The problem of an addition behind a bedroom

Imagine a home owner adds a “Bonus Room” on the rear of a house. It’s nice to have the extra space, right? Well, imagine one of the rear bedrooms now no longer has a direct exit to outside of the home. Is that going to be an issue?

bedroom without egress - by sacramento appraisal blog

The Problem: This home above has an addition of a Bonus Room that essentially removes direct exterior egress from one of the bedrooms. No big deal, right? Well, it actually is a big deal because by definition a bedroom must have two methods of egress. If you didn’t know, according to International Residential Code (R310.1), a bedroom needs to have one doorway that opens to the interior of the house and one doorway or window (of adequate size) that opens directly to the outside of the house (read here for more on what makes a bedroom a bedroom). Thus when an addition of a Bonus Room, Family Room, or Whatever Room blocks the secondary egress in a bedroom….. Houston, we have a problem! All of the sudden a room that was previously considered a bedroom is technically no longer a bedroom. If you’re interested in reading the nitty-gritty of various national codes on the subject, check out this document (pdf).

not a bedroom - sacramento appraisal blog

Impact on Value: Being that I’ve seen this issue twice in the past month, I thought it was worth kicking around some thoughts. Like most things in real estate, we need to look at the problem from a few different angles:

  1. The Lender: Keep in mind a lender might not want to lend on a property when there is a blatant safety issue. Or a lender might ask for the addition to be removed, a secondary egress to be added in the “bedroom” if possible, or for the appraiser to not consider the room as a bedroom any longer. Ultimately the appraiser can ask the lender for some direction or advice, but at the end of the day the appraiser has to communicate very clearly and make decisions that will lead to a credible value.
  2. Not Code Enforcement: Let’s remember it’s not the appraiser’s job to enforce code violations or stop a deal from moving forward if there are code issues. Increasingly lenders want appraisers make comments as if they were home inspectors, engineers, or code enforcement officers, but the appraiser’s job is to come up with a credible value. Bottom line. At the same time, appraisers need to know enough about building code to be able to recognize a blatant egress issue, disclose the issue, and consider if there is any impact on the value (there may or may not be).
  3. Less Bedrooms: Decreasing the bedroom count could impact value since a property is likely less marketable with less bedrooms.
  4. Permits: Let’s realize this addition may not have been done with a permit in the first place, so the appraiser is going to have to figure out what the market is willing to pay for a house that has some non-permitted space. Some appraisers will not assign any value to a non-permitted area, saying “no permit = no value”, while others will try to figure out how much the market is willing to pay for the house in its non-permitted state. Read more on a lack of permits here. Remember that some additions increase the functionality of a floor plan in a positive way, whereas other additions make a floor plan very funky (in a bad way).
  5. The Whole Enchilada: Ultimately, I find myself looking at the “whole enchilada” or entire package of a house when trying to figure out how a layout like this might be seen in the market. For instance, in a recent appraisal consulting assignment, an owner hired me to help him see the market since his house was not selling. On paper it looked like the house should be valued toward the top of the market because of its much larger size, but in actuality the lack of upgrades and funky floor plan (that blocked egress from one bedroom), ended up meaning the house attracted zero offers and was more comparable with the bottom of the market. The way I knew the house was more closely aligned with the bottom of the neighborhood spectrum was finding a few odd floor plan sales (that was lucky), the subject having zero offers at a higher price range, and even a previous sale of the subject property from years ago that showed it sold at the bottom of the market at the time despite its very large size.

I hope that was helpful. By the way, thank you to home inspector Ken Ives for a good conversation on some of the above points as I prepared this post.

Questions: Any thoughts, insight, or stories to share? Did I miss anything? I’d love to hear your take.

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Can two separate lots be included in one appraisal?

Can an appraiser include two lots with separate parcel numbers in one appraisal? Maybe, maybe not. This might seem like a random issue that almost never comes up, but I’ve seen it twice very recently, and I just finished an appraisal like this. Thus it’s important to know how to navigate the issue when it does arise. I hope this helps give some context, and I welcome your comments below.

Scenario 1: NOT GONNA HAPPEN

John owns a 2200 sq ft home on a half-acre lot, and when he bought the house 10 years ago he also bought a one-acre lot next door so he could have extra space. Each lot has its own parcel number. Now John wants to sell, and he plans to sell both lots together to fetch a premium for having a 1.5 acre lot. Can he do that?

Answer: What John has are two separate lots. He can try to market both properties together, but an appraiser is not going to value them together. Why? Because the lots are not legally bound together. Since each lot can be sold, developed, and financed separately, they will also be appraised separately.

Lot 1 and 2 example B by Sacramento Appraisal Blog

Scenario 2: GONNA HAPPEN

Imagine Anna owns a 2000 sq ft home that technically has two lots that are being sold together. The main house has a lot of 0.50 acres, but there is also a lot at 0.40 acres that legally cannot be sold separately from the main parcel with the home on it. Years ago the neighborhood was subdivided, and this smaller 0.40 acre lot became landlocked. This smaller lot is not buildable, and it is even recorded in the legal description and the preliminary title report.

Answer: In this case it is legit for the appraiser to include both lots in the appraisal because the lots are legally bound together and together they present the highest and best use of the property. An appraiser would appraise this as a home with a 0.90 acre parcel. In short, since these lots belong together, they are sold together, and appraised together.

Lot 1 and 2 example by Sacramento Appraisal Blog

FYI: Fannie Mae Multiple Parcel Requirements (Seller’s Guide B2-3-04):

  • Each parcel must be conveyed in its entirety.
  • Parcels must be adjoined to the other, unless they comply with the following exception. Parcels that otherwise would be adjoined, but are divided by a road, are acceptable if the parcel without a residence is a non-buildable lot (for example, waterfront properties where the parcel without the residence provides access to the water). Evidence that the lot is non-buildable must be included in the loan file.
  • Each parcel must have the same basic zoning (for example, residential, agricultural).
  • The entire property may contain only one dwelling unit. Limited additional non-residential improvements, such as a garage, are acceptable. For example, the adjoining parcel may not have an additional dwelling unit. An improvement that has been built across lot lines is acceptable. For example, a home built across both parcels where the lot line runs under the home is acceptable.
  • The mortgage must be a valid first lien that covers each parcel.

Look Mom, CBS did another story with me: A couple weeks ago I wrote about gentrification in the Oak Park neighborhood. After reading my post, a reporter from CBS Sacramento reached out to do an interview. I feel very honored, so I wanted to share. Click the image to view the story.

cbs 13 - 2

I hope this was helpful.

Questions: Any thoughts, stories, or insight ? Agents, have you sold something like this? Appraisers, did I miss anything? I’d love to hear your take.

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5 reasons why an appraiser CAN appraise a property above the highest sale

Can a property be appraised above the highest sale in the neighborhood? A real estate agent friend was told recently by an appraiser that the house could not be appraised above the highest sale because that is what Fannie Mae says. Is that true or not? Let’s consider some of the following points.

Curtis Park neighborhood in Sacramento - Sacramento Appraisal Blog

5 reasons why a house CAN be appraised above the highest sale:

  1. The Horse’s Mouth: Fannie Mae does not say appraisers cannot appraise a property above the highest sale. I’m not sure if the appraised value in this case was on point or not, but the appraiser was simply not correct regarding the supposed rule by Fannie Mae. Whenever someone states, “Fannie Mae says….”, I recommend asking the person what page of the Seller’s Guide he/she is referring to.  🙂
  2. Increasing Market: If a market is increasing in value, there is going to be a legitimate time where buyers are simply willing to pay more than most recent sales or even the highest sale. This is especially true when inventory is sparse and interest rates are low. This reminds us too that appraisers don’t make values increase, but rather measure when the market changes.
  3. Lower Sales: Recent sales may have closed at lower levels, but there is no rule that says appraisers have to use the newest sales. In fact, even Fannie Mae states the appraiser may need to use older sales rather than newer ones. Sometimes lenders tell appraisers to use sales within the past 90 days, but that type of rule is not consistent with Fannie Mae, and it might stand in the way of a good appraisal too. For instance, if two distressed short sale models closed last month, but there are ample model match sales from prior months (and current model match listings at higher levels too), it’s probably best to ignore the two recent lowball sales since they don’t represent the market. Remember also that one or two sales do not make or break a market.
  4. Zero Sales: The appraiser in this case said Fannie Mae prohibited the appraised value from being above the highest sale. But what if there were zero sales over the past year? Would that mean current value is bound to where sales were at last year? Nope. It can be tricky to see the market when there are no recent sales, but it can be done with time and skill.
  5. The Best: The house being appraised might be the best on the block or have a feature that pushes it over the top of recent prices. Thus it can make reasonable sense to see a home appraise for more than the others. Of course just because someone thinks a home is the best thing ever does not mean the market is willing to pay the highest price ever. Also, keep in mind every neighborhood has a price ceiling, which means buyers will inevitably only pay so much in that neighborhood before moving on to a different area.

BRACKETING: Please know I’m not trying to give the appraiser a hard time or throw any appraiser under the bus (I love my fellow appraisers), but I did want to offer the above points because there is space for some conversation. While the appraiser was incorrect about Fannie Mae’s rule, I do appreciate the appraiser being aware of the concept of bracketing. Bracketing is basically when appraisers will use some superior sales and some inferior sales to help establish value for a property. This can be a good practice when choosing potential comps because it helps us see the higher and lower ends of a competitive market. Bracketing is not always possible (see points 2-5), but it can help support a value or adjustments. For instance, if valuing a fixer property, we would want to use at least one fixer comp so we know what the market was actually willing to pay for a fixer. Otherwise if we only use remodeled homes for comparison, we are left sort of guessing what the downward adjustment should be for condition. Is it $20,000, $30,000, $50,000, $100,000, etc….? The best way to know what the adjustment should be is to find actual fixers in the market. How much of a discount for condition is there between remodeled homes and fixers? The same holds true for figuring out the value of a built-in pool. Rather than guessing at the value (say $10,000), if we look at competitive home sales with and without pools, we can begin to extract a price buyers have been willing to pay. In other words, if we bracket sales with and without pools, it helps us begin to see the market.

how to think like an appraiser biggerHOW TO THINK LIKE AN APPRAISER (class I’m teaching): Locals, if you are around on July 16th, I’d love to have you come by the Sacramento Association of Realtors for a class I’m teaching called “How to Think Like an Appraiser”. This will be three hours of relevant conversation (and we’re going to have some fun). This is perfect for new agents as well as veterans. My goal is to leave you with insights to apply to your listings and tips for working with appraisers. Register here.

Question: Any thoughts, stories, or points to share? I’d love to hear your take.

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How do appraisers account for a difference in age between comps?

There are so many factors to consider when valuing a property. Anyone who works in real estate knows this. So how do we account for a difference in age between comps? Does age matter? Should we make any value adjustments? Someone asked me this recently, so I figured it was worth kicking around the issue together. I’d love to hear your take in the comments below.

difference in year built in the appraisal report - sacramento appraisal blog

Question: How do appraisers account for a difference in year built? Do appraisers give an adjustment when to comps there is an age difference?

Answer: Here’s my take. Most of the time buyers tend to buy based on condition instead of age. Thus if there is a difference of a few years or so within a subdivision, it might not have any impact on value as long as the condition is similar. For instance, in some tracts we see an age range of 1977 to 1983. If one house was built in 1977 and another in 1983, and they are in the same condition, it’s unlikely to see the 1983 home command a value premium unless for some reason it has a higher quality or if it is located on a stronger street. Sometimes buyers are actually not even aware of the age of the home. They’re really just looking at the neighborhood and buying what is there. Do you agree?

My $500 Adjustment: I’ll admit when I first began appraising I used to adjust $500 per year on all comps in every appraisal because that’s what I was taught to do. In very technical terms, this valuation methodology is…. bogus. After all, a $500 adjustment per year certainly doesn’t apply to every neighborhood, every market, or every property type. These days though I rarely make any adjustment for year built since most of the time I’m looking at condition instead. However, if the age gap is too large, there may be a difference in value, and we we have to begin asking if we should even be comparing the homes in the first place. For instance, is 1977 vs. 1990 a good comparison? What about 1990 vs. 2003? Maybe not because we might be dealing with a different quality of construction, different tracts, or different markets. But at the same time, we might see homes in one area were built in 1955 and another nearby area has homes built in 1972. If there is no price difference observed between both areas, then the homes may easily be competitive despite their age gap. The thing we need to do though when valuing a 1955 home is to be sure to find 1955 sales instead of just 1972 sales (this helps prove the market really does pay the same amount for both ages).

Subjective Mush: I know this begins to sound very subjective, but there is no rule out there when an adjustment is needed other than when buyers at large have clearly paid more or less because of a feature. In reality it can be tempting to make value adjustments for every single distinction, but sometimes it’s best to not force adjustments by remembering the market isn’t so sensitive as to warrant a price reaction for every single difference. However, a good rule of thumb when searching for comps is to take an “apples to apples” approach. This means we start by searching for similar-sized homes with a similar age rather than choosing newer or older sales that really might not be competitive. I know this sounds basic, but when we keep the fundamentals in mind, it keeps us sharp (right?).

Brand New Homes: As I mentioned recently, we do need to be careful about comparing brand new homes with ones that are even a year or two old because brand new homes tend to sell at a price premium. This means despite only 1-2 years difference in age, we might see a pretty big difference in value.

I hope this was helpful.

Questions: Anything else you’d add? When do you think age does matter to buyers? Any stories or examples?

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