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Bad real estate advice & blue bathrooms

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There’s no shortage of bad real estate advice out there. Today let’s look at a few common examples and talk through Zillow’s recent claim that blue bathrooms add $5,400 in value. Any thoughts? I’d love to hear your take.

Common bad real estate value advice:

1) Solar Salesman: “You will get $20,000 in value if you buy this $20,000 solar system. Buyers always pay for the full cost of the system in the resale market”

2) Enclosed Patio Contractor: “This 400 sq ft enclosed patio will definitely add 400 extra sq ft of living area to your home when you sell it.” 

3) Energy Salesman: “If you do these energy upgrades for $28,000, you’ll get $28,000 back in value. There won’t be any trouble selling your home after going through the PACE program either.” 

4) Landscaper: “Studies show doing $2,000 of landscaping will yield about $10,000 in value.”

5) Zillow’s Blue Bathroom: “Homes with blue bathrooms sell for $5,400 more than expected.”

What other examples can you think of?

Thoughts on Zillow’s blue bathroom:

Zillow put out a press release last week stating, “Homes with blue bathrooms, often found in hues of powder blue or light periwinkle, sold for $5,400 more than expected.” Thanks Jonathan Miller for writing about this. A few thoughts:

a) False hope: Consumers hear they can increase their value by $5,400, so they think they can just buy a gallon of paint for $30 and make some huge profit. As Jonathan Miller said, “The consumer absorbs the results as gospel without challenge.”

b) Location: Which market would this idea of blue paint apply? Is it true in Portland, Sacramento, Birmingham, and Baton Rouge? Is it equally true at $200,000 as well as $900,000? Was it true when the market was collapsing in 2007 or is it only true right now? How long will it continue to be true? 

c) Buyer Behavior: When we hear such precise value claims, let’s take a step back and ask if buyers actually behave that way. Have you ever met a buyer who said, “Oh snap, that blue is on point. I’m gonna pay $5,400 more for this house now”? Probably not. To be fair we all know color does make a difference for value. Yet making such a precise value claim at $5,400 ironically doesn’t line up with how buyers tend to behave in real life.

d) Multiple factors: There are so many factors when it comes to a house selling at a certain price. Maybe the blue paint is part of the package, but what if it’s also the condition, remodeled kitchen, refinished wood floors, landscaping, updated bathrooms, location, garage size, multiple fireplaces, school district, built-in pool, etc… Maybe it’s just me, but isolating only one inexpensive factor and attributing a large value boost seems like a stretch.

My advice? Be careful when individuals without local real estate expertise start giving you specific value advice. Of course their advice might be spot on, but sometimes people say things in order to get a contract signed. Also, be wary of general stats because they might not make any sense for the local real estate market or for every property type (or market). Lastly, before doing something significant to your home, you might consider finding trustworthy real estate professionals in your local market who can help give advice or steer you in the right direction.

I hope this was interesting or helpful.

Questions: What other examples of bad real estate advice can you think of? What do you think of studies that make specific value claims? Anything else to add? I’d love to hear your take.

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How does a reduced agent commission impact the appraisal?

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How does a reduced commission from a real estate agent end up impacting the appraised value? Does it matter? Let’s talk about that.

1) Comps vs contract: We have to remember value is found in the comps rather than the contract price. Thus imagine if both agents gave up their commission because they were feeling generous (and wanted to work for free). Does this mean the subject is now worth 6% less? Not at all because we find value from the comps rather than what the subject property is in contract for.

2) Add back in the reduction: When choosing comps and I read in MLS, “Buyer’s agent reduced commission”, it’s a tell I need to call for more information and find out what went on. In the case to the right the buyer’s agent was the buyer and waived the commission. Being that this $850,000 home sold about 3% lower than other sales, it was prudent for me to give an upward 3% adjustment to account for the commission that normally would’ve been padded into the contract price. Otherwise if I blindly used this comp without accounting for the reality that it closed lower for a reason, I could have undervalued the subject property.

UPDATE: I’ve received some grief from a few appraisers over point #2. Fannie Mae does not allow positive adjustments for concessions (though are my examples financing or sales concessions since the seller really didn’t give anything to the buyer?). Here’s the thing. If a sale legitimately sold too low because the agent waived a commission, appraisers have to consider if there was any impact to the price. Bottom line. I find many agents waive their commissions when they are buyers, so these “comps” may need to be given less weight in the overall value (or maybe adjusted up somehow). Ultimately we have to know the story of the comps so we can tell the story of value for the subject property. Don’t lose sight of that in the midst of my example – even if you disagree with the methodology.

3) No impact: There are times when I read in MLS that one of the agents waived or reduced a commission, but the property really closed right where it should have. In a case like this it can be frustrating that an appraiser doesn’t give an upward adjustment, but there’s not really one to give if the property sold on par with everything else. The truth is some agents who are buyers waive a commission without really getting a price discount. It happens.

4) Rubber stamping: Appraisers have to be cautious to not “rubber stamp” a lower contract price when there is a waived commission on the subject property. For instance, a property was listed around $950,000 and had multiple offers at that level. A cash buyer ended up getting into contract at $900,000. However, the real price would have been $960,000, but the buyer paid $60,000 of commissions and fees outside of escrow so the sales price would be lower (smart move to get a lower tax base). Anyway, as an appraiser I have to be careful to be objective and weigh the market in the comps rather than “rubber stamp” a property like this at the contract price at $900,000.

Advice to real estate agents:

1) Make it clear in MLS: Be clear in MLS when a commission has been waived or reduced. This helps appraisers when they are choosing comps.

