Three dangerous ways to choose comps

It’s easy to get into value trouble when choosing comps, and today I want to highlight three ways to do that. I’ve observed each of these methods very recently, which is why I hoped to kick around some ideas together. I could have just as well entitled this post, “Three ways appraisers DON’T choose comps.” Any thoughts?

choosing comps for appraisal - sacramento appraisal blog

Three dangerous ways to choose comps:

1) Price: When putting a value on something, searching by price is a quick way to NOT see the full picture. For instance, if we pull comps for a $750,000 sale by looking at all sales between $725,000 and $775,000, what we end up getting is a limited view of one price range. Have we truly found any similar properties or just the ones that have sold in that range and happen to support the contract price? The danger of searching by price is we can end up letting a few high sales impose a value on a property instead of letting similar homes paint a picture of value. This is why sometimes appraisers disregard the “comps” they are given from the real estate community because they are only similar in price rather than square footage, age, condition, location, upgrades, etc… If you are in the habit of searching by price in MLS when pulling comps, I might recommend searching by square footage instead (or by a parameter you think will help you make quality comparisons).

2) Capitalization Rates: The 2-4 unit market has been heating up in the Sacramento area. In fact, the new Yardi Matrix 2017 Winter Report says multi-family rents in Sacramento will grow by 9.6% this year. If that’s how things shake out, we’ll basically have seen a 30% increase in rent over the past few years. Wow!! Anyway, I’m finding news of the hot rental market is causing some 2-4 unit properties to be priced according to unrealistic cap rates instead of realistic comps and rental income (or even realistic cap rates). What I mean is sometimes comments in MLS say “check out the 8% cap rate” when the neighborhood really isn’t getting rates that low. Maybe surrounding properties are showing rates closer to 9-10%. This might not seem like a big deal, but when we plug an 8% rate into the cap rate formula instead of a realistic 9-10% rate, the value can be substantially different. My advice is to be cautious about imposing a cap rate on a property.

3) Price Per Sq Ft: In real estate it’s easy to see a sale down the street and then apply the price per sq ft from the sale to the subject property. But what if the price per sq ft doesn’t make any sense for the subject? The truth is smaller homes tend to have a much higher price per sq ft than larger ones, and dissimilar homes might actually have a far different price per sq ft too. Thus my advice is to be cautious about imposing a certain price per sq ft on a property when searching for comps. Let’s pay attention to price per sq ft figures, but at some point we have to ask the question, what are similar properties actually selling for? By the way, if you haven’t seen my Starbucks cups analogy, it’s a fun way to think about price per sq ft. 

The Big Idea of Imposing: All of these methodologies essentially help impose a value on a property because we end up applying a metric or price range to comp selection instead of looking for what is truly similar. Thankfully there isn’t only one way to search for comps, but no matter what we do it’s important to try to be objective and discover value rather than doing something that might impose value on a property. Know what I’m saying? By the way, here is how I tend to choose comps as an appraiser just in case you’re peeved I only told you what not to do.

Blogging Class on Thursday: In a couple of days I’m teaching a two-hour class at SAR called Successful Real Estate Blogging. This will be incredibly practical and my goal is for you to leave with insight on how to be effective. Click HERE for details.

I hope that was helpful or interesting.

Questions: Did I miss anything? Anything you’d add? I’d love to hear your take.

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How will appraisers deal with the new water-conserving plumbing fixtures law?

The Governor doesn’t like my toilet. Or my faucet. Or my shower head. If you didn’t know, on January 1, 2017 it’s going to become law in California for residential and commercial property owners to install water-conserving plumbing fixtures if the property was built before 1994. You can read the details of the law here, but let’s consider how this might play out. I’d love to hear your take too. Any thoughts?

Question: Will home values be affected depending on whether water-conserving plumbing fixtures are present or not? How will appraisers deal with this new law?

1) Wait and see: This is one of those issues that is only theoretical right now. We are going to have to wait to see how it plays out. That’s the truth.

2) Laws & value: Just because a law exists doesn’t necessarily mean value exists. For instance, smoke detectors and carbon monoxide alarms are required by law in certain instances in California, but the lack of these items doesn’t mean the house is worth less. Is the market that sensitive where buyers would walk through and say, “I’m going to pay $25 less for this house because a smoke detector is missing in the bedroom”? I doubt it. My sense is buyers would probably pay the same amount for a house whether smoke detectors or CO alarms are there or not. I realize toilets are more costly than smoke detectors though, so that is something we have to consider.

