An open letter to buyers in an aggressive market

Dear Buyers,

Yesterday I talked with a few buyers who are in the trenches of the market. One is feeling frustrated at not getting offers accepted, and the other is starting to feel like affordability is beginning to vanish. I was actually taken aback with the sense of hopelessness felt by the latter individual, so I wanted to share some perspective as an appraiser when it comes to making offers in an aggressive-feeling market. Whether you are in Sacramento or elsewhere, I hope this helps. Any thoughts?

40519811 - empty notebook and pen on table

Advice for buyers in an aggressive market:

1. Shop below your price range: We are in a market where multiple offers are commonplace in many price ranges and neighborhoods. This means if you are qualified up to $300,000 and money is tight, you might want to consider homes that are priced $270,000 to $300,000 instead of just $299,000. This allows you some space in case there is a bidding war.

2. Expect to get beat: Sorry to be a downer, but you probably aren’t going to get into contract on the first home you offer on. Remember, real estate is a bit like dating. You often don’t marry the first person you go out with. So take heart and expect you’ll submit many offers until something sticks.

3. Know when listings usually hit the market: There is a season in real estate, just like there is a season for baseball, weather, or elections. It’s true inventory is sparse, but it’s also true listings don’t start to hit their stride until March through August. Sometimes February will be a stronger than usual month, but we still don’t see the bulk of what’s going to hit the market until May through July / August. If you don’t believe me, look at the light green listings below over the past few years. In short, don’t freak out in February if there isn’t much on the market. 

listings in sacramento - sacramento appraisal blog

4. Don’t let sensational headlines stress you out: Headlines these days often talk about how hot the market is, but my advice would be to read stories carefully and ask a few real estate professionals what they think too. For instance, one headline says “Sacramento will be one of the hottest markets in the nation” as values are projected to increase by 7% in 2017. This one story has seriously saturated the market and I’m hearing this sentence about everywhere I go. The irony though is a 7% price increase is about what happened in 2016, which means the headline could have just as easily said, “The market looks like it’ll do about the same thing this year.” I don’t say this to gloss over how competitive the market is, but only to highlight we need to read articles carefully and think critically rather than immediately stress out.

5. Don’t mistake low-ball pricing for the market: Some properties are attracting 15-20 offers, but my sense is when that happens it’s usually more about low pricing than the actual market. This week I saw a property listed at $290,000 that probably should have been listed at $350,000. We can look at the 15 offers and bemoan how intense it is out there or we can realize this one was priced ridiculously low.

6. Be careful of bidding up to “no man’s land”: While it’s plausible to think the contract price might get pushed up a bit with multiple offers, don’t forget to be realistic about what the home is actually worth. If you know you don’t have cash to pay for the difference between a realistic appraised value and the contract price, you might not want to offer that high then. Somehow you’re going to need to stand out as a buyer to the seller, but an unrealistic offer well beyond a reasonable value probably isn’t going to help you in the long run.

7. Realize cash doesn’t always win: There is a false idea that cash investors from the Bay Area are beating out financed buyers all the time – especially those bringing very little money to the table. The truth is 1 in 4 sales last year in Sacramento County were FHA buyers who put down 3.5% (or less if they used down-payment assistance). Keep in mind only 14% of all sales were cash during this same time. Moreover, 27.4% of all sales under $500,000 had FHA loans in 2016 in Sacramento County.

8. Find a way to stand out: There could be multiple offers, so you need to figure out a way to stand out and make a positive impression on the seller. Of course the strength of your offer is the first place to start, but beyond that find a way to make an emotional connection with the seller too if possible. I might recommend brainstorming ideas with your agent. When my wife and I bought a house a couple of years ago there was actually a higher offer on the property, but the seller accepted our offer instead. When touring the home we were fortunate to meet the seller and we hit it off a bit. During the conversation the seller mentioned her son was going to start at a new private school. Anyway, when we submitted the offer we wrote a personal letter complimenting the house and reminding the seller who we were. We also looked up the school and found it was $1400 per month. We then wrote in our offer we were going to give the seller an extra $1400 at the close of escrow to help pay for her son’s school (The underwriter actually freaked out because she’d never seen a buyer do that). I’m not saying you need to do something like this, but in our case it definitely made a huge impression. It showed that we listened, we truly cared, and we were very serious about the home. 

