5 things to remember about the value of landscaping

How much value does landscaping really add? Nothing. A minor amount. A huge total. I’ve heard it all when it comes to what people think landscaping is worth. Today let’s kick around some ideas from an appraisal standpoint. Anything to add?

landscaping in appraisals - sacramento appraisal blog

5 things to remember about the value of landscaping

1) The myth of no value: I’ve heard the sentiment from some real estate professionals that landscaping does not count toward the value. My take? Landscaping is often very important to buyers – especially when it is extensive or highly expected in certain neighborhoods.

2) Front vs back: My sense is front yard landscaping does not sway buyers like the backyard does. I’m not saying it’s not important or curb appeal doesn’t matter (it does). I’m only saying the rear yard tends to make a much more significant impact on value since people spend more time there.

3) One size doesn’t fit all: The value of landscaping will vary significantly depending on the price range and neighborhood. For instance, a few years back during the height of home flipping activity, it was common to see flippers at the lower end of the market do very basic cosmetic landscaping in the front yard while doing almost nothing with the backyard (seriously, rear yards were at times just dirt or bordering on unkempt). In contrast, higher priced homes were getting full-service attention in both the front and backyard. Why? Because the market had different expectations by price range and the investors’ sense was spending the money was worth it in some neighborhoods and not others.

4) On par after huge money spent: Sometimes owners will spend good money to redo an unkempt yard only to expect a huge price premium. The problem is post-landscaping the owner is now basically on par with other homes in the neighborhood rather than in a position to command a premium. This is not easy to swallow, but it’s important to recognize in order to avoid overpricing. 

5) Dollar for dollar: While we like to get a “dollar for dollar” return on our improvement projects (at the least), that’s not always possible in real estate. So when an owner says, “I spent $125,000 in my backyard” and otherwise similar homes are selling for $700,000, can we really expect this property to be worth $825,000? That’s probably not realistic, right? Most of all though, let’s find comps with incredible landscaping and let those properties tell the story of value. That way we are letting actual market data speak to us to set the tone for what buyers have been willing to pay for similar landscaping. Isn’t that better than shooting from the hip about what landscaping may or may not be worth?

Case-in-point for an incredible backyard: While appraising in the Natomas area of Sacramento I came across a house with an incredible backyard. I ended up NOT using it as a “comp” because this property sold about 10% higher than others because of the built-in pool, custom covered patio, built-in BBQ, outdoor fireplace, and everything else in the yard. I’m not calling all of these things landscaping of course, but at the same time let’s be realistic to think buyers may lump some of these items in the same category. Anyway, at times it’s tempting to give a token $10,000 upward value adjustment when we see a nice rear yard because that’s what a mentor taught us to do, but sometimes the market is willing to pay more like 10%. In this case otherwise similar homes seemed to come in around $450,000 and the subject sold for $495,000 (there were 7 offers). There was one other sale at $485,000 and it also had a sweet backyard. As you can see on the graph, the incredible backyard seemed to really matter.

incredible landscaping - sacramento appraisal blog

Here is what the rear yard looked like. I could live with that. You?

house with amazing rear yard - sacramento appraiser

Remember, let’s find a few examples of extensive rear landscaping (or an amazing backyard) if possible so we don’t base our perception of value on only one sale. After all, what is that one sale sold too high or too low?

The Washington Post: Two weeks ago I wrote a post about the ugly side of appraisal fees, and as a result Ken Harney of The Washington Post interviewed a handful of appraisers (including me) for a piece that went live today. Ken is a nationally syndicated columnist, so the conversation that took place here is going to be moving to a much bigger level. Thank you everyone. Here is Ken’s article.

Questions: What stands out to you most about what I mentioned above? What is #6? Did I miss something?

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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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