3) Expectations of buyers & value: A key issue is whether buyers will expect water-conserving plumbing fixtures once sellers are required to begin disclosing if there are any non-compliant fixtures at a property. The truth is right now buyers really don’t expect these fixtures. Have you ever seen a contract where a buyer said, “Seller to update all plumbing fixtures or provide a credit to the buyer to cure the outdated fixtures”? Probably not. This doesn’t mean buyers aren’t willing to pay more for newer features, but only that buyers don’t tend to draw a line of demarcation for these features right now when making an offer on a house. But will they in the future because of this law? In short, if it becomes a big deal to buyers, then it needs to be a big deal for appraisers. If buyers come to a place where they expect a price discount when specific water-conserving plumbing fixtures are not present, then it is a value issue. If buyers could care less, then it really wouldn’t be prudent for appraisers to penalize a property for not having these items – even though there is a law in place.

4) The silliness of focusing on small-ticket items: Let’s be cautious about asking appraisers to analyze the value impact of a toilet that flushes 1.5 gallons vs 4 gallons. Can appraisers or anyone for that matter really be that precise? Is the market honestly that sensitive to the point where buyers would pay more or less for this minor difference? Let’s be realistic and consider many buyers would likely notice the age of the toilet rather than how much it flushes exactly. On a different level though, some buyers want/need toilets that have a more powerful flush because… well, you know. On the other hand, if the cost to replace plumbing fixtures throughout a house is going to be thousands of dollars, then that is something buyers might really care about.

5) The way lenders handle this is a big deal: The state law doesn’t require sellers to replace fixtures when selling a home, but sellers do need to disclose non-compliant fixtures. Thus when lenders read about non-compliant fixtures in a purchase contract, will they require plumbing fixtures to be updated? That is the million-dollar question. What will lenders do during a refinance too? Will they ask appraisers to identify if there are any non-compliant fixtures? That would be a bad idea since appraisers aren’t trained to identify such fixtures. If lenders are strict about applying this law, it can end up impacting how sellers prepare to sell their homes, repairs buyers request in contracts, and what lenders ask appraisers to do when these features are not present. 

I hope that was interesting or helpful.

Recent Podcast: By the way, I did a podcast a couple of weeks ago with Marguerite Crespillo. It’s always fun to talk shop. Listen below (or here).

Questions: What impact do you think this law will have on real estate (if any)? Did I miss something? Appraiser colleagues, what else would you add? I’d love to hear your take.

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That place where marijuana & real estate meet

Marijuana is on my mind. In recent weeks Californians voted to make recreational marijuana legal, and I can’t help but consider the impact it might have on real estate. Here are a few things I’ve been mulling over. Anything you’d add?

44200664 - cannabis leaves on old wooden background

1) Land Value: All of a sudden land that is ripe for marijuana growing is looking pretty attractive. I’m not talking about tiny postage stamp lots in subdivisions, but rather larger-sized parcels in outlying areas. The truth is many savvy land buyers have already been making their move on large parcels in surrounding areas to Sacramento, but there are going to be more opportunities out there. I saw one listing recently where an agent said, “Good for ‘income-producing crops'” (code for pot). For further reference, here is an article discussing a “green rush” in Yolo County (people setting up marijuana businesses). 

2) Home Experimentation: I expect to see more owners and renters trying to grow their own weed at home. Some will grow a few plants, but others will aim to start a business to make some money in an economy that still isn’t all that vibrant.

3) Commercial Vacancies & Rents: If California ends up being anything like Denver, which has nearly 4 million square feet of commercial space used for cannabis production, I’m guessing we’ll see more interest in industrial properties and higher rents in certain areas. Goodbye commercial vacancies. Here is an image from The Sacramento Bee to show all the locations where pot can be grown in Sacramento. Image created by Nathaniel Levine.

pot-cultivation-map-from-sacramento-bee-in-january-2016-story

4) Disclosures: Talking about marijuana in contracts, listings, and appraisals isn’t anything new in real estate, but my sense is if it becomes more common to see pot growing in homes, we’ll need to hone our skills and consider what disclosure needs to look like. By the way, could the smell of a nearby pot farm need to be disclosed? As an appraiser I’m concerned with the condition of the house. There is obviously a huge difference between a massive grow operation with hundreds or thousands of plants and a home owner with a few plants. What I’m going to be looking for is anything that might make an impact on value or a health and safety issue – exposed wiring, over loaded plug-ins, poor ventilation, mold, etc… I’m not there to nark or judge by any stretch, but only figure out the value (and discuss and photograph anything that impacts value).

weed-sign-in-portland-sacramento-appraisal-blog

5) Advertising: I took my family to Portland last week to enjoy Thanksgiving, and it was amazing to see how much advertising there was for pot (because it’s legal there). Everywhere I turned Downtown there was another weed billboard, A-frame sign, or a green cross (the symbol of a dispensary). Please don’t think I’m dissing Portland because I love the city and can’t wait to go back. I’m just saying we might expect to see the same thing in California when it comes to advertising. Can signs impact the feel of a city or neighborhood? Will there be more signs in certain areas than others? Time will tell.