9. Listen to your agent: You probably know the market pretty well by now because you’re scouring listings in an obsessive compulsive way on Redfin, Zillow, and MLS. This also means you are most likely going to find your eventual home before your agent does. That’s how it works these days. Just remember finding the home is the easy part, but the most important thing your agent can do for you is negotiate on your behalf and offer professional guidance and advice along the way. Will you listen?

I hope this was helpful.

Sincerely,

Ryan

Questions: What piece of advice resonates with you? What is #10? Did I miss something? I’d love to hear your take.

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Trends to watch in real estate in 2017

What’s the real estate market going to do this year? I thought it would be worthwhile to consider some of the emerging trends to watch in 2017 in Sacramento and beyond. What do you think? I’d love to hear your take in the comments.

real-estate-market-in-2017-sacramento-appraisal-blog

1) Bubble conversations: This year we are going to have even more real estate “bubble” conversations. We’ll hear things like, “The bubble is going to pop in 2017”, or “Get ready for 2007 again”, or “It’s all going to crumble after this year.” As these conversations ensue, my advice is to sift through the headlines, pay close attention to actual data, know the limitations of your ability to predict the future, and be in tune with the way the seasonal market tends to behave so you can spot anything out-of-the-ordinary.

2) Creative lending: As interest rates presumably rise in coming time, it will make mortgages more expensive (duh). This won’t matter for some buyers because they have the money to afford the market, but others will need an extra edge to keep up with higher prices. This is where lenders can loosen up financing options so they continue to close deals and make as much money as possible (sounds healthy, right?). Keep in mind President-Elect Trump is talking about repealing Dodd-Frank too, and that could create waves in the market if it actually happened. 

values-in-real-estate-sacramento-appraisal-blog-image-purchased-and-used-with-permission-from-123rf3) Housing inventory remains low: There isn’t any quick fix for anemic housing inventory, so we can expect to see another year of low inventory unless something drastic happens causing sellers to list their homes. That brings me to share something I talked about last month. In a video John Wake talks about San Francisco values and how sellers tend to wait to list their homes when values are increasing. The thought is, why list now when values are going to be higher next year? But then when values do eventually turn there can be a flood of houses hit the market as a “race to the exit”. That’s something to keep in mind.

4) Marijuana: It can be polarizing to talk about marijuana, but it’s definitely a market force since it is now legal in California for recreational use. Over the next year many cities and counties will be fine-tuning rules for grow operations, so be on the lookout for details. By no means am I glorifying marijuana, but I will be talking about it in coming years because it’s a force bound to impact real estate values. 

5) Smart homes: With the advent of Amazon Echo and Google Home, consumers can now say things like, “Alexa, set the sprinklers for 7am tomorrow morning” or “Okay Google, turn the temperature to 68 degrees.” The huge popularity of these devices during the holiday season will only mean millions more households are now going to be making their homes more digitally connected.

finding-cheap-properties-image-purchased-by-sacramento-appraisal-blog-from-123rt-dot-com6) Disappearance of the $100,000 market: There is definitely upward value pressure on the lowest end of the price spectrum. Other price ranges last year were much more flat, but not so much with the lowest prices in town. This year in Sacramento we are going to very likely see the disappearance of the market under $100,000. Each month lately we’ve had maybe 6-12 sales under $100,000 for single family detached homes, and after the next few quarters I expect that number might be down to zero. We shall see though.

7) Home flipping courses: There will be no shortage of “learn to flip” courses coming to a city near you. Friends, be very cautious about paying anyone to teach you “secrets” you can probably get for free online. You can read my open letter to celebrity flippers for more thoughts.