2) Tell the story: When you’re talking with appraisers about critical neighborhood sales during a listing, I would definitely recommend pointing out any commission reductions in important comps because at times it’s easy to miss the fine print in MLS about waived commissions. In point #2 above I was appraising something for a cash buyer and I was told, “The buyer’s agent was actually the buyer on the house a few doors down and she waived the commission. You can definitely call to verify.” I appreciated the heads-up – especially since this detail was not in MLS.

I hope that was helpful.

How to Think Like an Appraiser: I’m teaching a class at SAR on May 18th from 9-12pm called How to Think Like an Appraiser. Click here for details.

Questions: What point above stands out to you most? Anything else to add? I’d love to hear your take.

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10 things to know about low housing inventory

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Inventory is low. Really low. That’s one of the big stories right now in real estate, so I wanted to spend some time kicking around some thoughts. Let’s take a look at ten things to know about housing supply in Sacramento. If you aren’t local, I hope you can still find some value. Do you see any parallels to your market? Any thoughts? 

DOWNLOAD 50 graphs HERE: Please download new market graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

10 THINGS TO KNOW ABOUT LOW HOUSING INVENTORY

1) Housing inventory is clearly on a declining trend.

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

Housing supply has been vanishing over the past few years in light of greater buyer demand, sellers sitting instead of selling, less new construction, increasing sales volume, and other reasons.

2) Housing supply is really sparse (except at the top).

inventory - March 2017 - by home appraiser blog

Housing supply was low last year, but this year it’s 15-20% lower. Having less listings means it’s really competitive for buyers – especially under $400,000. However, inventory is not low at every price range as there are far more listings at the top. Before freaking out though, this is actually a normal trend we see almost every single month. But the disparity between under $500,000 and above $1,000,000 is striking. As an FYI, it’s worth noting the top of the market does feel a bit soft.

3) Inventory is still not as low as the Blackstone days.

inventory in sacramento county Since 2011 - by sacramento appraisal blog

It’s true that inventory is anemic, but we have to remember during 2012 and 2013 it was at one month for nearly an entire year when Blackstone and other investors were gutting the market. I mention this because while the market has an aggressive feel, it’s still not what it was. If inventory persists in declining though it will be a bloodbath in terms of competition for buyers (good for sellers though as a developer mentioned to me on Twitter). 

4) Inventory was 1400% higher ten years ago during the “bubble”.

inventory in sacramento county Since 2007 - by sacramento appraisal blog

Ten years ago during the worst of the real estate “bubble” popping we had a 14-month supply of homes for sale (as opposed to one month now).

5) Bank-owned inventory is not a driving factor today.

REOs and Short Sales Sacramento County - by Sac Appraisal Blog

Eight years ago over 70% of all sales in Sacramento County were REOs, but that number is now about 3%. Some folks promise a new “foreclosure wave”, but it’s definitely not here right now.

6) Low inventory is putting pressure on values to increase.

Median price since 2013 in sacramento county

Declining inventory over the past few years is a big factor in rising prices. Right now values are about where they were at the height of last summer (or slightly higher) after a lull in the fall in many neighborhoods in Sacramento County. But let’s not make the mistake to think the market is doing the same thing everywhere. The truth is in some areas increases have been modest at best over the past year while some price ranges feel flat, but the bottom of the market is hands-down experiencing the largest increases. Remember, in some price ranges the market feels more aggressive than actual value increases too, so it’s really important to sift through emotions, look at actual numbers, and not overprice because the market is “hot”. A good mantra for some areas is “Aggressive Demand, Modest Appreciation.”

7) Strong demand is a huge reason why inventory is declining:

price metrics since 2014 in sacramento county

Demand is strong right now for both buying and renting, and buyers and tenants are simply gobbling up almost anything out there (I say “almost” because buyers are still sensitive about adverse locations and overpriced homes). Thus it’s not surprising to see the median price is 7% higher than last year, the average sales price is 9% higher, and the average price per sq ft is about 9% higher. Prices increases from February to March were anywhere from 1-3% depending on the metric (this doesn’t mean values went up by 1-3% though). 

8) Increasing sales volume is one reason for lower inventory.

Cash in Q1 - by Sacramento Regional Appraisal Blog

Housing inventory is the relationship between sales and listings, so if there are more sales and no real change in the number of listings it will naturally mean inventory as a metric will show a decline. Look at the graph above to see all sales since 2013 for the first quarter of the year. Can you see how sales volume is increasing? At the same time we see cash volume declining. This reminds us the market is trying to figure out what normal looks like. It’s healthy to see sales volume growing.

9) Low interest rates have helped take homes off the market.

Interest Rates Since 2008

Historically low interest rates have played a big role in shaping inventory in that some owners are sitting on a 3.5% interest rate from years ago and they are simply not going to move unless necessary. Why would they anyway if their replacement home would come with a much higher mortgage? This means there are fewer homes hitting the market that might otherwise sell.

10) Low inventory is causing homes to sell faster.

CDOM in Sacramento County - by Sacramento Regional Appraisal Blog

Last year it was taking 5 days longer to sell a home and two years ago in March 2015 it was taking 15 days longer to sell a home. Can you see how low inventory makes a difference in how long it takes to sell? By the way, here is CDOM by price range. As you can see, the higher the price the longer it takes to sell. Just because it is a “hot” market does not mean every property is selling in 3 days.

BIG MONTHLY POST NOTE: Once a month I do a big market update (and it’s long purpose). Normally I talk about Placer County and the Sac Region too, but I tore my MCL a few weeks back, so I only had time to focus on Sacramento County in today’s post. Next month I’ll likely be back to normal (but I may change it up too).

DOWNLOAD 50 graphs HERE: Please download new market graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: Did I miss anything? Any other thoughts as to why inventory is low? How would you describe the market right now? I’d love to hear your take.

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5 things to remember about the value of landscaping

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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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