6) Marijuana Branding: I’m waiting for more in the real estate community to go public with their MJ branding. Last month a Sacramento law firm announced its marijuana practice. Ironically one of the partners has the last name Kronick, which is oh so close to Chronic. Anyway, there is still available shelf space for weed branding such as “Marijuana Realtor”, “Cheebah Appraiser”, and “Mary Jane Lender.” I’m kidding. Sort of.

7) Loans on “Grow” Properties: Some lenders don’t want to lend on properties that are being used for marijuana growth (keep in mind this likely doesn’t mean just a few plants). Here is some direction from a certain bank I sometimes work for when it comes to this issue. This unnamed bank sent out a message to its appraisers regarding grow houses:

####### Bank is currently unable to lend on any property with marijuana grow operations. The marijuana industry is state regulated and ####### Bank is federally regulated. Therefore, we are not in a position to lend to borrowers with income from that source nor can we lend on properties with active marijuana grow rooms or facilities. 

If you encounter a property with an active marijuana grow operation, please take at least one descriptive photo, complete your inspection of the property then cease work on the file and immediately contact your ####### Bank Appraisal Coordinator. Please do not attempt to quote ####### Bank lending policy. We will take care of that and you will, of course, be compensated for the time you’ve already invested in the appraisal.

I hope that was interesting or helpful.

Questions: Anything to add? Did I miss something? What impact do you think the legalization of marijuana might have on real estate? If you are located in a state where marijuana has been legal, what advice do you have for Sacramento? I’d love to hear your take.

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Predictions, Trump’s impact on real estate, and a Sacramento market update

I reached the point of political exhaustion last week in a big way. This doesn’t mean I’m tuned out, but right now I find myself glossing over Facebook rants or skimming certain conversations because they’re only going lead to arguments. Yet still I hoped we could chat briefly about politics and real estate – without unfriending each other. Then let’s take a deep look at the Sacramento market. Any thoughts?

18345737 - the white house, view from the south, home of the president of the united states of america in washington dc usa

Huge Data Fail & Predicting Real Estate: The media laid an egg when it came to predicting the presidency. In fact, it seemed like many political pundits were shell-shocked when election results were coming in contrary to their predictions that Hillary would win. I don’t mention this so we can argue, but only to remind us of the danger of predicting, being wrong, and then having pie on your face (losing credibility). If some of the best political minds in America couldn’t predict the outcome of the presidential race, can we really predict the future of the real estate market with certainty?

Trump Presidency and Newlyweds: I’ve been asked a couple of times this week how a Trump presidency has impacted real estate so far. My answer is simple. Imagine asking a newlywed couple after one week of marriage to tell us how their marriage is going. It’s only been a week though. We probably need more time to really know how married life is going to unfold. The same holds true with Trump’s impact on real estate. We haven’t had enough time to see waves in the market yet, and nobody really knows how his policies will affect housing. There are many predictions right now, especially about repealing Dodd-Frank, but those are only guesses (see paragraph above).

Any thoughts?

—-—–—– And here’s my big monthly market update  ———–—–

big-monthly-market-update-post-sacramento-appraisal-blog-image-purchased-from-123rfTwo ways to read the BIG POST:

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

DOWNLOAD 71 graphs HERE: Please download all graphs in this post (and more) here as a zip file. Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

NEW: I created a one-page market sheet to print and keep handy when talking about real estate. I figured it might be helpful to use while talking on the phone. I’m not sold on the look, but is this a step in the right direction? Download here.

Quick Market Summary: A brutal election season has ended (thank God), and many Americans feel worn out, but the market doesn’t feel that tired. The truth is when we look at the stats we are seeing about what we’d expect at this time of year. Ultimately prices are down 1-3% from the height of summer, it took two days longer to sell a house last month, and inventory is down 14% in the region from last year. It’s easy to see softer stats and assume the market is beginning to crash, but the market softens like this almost every single year (besides 2012 when Blackstone and friends gutted the market and we didn’t have a normal fall season). I’m not saying values are not inflated, affordability isn’t becoming more of a factor, or even the market won’t turn at some point, but only that things feel fairly normal right now for the season. Sales volume has been strong this year in Sacramento and is up slightly from last year despite cash and FHA volume both dropping by 7-8%. Inventory is anemic and there really isn’t a quick solution to deal with that problem, but buyers are still finicky about price despite very few homes being listed on the market. Sellers don’t get this, so they try to command whatever price they want, but that rarely works in this market. Keep in mind buyers are scouring Zillow and Redfin every single day, they are visiting properties with their agent, they are getting beat out on other homes, and they are often looking for MANY months before getting a contract accepted. Sellers frankly are not doing anywhere near this level of research, which is one reason sellers are less in tune with proper pricing. Check out specific stats and graphs below for Sacramento County, the Sacramento Region, & Placer County.

Sacramento County:

  1. The median price is $320,000 and is down a few percent from the height of summer, but it’s 10% higher than last year.
  2. The average price per sq ft was $202 last month (down 1% from a few months ago, but 8.5% higher than last year).
  3. There were only 38 short sales and 31 REOs in the county last month.
  4. Sales volume was 5% higher this October compared to October 2015.
  5. It took 3 days longer to sell a house last month compared to the previous month (one year ago it was taking 5 days longer to sell).
  6. Sales volume is up slightly this year compared to last year (1% or so).
  7. FHA sales volume is down 7% this year compared to 2015 (25% of all sales were FHA last month).
  8. Cash sales are down 8.5% this year (they were 12% of all sales last month).
  9. Housing inventory is 12% lower than the same time last year.
  10. The average sales price at $353,000 is down about 1% from the height of summer (but is 9% higher than last year).

Some of my Favorite Graphs this Month:

median-price-since-2013-in-sacramento-county

inventory-in-sacramento-county-since-2013-part-2-by-sacramento-appraisal-blog

inventory-september-2016-by-home-appraiser-blog

cdom-in-sacramento-county-by-sacramento-regional-appraisal-blog

price-metrics-since-2015-in-sacramento-county-look-at-all

sales-volume-in-sacramento-county-since-2012

seasonal-market-in-sacramento-county-sales-volume-6

seasonal-market-in-sacramento-county-inventory-4

seasonal-market-in-sacramento-county-4

SACRAMENTO REGIONAL MARKET:

  1. The median price was $357,000 in October. It went up slightly from September but is down 3% from the height of summer (up 9% from last year).
  2. The average price per sq ft was $208 last month. That’s down about 1% from the height of summer and 7% higher than last year.
  3. It took 2 days longer to sell compared to the previous month (but 5 less days compared to October 2015).
  4. Sales volume was 4% higher this October compared to October 2015.
  5. FHA sales volume is down 8% this year compared to last year.
  6. Cash sales were 13.5% of all sales last month (FHA sales were 21%).
  7. Cash sales are down 7% this year compared to last year.
  8. Housing inventory is 14% lower than the same time last year.
  9. REOs were 1.8% and short sales were 2% of all sales last month.
  10. The average sales price was $393,000 in October. It’s down about 3% from the height of summer but 8% higher than last year.

Some of my Favorite Regional Graphs:

median-price-sacramento-placer-yolo-el-dorado-county

sacramento-region-volume-fha-and-conventional-by-appraiser-blog

inventory-in-sacramento-regional-market

regional-inventory-by-sacramento-regional-appraisal-blog

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

regional-market-median-price-by-home-appraiser-blog

PLACER COUNTY:

  1. The median price was $438,000 last month (highest point of year, but take that with a grain of salt).
  2. The average price per sq ft was $213 last month (down very slightly from the height of summer and up 6% higher than last year).
  3. It took 41 days to sell last month (same as previous month but 6 days less than one year ago).
  4. Sales volume was about 3% lower this October compared to October 2015.
  5. FHA sales volume is down 16% this year compared to last year.
  6. Cash sales were 17% of all sales last month (FHA sales were 13%).
  7. Cash sales are down 3.6% this year compared to last year.
  8. Housing inventory is 13% lower than the same time last year.
  9. Both REOs and short sales were each 1% of sales last month.
  10. The average sales price was $481,000 and is 8.5% higher than last year.

Some of my Favorite Placer County Graphs:

placer-county-sales-volume-by-sacramento-appraisal-blog

inventory-in-sacramento-regional-market

days-on-market-in-placer-county-by-sacramento-appraisal-blog

months-of-housing-inventory-in-placer-county-by-sacramento-appraisal-blog

number-of-listings-in-placer-county-2016

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

placer-county-price-and-inventory-by-sacramento-appraisal-blog

DOWNLOAD 71 graphs HERE: Please download all graphs in this post (and more) here as a zip file. Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

Questions: Did I miss anything? What impact do you think Trump will have for the real estate market (if any)? What are you seeing out there? I’d love to hear your take.

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