8) Custom woodworking: I’ve been seeing more and more custom woodworking in homes. I don’t mean really high-end craftsmanship per se, but rather the cool DIY stuff you might see on Pinterest or a show like Fixer Upper. I’m seeing more wood walls, large wood slabs, custom exterior wood accents on the exterior, etc…. As a dabbling woodworker, this makes me smile.

9) More agents will enter the market: When values increase and positive real estate news saturates the market, it tends to compel people to enter the real estate profession. So last month’s headline that Sacramento will be one of the “hottest market in the nation” in 2017 very likely sealed the deal for a number of folks on the fence about getting into real estate. 

real-estate-contracts-multiple-offers-in-sacramento-appraisal-blog10) Multiple offers: We are likely to continue to see a climate of multiple offers in the Sacramento area. In a market like this I would advise sellers to be realistic about pricing their homes properly. What have similar homes actually sold for? What is similar and getting into contract right now? It’s easy to cherry-pick the highest non-similar sales in the neighborhood because “the market is hot”, but we have to remember similar homes are the “comps” appraisers are going to use (key point). At the end of the day appraisers have to support the value, so it may be best to be reasonable on the front end rather than run into all sorts of “appraisal issues” because the property got into contract too high. Remember, just because housing inventory is low does not mean you can command whatever price you want. That may have been more true in early 2013, but it’s not true right now.

11) The 2-4 unit market is heating up: These days in many areas it seems like the market is heating up with some surprisingly high prices again for 2-4 unit properties. Values were subdued for years after the housing crash, but news of increasing rents is certainly part of what’s helping drive 2-4 unit prices up. I’ve also observed some Bay Area buyers wanting to park money in Sacramento and overpay. Sometimes unrealistic cap rates are being used to justify value too (more on that in a few weeks maybe).

12) Appraisal waivers: Last month Fannie Mae rolled out an appraisal waiver program. They say this program is only for refinances, but it’s a pretty good guess we’re going to see some purchases waived too. On one hand this program can help offset slower turn-times by appraisers lately, but on the negative side of things it can lead to inflating values too. In short, let’s watch this closely and not forget important safeguards in real estate (like appraisers).

BONUS: This is a quick (well, 12 minutes) walk through what it looks like to see the seasonal trend in real estate and what it was like when values began to decline in 2005. With so much “bubble” talk these days, it’s critical to be able to cut through any hype, focus on data, and be able to spot seasonal trends (and non-seasonal trends). Watch below (or here):

I hope that was helpful or interesting.

Questions: What else do you think will be important in 2017? Did I miss something? I’d love to hear your take.

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Big demand and the force of FHA in Sacramento’s housing market

Big demand. Big FHA. Let’s talk the latest housing trends in Sacramento. If you’re local, my goal is to give you 10 quick talking points to share with clients. If you’re not local, what are you seeing in your area?

Two ways to read my big monthly market post:

  1. Scan the talking points and graphs quickly.
  2. Grab a cup of coffee and spend a few minutes digesting what is here.

star-wars-real-estate-photo-by-sacramento-appraisal-blog-530

One Paragraph to Describe the Sacramento Market: This year the market feels much stronger than it did last year at the same time. Values have not skyrocketed like they did a few years ago, but there has been somewhat of a desperation among buyers to get into contract before interest rates and/or values rise much more. This has made for an environment where multiple offers have been commonplace (at least for properties that are priced correctly and in average condition). Housing inventory did increase slightly last month, and we are starting to see slightly more price reductions, but demand is still “off the charts” in that pendings are a good 20% higher than one year ago. Regional prices have seen an uptick these past few months, and sales volume is 7% higher so far this year compared to last year. We all know low interest rates and sparse inventory have been driving the market, but having such a huge percentage of escrows going FHA has also boosted sales figures. Remember that many FHA buyers are not putting much “skin in the game” so to speak, and at times they tend to offer more than anyone else to get a contract accepted. Being that 25% of all sales in the Sacramento region were FHA last month (and 29% in Sacramento County), this definitely creates more competition at certain price ranges and makes housing stats look more impressive. As housing inventory presumably begins to increase over the next few months (as it did last year), watch out for price reductions, unrealistic expectations from sellers, and buyers gaining more power.

