look at the price point of the Reagan house. What do you see?

Homicidal Handyman House: There is a property in Oak Park where a serial killer dubbed “The Homicidal Handyman” murdered someone in the later 80s. This property was purchased last year by an investor and I’m waiting to see if it comes on the market (it has a choice location). This murder occurred about 30 years ago though, and the reality is that stigma associated with gruesome crimes fades over time. In other words, it might be a big deal for value to buy a property right after a murder, but much less of an issue if the crime occurred 30 years ago. I observed a recent murder property in the Sacramento market and in this case there was a 5-10% hit on value, though it might not have been an issue at all had the murder taken place 30 years ago instead of recently. Architectural Digest actually did a great piece on stigma recently and I was pleased to see they interviewed Jonathan Miller.

Dorothea Puente Murder House: Seven bodies were discovered at a duplex on F St in Sacramento in the late 80s compliments of Dorothea Puente. She lured victims to her “boarding” home, drugged and buried them, and then cashed their social security checks. This Victorian duplex has some charm as you can see, but it definitely has a dark history too. There was a documentary made about this house in 2015 and the owner has even given tours through the years too. This just goes to show it may be possible to monetize a famous house. Though in this case the owner has donated tour proceeds toward organizations working to alleviate homelessness (way to go).

Here’s a sales history of the Puente duplex. What do you see?

Lady Bird House: A recent movie called Lady Bird is set in Sacramento and had some filming done in the city too. Here is the front of one of the home’s shown in the movie (located in Fab 40s). This was not the main character’s dwelling, so it may not attract much of a following, though it’ll be interesting to see if people snap selfies here. For reference, the San Francisco Chronicle shared Lady Bird filming locations so fans can visit. In this case the owner probably has some bragging rights to say, “My home was in Lady Bird”, and I’d imagine any future listing would mention this fact. But will the market as a whole pay more for a house like this because it had a minor role in a movie? I’ll give you my opinion in the comments if you give me yours.
 
And here’s my Lady Bird selfie.  🙂
 
Closing thoughts: It seems like fame can either be good or bad when it comes to real estate values. If a house is famous for something gruesome, it could easily harm value (duh). But part of it depends on how long ago a crime occurred. On the other hand if a home is historically important, it could be a huge bonus for value (duh again). Yet fame can come at a cost too by increasing foot traffic and looky-loos. Would an owner have to disclose the stream of unwanted visitors to potential buyers? Could this potentially limit marketability? Could it impact rental value if there were camera flashes happening at night? Would tenants get fed up over time? These are important questions to ask. Lastly, we would be wise to not overthink a property’s value that had “15 minutes of fame” so to speak. Thus just because a home had a cameo in a movie or was previously owned by someone famous does not mean at the end of the day the market is going to pay anything more for the property. It’s true certain fans might offer more for a particular home owned by a celebrity or athlete, but what would the market as a whole pay? That’s always the bigger question. 
 

Think Like an Appraiser Class (I’m teaching): By the way, I’m doing my favorite class on Dec 7 from 9am-12pm called How to Think Like an Appraiser. We’ll talk through comp selection, making adjustments, tips for talking about value, and what to do in various scenarios. Details here.

Questions: Would you buy a house that was famous in a movie or owned by someone famous? Why or why not? Have you seen any measurable impact to value for a celebrity property? I’d love to hear your take.

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

When a home is almost three bedrooms (but technically only two)

By 16 Comments

Imagine a house that used to be three bedrooms until the owner converted one room into a den. Is there a big hit to value now? Will the appraiser only give credit for two bedrooms? Let’s consider some thoughts below. Anything to add?

1) Big deal for value: First off, there can be a huge difference in value between a property that has three full bedrooms and one that only has two bedrooms with no other space that could possibly be used as a bedroom (such as a den). A three-bedroom unit simply has more utility and marketability, so when appraising a classic two-bedroom property I definitely want to take an “apples to apples” approach in my comp selection by finding other two-bedroom homes since those ones are most similar in appeal.

2) Buyers see the bigger picture: Sometimes we see homes that technically only have two bedrooms because a buyer selected a builder’s “den option” or maybe a seller removed a closet in the third bedroom. We’d be right to classify these homes as 2-bedroom properties, but at the same time my sense is if there’s an extra den or office that can be easily converted to a bedroom, buyers see the bigger picture of the house without getting too stuck on one less closet. Thus we can probably compare a house like this with other three-bedroom homes more than classic two-bedroom homes. Though we have to consider any impact to value for the lack of a closet.

EXAMPLE 1: A seller closed up a bedroom closet to use the space as an office and is now concerned an appraiser is not going to give him credit for the extra “bedroom.” Since there isn’t a closet, an appraiser will likely label the home as two bedrooms, BUT the appraiser will also recognize the house can very easily have an extra bedroom with the addition of a closet. Since the house is so much closer to being a three-bedroom home, it would be very limiting to only use classic 2-bedroom comps (see #3 below too). In other words, buyers see the big picture of a house and they probably aren’t going to expect a massive price reduction over one simple closet being removed.

EXAMPLE 2: I was asked how to value a 2-bedroom house that was close to 3000 sq ft and there were no other “comps” that size with only two bedrooms. But the thing is this house had extra space that could easily be converted to a third and fourth bedroom with the addition of closets. In situations like this it’s so easy to get locked into a rigid comp search and only look at two-bedroom homes. I’m a big fan of “apples to apples” where possible, but sometimes we have to step back and look at properties like buyers do. In this case there were multiple offers on the home because buyers were seeing the bigger picture of value rather than getting wrapped up in two closets missing. It’s possible this home could still sell at a discount, but let’s not start comparing it with significantly smaller two-bedroom “comps” either because that’s not what buyers are doing.

3) Logic and adjustments: Whenever we see a difference in bedroom count it’s easy to give a canned value adjustment. So without any research we hear, “The value difference between a 2-bedroom and 3-bedroom home is $20,000.” Okay, maybe that number works sometimes, but let’s step back and think like logical buyers. If looking at a home that has a den option that is otherwise similar to a traditional bedroom, it might cost around $2,000 to add a closet. In a situation like this does it really make logical sense to give a $20,000 negative adjustment? In other words, would buyers truly penalize a property at $20,000 because there is technically no closet? I would venture to say most buyers are probably not going to expect a huge price discount for such a minor cost-to-cure.

4) The market might not care: Sometimes the market doesn’t show much of a price impact for only having two bedrooms. We see this in 55+ communities, but we might also see it with architecturally interesting properties where prospective buyers might not need extra bedrooms. This is a good reminder to step back from being trigger-happy about giving the same value adjustment since the market doesn’t always make an adjustment.

5) Pro tip on downsizing: I recommend not turning a 3-bedroom to a 2-bedroom house. I see this happen when an owner wants a larger master bedroom, but it’s a quick way to lose marketability (and maybe value).

I hope this was helpful or interesting.

Think Like an Appraiser Class (I’m teaching): By the way, I’m doing my favorite class on Dec 7 from 9am-12pm called How to Think Like an Appraiser. We’ll talk through comp selection, making adjustments, tips for talking about value, and what to do in various scenarios. Details here.

Questions: What is #6? Do you have any stories or examples to share about the value difference (or lack thereof) between bedrooms? Anything else to add?

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

Two questions to ask about permits

By 14 Comments

I delivered bad news recently. Well, it was helpful news for the buyer, but maybe bad news for the seller. There was a 700 sq ft home addition that turned out not to be permitted as living area, and I was the guy to let everyone know. Oh dang!! Let’s talk about this and highlight two important things about permits. 

Two things to consider with permits:

1) Signed off: It’s one thing if a permit was pulled, but the most important thing is that it was finaled. If a permit is not finaled, it’s sort of like getting a marriage license from City Hall but not actually getting married. The thing is the marriage license is only the beginning of the process, and it means very little by itself unless it results in a marriage ceremony. The same thing is true with permits in real estate. The beginning part of getting a permit matters, but unless the permit is actually signed off at the end, then the act of pulling a permit means very little. Thus when someone says, “We pulled a permit,” a good follow-up question might be, “When was the permit finaled?”

2) Getting specific: In the situation above there was one big problem. The large addition was basically an attic conversion on the third floor, and it was only permitted as storage in the eyes of the county – not as living area. This reminds us that sometimes after being told an area is permitted, we might consider asking a clarifying question, “What was it permitted as?” After all, it can be technically correct to say an area was permitted, but was it permitted for the actual use it’s being said to have been permitted for? That’s the real issue. 

Appraisers and non-permitted areas: There are times when appraisers might include non-permitted areas in the value, but there is no one rule for appraisers to apply in all cases because each situation is different. Though my sense is when an area is very large most appraisers probably won’t include it in the square footage because it hasn’t gone through the most basic process of becoming legitimate in the eyes of the building department. In other words, it’s one thing to include a non-permitted covered patio in the value because that’s pretty minor and so common in many markets, but it’s another thing to include an addition that represents 20% of the total square footage of a house. You can read more about the problem of non-permitted additions here.

I hope this was helpful or interesting.

Questions: What is a third thing to consider when it comes to permits? Any stories or wisdom to share? Anything else to add?

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