DOWNLOAD 51 graphs HERE (zip file): Please download all graphs in this post (and more) here as a zip file (or send me an email). Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share.

Sacramento Regional Trends for May 2015 (Sac, Placer, Yolo, El Dorado):

  1. The median price in the Sacramento Region is $333,250.
  2. The median price is 7.5% higher than one year ago (May 2014).
  3. Sales volume is up 7.3% so far in 2015 compared to the beginning of 2014 (January through May).
  4. It took an average of 38 days to sell a house last month (44 days in April).
  5. Cash sales were 15.6% of all sales last month.
  6. FHA sales were 25.4% of all sales in the region last month.
  7. Sales volume was 7% higher this May compared to last May.
  8. There is 1.9 months of housing inventory (2.2 months in May 2014).
  9. The average sales price is $368,525 (7.5% higher than last year).
  10. It took 14 less days to sell a house this May compared to May 2014.

median price and inventory in sacramento placer yolo el dorado county

fha and other sales in sacramento placer yolo el dorado county

volume cash and conventional in region by sacramento appraisal blog

months of housing inventory in region by sacramento appraisal blog

days on market in placer sac el dorado yolo county by sacramento appraisal blog

Sacramento County Market Trends for May 2015:

  1. The median price in Sacramento County is $289,950.
  2. The median price is 7% higher than one year ago (May 2014).
  3. It took an average of 35 days to sell a house last month (42 in April).
  4. Cash sales were only 15% of all sales last month.
  5. FHA sales were 29% of all sales in Sacramento County last month.
  6. Sales volume is 5.7% higher this May compared to last May.
  7. There is 1.7 months of housing inventory (2.0 months last May).
  8. The average price per sq ft is 183 (13% higher than last May).
  9. The average sales price is $317,000 (7.5% higher than last year).
  10. It took 12 days shorter to sell a house this May compared to May 2014.

Median price and inventory since 2011 by sacramento appraisal blog - with median figures

price metrics since 2014 in sacramento county

months of housing inventory by sacramento appraisal blog

CDOM in Sacramento County - by Sacramento Appraisal Blog

sales volume in May in Sacramento County since 2008 Interest Rates Since 2008

Placer County Market Trends for May 2015:

  1. The median price in Placer County is $400,000.
  2. The median price is 5.3% higher than one year ago (May 2014).
  3. It took 38 days on average to sell a house last month.
  4. Cash sales were 15.8% of all sales last month.
  5. FHA sales were 21.5% of all sales in Placer County last month.
  6. Sales volume was 9.8% higher this May compared to last May.
  7. There is 2.1 months of housing inventory (2.5 months last May).
  8. The average price per sq ft is 201.
  9. The average sales price is $445,218 (5.7% higher than May 2014).
  10. It took 16 days shorter to sell a house this May compared to last.

Placer County median price since 2012 - by home appraiser blog

months of housing inventory in placer county by sacramento appraisal blog

days on market in placer county by sacramento appraisal blog

number of listings in PLACER county - May 2015 - by home appraiser blog

Placer County sales volume - by sacramento appraisal blog

interest rates inventory median price in placer county by sacramento appraisal blog

I hope this was helpful. Thank you so much for being here.

DOWNLOAD 51 graphs HERE (zip file): Please download all graphs in this post (and more) here as a zip file (or send me an email). Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share.

My New Office & the Desk I Built: By the way, I wanted to share some exciting news. I’m in the process of building a new home office since I recently moved to Carmichael. By this time next week my office should theoretically be finished, but for now here is a desk I built out of reclaimed wood last week. It’s a beastly 12′ long, and it’s designed for two work stations.

The desk I built

Questions: How do you think sellers and buyers are feeling about the market right now? What are you seeing out there?

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Appraisers killing deals, comps and high prices

There is lots of talk about appraisers being “deal killers” because appraisals are coming in too low. I’m not saying that’s fiction, and I’m not about to defend bad appraisals either, but sometimes it’s about the deal being unrealistic rather than appraisers killing it.

Image by Sacramento Appraisal Blog

Choosing the Right Comps: I appraised a property in Citrus Heights recently just south of the Placer County line and the City of Roseville. The subject neighborhood is outlined in yellow below. During the course of the appraisal I extended the opportunity for the Listing Agent to share any competitive sales or data that was used to develop the list price. The agent then provided me with “comps” across the county line in Roseville (in the “blue” territory below). These sales of course supported the contract price for the subject property, but were they really adequate comparable sales? Would buyers consider properties in Citrus Heights and Roseville at the same time? Is there any price difference between these two neighborhoods? What does the data say? (see graph below)

Citrus Heights vs Roseville Map - Sacramento Appraisal Blog

citrus heights vs roseville - graph by Sacramento Appraisal Blog

There are surely times when sales in a different city or county might be competitive and therefore worth considering in an appraisal, but not in this case in my opinion. Why? Because the Roseville neighborhood plain and simply has higher property values – not to mention it has a different school district. If I used the “blue” comps above, the subject property would have an inflated value. Bottom line.

What are the market takeaways from this scenario?

  1. Bad Comps: It’s best to use comps (comparable sales) from the immediate neighborhood, but that’s not always possible – especially if the subject property is unique. Ultimately, regardless of where comps come from, the appraiser needs to have a good reason for using them. If comps are from a superior area, they should be discounted to be more consistent with the subject neighborhood. The same holds true for an inferior neighborhood in that the appraiser should add value to those sales to bring them up to the same level of the subject neighborhood. Ultimately the wrong comps can lead to a value that is either too high or too low.
  2. Realtors: If you supply comps to an appraiser, it helps if they are truly competitive sales. Would a buyer for the subject property consider purchasing the comps as a replacement if the subject property was not available? As an FYI, when the agent for the property above told me these two neighborhoods had the same school district (they don’t) and there was no value difference either (there is), I had a hard time believing any other information the agent shared with me about the number of offers or the price level of offers too. It was unfortunate to have the feeling that I couldn’t trust the agent, whether the agent was simply mistaken or a more purposeful communicator.
  3. Appraisers: It’s important to pay close attention to nearby neighborhoods to ensure there is no price difference.
  4. Proper Pricing: The market has been “on fire” in Sacramento as prices have shown an increase lately in many areas. However, it’s still important to price properties according to the market. After all, there are many reasons why buyers will overpay right now. If you are a seller, look at the most recent sales (and listings), and be competitive with realistic expectations. I’ve noticed many sellers are actually not choosing the highest offers because they know it just won’t appraise that high. However, sometimes offers at extremely high levels are chosen, and then frustration ensues when the appraisal comes in “low”. Yet the real issue in these cases is that the buyer offered too much and the seller expected too much. It’s really not an appraisal problem (assuming the value was solid of course).

The Bottom Line: I am not wearing market blinders that ignore there is a real issue with the quality of appraisals. That’s why I’ve written so much about challenging low appraisals. Yet at the same time there are properties being priced very aggressively right now, which is also important to sift through. In cases like this, when the appraiser recognizes value at a level lower than the contract price, the appraiser is simply doing what should be done, right?

Any thoughts or stories to share? If you are an agent, how have the appraisals been for your deals lately? What do you wish appraisers would do differently? (please comment below)

NOTE: This is in no way intended to bash Realtors. That’s not how I operate. In fact, this next year will be my fourth year sitting on a committee with the Sacramento Association of Realtors. If you are looking for a trustworthy real estate agent, my digital Rolodex is full of referrals for you.

If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook