Does a fence need to be painted to meet FHA standards?

Does a fence need to be painted or stained to meet FHA minimum property standards? During an FHA refinance an appraiser recently told a home owner that his fence needed paint or stain for the loan to work. Is that really true though? Let’s dig into this issue. I’d love to hear your take in the comments.

FHA appraisal standards for wood fence - sacramento appraisal blog

The Quick Gist: FHA requires appraisers to identify defective paint surfaces on a home’s exterior (which also includes the fence). However, this doesn’t mean a fence actually needs to be painted. Being that most fences such as cedar, cypress, and redwood are already considered a sustainable wood (or sealed or treated), they don’t actually need to be painted. Think about it practically in that new home builders don’t paint their fences and neither do the vast bulk of property owners. But if a fence has been painted in the past and now has defective paint (peeling, chipping, flaking), then the defective portion should be scraped and sealed according to FHA standards (see p 497 in FHA Manual 4000.1 for a paragraph on defective paint).

FHA-photo-by-Ryan-LundquistThe Reality: Appraisers are not trained to identify whether wood is sealed or not. Maybe some appraisers have that skill set, but most probably don’t. While on the phone with HUD yesterday I even asked them how an appraiser would specifically identify a fence that was not sealed. Crickets. The person on the phone did not have an answer other than to say FHA requires a fence to be sealed from the elements. This means a reasonable focus for appraisers would be to call out defective paint on fences, but otherwise assume the wood is sealed unless there is evidence to suggest otherwise. Does that seem like good common sense? One further point to consider is something my friend Realtor Dean Rinker said in a conversation recently. Even if the standard was the fence needed to be painted, would that also include the neighbor’s portion of the fence too? Imagine that.

14727880 - 3d illustration: a group of cans of paint and roller

Yeah, but the house was built in 1968: I’ve seen people quote the following section from the old FHA manual (or a recent FAQ) in support that fences need to be painted. The idea is that if a fence was built before 1978 when lead-based paint was used, then the home’s fence should be painted to curb any safety issue. First off, if the fence has never been painted, there is NO safety issue with lead-based paint. Thus the age of the house is not the driving issue in this conversation on fences. Most of all, this section states an appraiser should be looking for defective paint on the fence, but it does NOT state the fence needs paint. It is true FHA does not want bare wood on the house, but it is entirely normal for fences to be “bare” (keep in mind wood on fences is sealed or treated though, so it is technically not bare).

If the home was built before 1978, the appraiser should note the condition and location of all defective paint in the home. Inspect all interior and exterior surfaces – wars [sic], stairs, deck porch, railing, windows and doors – for defective paint (chipping, flaking or peeling). Exterior surfaces include those surfaces on fences, detached garages, storage sheds and other outbuildings and appurtenant structures (FHA’S 4150.2 Old Manual).

When it comes to FHA the standards aren’t always as clear as we’d like them to be. This is why it’s critical to know what the FHA manual actually says, consider the spirit of the FHA manual, be in tune with how the bulk of appraisers deal with issues, and of course use common sense.

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

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The stats show the market is slowing (and we’re not surprised)

Shocking titles tend to get clicked more on Facebook. So if I wanted more clicks, I probably could have gone with a sensational title like, “The market is taking a turn downward”. Or maybe I could have said, “Big changes you MUST know about in Sacramento real estate.” After all, the stats are showing values are softening, so hyping up this point could certainly lead to more traffic. But you know what? I’m not interested in hype, and I never want more clicks at the expense of my integrity. Yes, the market is growing softer right now, and that can feel scary for some, but truth be told there really isn’t any shock here because this is exactly what we expect to see happen during the fall months. Nonetheless, the fascinating part is the fall season this year has still been different than it was last year. This year is actually much more competitive and far less dull. So let’s unpack some trends below with the goal of understanding what values are doing so we can more effectively tell the story of the market to our clients and contacts. I hope this is helpful for locals as well as out-of-town readers (what is your market doing right now?).

housing numbers - image purchased and used with permission by sacramento appraisal blog

Two ways to read THE BIG MONTHLY POST:

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

DOWNLOAD 70 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 (please don’t copy verbatim). Thanks.

One Paragraph to Describe the Sacramento Market: The market has been slowing in the Sacramento area, but it’s nowhere near as slow as it was last year at the same time. Overall sales volume is up nearly 11% in the region this year, housing inventory is down 24%, and homes took 4 fewer days to sell this September compared to last September. There have actually been less price reductions so far this year too. In terms of home prices, the median price, average price per sq ft, and average sales prices are tending to be about 4-5%+ higher than they were last year, though this doesn’t mean values are necessarily 4-5% higher. This is an important distinction because median price increases don’t always translate dollar to dollar to actual value. Keep in mind the median price in the regional market has softened by almost 2.5% over the past few months, and the median price in Sacramento County has been about the same for five months in a row. There are some graphs below to help show the seasonal market, and they remind us it is customary to see the median price soften, inventory increase, and sales volume decline during the fall months. Overall there is still a higher demand than there was last year, but the market is very price sensitive. Buyers simply aren’t pulling the trigger on overpriced homes (sellers, please consider that). By the way, if you missed my post last week, I gave some perspective on “real estate bubble” conversations, and it is a very relevant post as we see price metrics begin to soften at this time of year.

Sacramento County Market Trends for September 2015:

  1. The median price has been hovering around $290,000 for 5 months (3.6% higher than last year).
  2. It took an average of 36 days to sell a house last month (up 2 days from the previous month).
  3. Last year at this time it was taking an average of 41 days to sell a house.
  4. FHA sales were 29.5% of all sales last month (nearly 28% of all sales in Sacramento County last quarter).
  5. Sales volume is 10.1% higher so far in 2015 compared to last year.
  6. Sales volume was 13% higher in Sept 2015 compared to Sept 2014.
  7. There is a 1.74 month supply of homes for sale (similar to previous month).
  8. Housing inventory is nearly 30% lower right now compared to Sept 2014.
  9. The average price per sq ft is 188 (5.6% higher than last September).
  10. The average sales price is $314,317 (1.9% higher than last September).

Median price since 2013 in sacramento county

reo and short sales sacramento county 2

seasonal market in sacramento county median price

seasonal market in sacramento county sales volume 2 FHA and cash trends in Sacramento 3

seasonal market in sacramento county inventory 2

inventory - September 2015 - by home appraiser blog CDOM in Sacramento County - by Sacramento Appraisal Blog price metrics since 2014 in sacramento county

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

  1. Sales volume was up 11.5% in Sept 2015 compared to Sept 2014.
  2. Sales volume for the year is up 11% compared with 2014.
  3. The median price at $325,000 is up 4.8% from last year, but down 2.5% from the past few months.
  4. It took an average of 41 days to sell a house last month (2 days longer than last month).
  5. FHA sales were 23% of all sales in the region last month.
  6. There is 2.06 months of housing inventory (same as previous month).
  7. The average sales price is $360,481 (4.3% higher than last year, but down slightly from three months ago at $370K).
  8. It took 4 less days to sell a house this Sept compared to Sept 2014.
  9. FHA sales volume has increased by 30% in 2015 compared with 2014.
  10. Housing inventory is nearly 24% lower right now compared to Sept 2014.

sales volume 2015 vs 2014 in sacramento placer yolo el dorado county

breakdown of sales fha and everything else in sacramento placer yolo el dorado county

breakdown of sales in sacramento placer yolo el dorado county

median price sacramento placer yolo el dorado county

months of housing inventory in region by sacramento appraisal blog

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

Placer County Market Trends for September 2015:

  1. Sales volume was up 7.7% in September 2015 compared to September 2014.
  2. Sales volume for the year is up 15.8% compared with 2014.
  3. The median price in Placer County is $389,000 (about 1% higher than last year at the same time).
  4. Cash sales were 18.8% of all sales last month (very normal level).
  5. It took 46 days on average to sell a house last month (same as previous month).
  6. Last year at this time it took 1 day longer to sell a house.
  7. FHA sales were 16.7% of all sales in Placer County last month.
  8. There is 2.42 months of housing inventory (17% lower than last year).
  9. The average price per sq ft is 194 (5.3% higher than last year at the same time).
  10. REOs were 2.6% of all sales and short sales were 1.5% of all sales last month.

Placer County median price since 2014 - part 2 - 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

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

Placer County sales volume - by sacramento appraisal blog

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

Quick Pricing Advice:

  1. It’s normal for prices to cool during the fall. This year the market is not as soft as it was last year at this time, but we are still seeing a softening.
  2. Price according to the most recent listings that are actually getting into contract rather than the highest sales from the spring.
  3. Talk about the difference between actives, pendings, and neighborhood sales on your listing appointments and in your appraisals. See How to use a CMA to gauge the temperature of the market for a fantastic way to quickly explain what the market is doing to your clients.
  4. The market is price sensitive, which means buyers are not biting on overpriced listings despite inventory and interest rates being relatively low.
  5. Remember there are many markets within a market, so price according to the neighborhood market rather than county-wide trends since your neighborhood might be more or less aggressive compared to the entire county.

DOWNLOAD 70 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 (please don’t copy verbatim). Thanks.

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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Some perspective as real estate “bubble” conversations emerge

Lots of real estate “bubble” talk lately. Have you noticed? It’s a hot topic for the public and real estate community as housing affordability is becoming more of an issue since values have been on the rise for the past four years. Even Hollywood is getting in on the action with movies hitting the screen about the bursting of the “bubble” ten years ago (thanks Jonathan Miller for the heads-up). Anyway, this isn’t another post on whether we are in a bubble or not, but rather some things to keep in mind for the real estate community as bubbly conversations emerge. I’d love to hear your take in the comments below.

real estate bubble - image bought and used with permission from 123rf dot com by sacramento appraisal blog

Enjoy the tips. Anything you’d add?

Things to keep in mind during real estate “bubble” conversations:

  1. Predicting is Dangerous: Predicting the future of real estate is sort of like predicting what Justin Bieber is going to do next. What will the Biebs do next month or next year? Nobody knows. The same is true in real estate, and it’s okay for real estate professionals to simply say, “I don’t know what the market is going to do. My crystal ball is broken. But I can tell you what the market is doing right now and what it seems poised to do.” Seriously, if you work in real estate, this is probably the best and most honest answer you can give.
  2. Remember that markets change: At some point in the future values are going to decline, and at some point in the future they are going to increase. Of course we want to avoid incredibly steep declines, but otherwise it’s normal for real estate values to go up and down, and we should therefore expect that. We seem to have a mindset that prices should only increase, but that’s just not realistic. That would be like saying every day should be sunny or each day of a marriage should be only positive and filled with bliss (nothing is always positive).
  3. Be in tune with the slow fall season: When the market slows during the fall, it only exacerbates bubble talk. The past three years have seen a very definitive dull market in the fall (at least in the Sacramento area), and we need to respect and embrace that slow seasonal reality (and price accordingly). It’s sort of like when work is slow, it’s easy to get depressed or even think the business is going under. Well, it’s the same deal with the cyclical real estate market.
  4. Never promise equity: It’s easy to say things like, “This house will be worth much more in two years, so it’s a good time to buy,” but can anyone really guarantee that? If you never promise value to your clients, they can never come back and say, “You told me the market was going to increase and it didn’t”. This was exactly what many real estate pros told buyers using 100% financing last decade. “Hey, the market is going to increase, so don’t worry about that adjustable rate. You can refinance out of it in two years.” Interestingly enough, today’s FHA buyers are sometimes told, “You can get in the market with FHA now, and just refinance into a conventional loan when the market increases.”
  5. Focus on affordability: Everyone wants to buy at the lowest point in a market, but very few people actually pull that off. In fact, many times it’s simply an accident when it does happen. Ultimately people ought to buy when it makes sense for their wallet and lifestyle, and that is a fantastic point to emphasize because it respects where people are at in life rather than telling people when they should do something. If you have clients who want to buy, then honor their desires by helping them understand what affordability looks like with whatever market is in front of them.
  6. Become great at explaining the cake: Value in real estate is like a multi-layered cake since there are many “layers” in a market that impact prices. See my cake image here and use it (I love this analogy). It’s easy to think of real estate in terms of being only about supply and demand, but it’s also about interest rates, the economy, cash investors, financing, affordability, jobs, consumer confidence and so many other “layers”. In short, when one layer of the cake changes (such as inventory or financing), it can change the entire cake (the market).
  7. Hone your pricing skills:  How can you get better at pricing, pulling comps, or making value adjustments this year? It can be challenging to price when a market slows or declines because values might actually be lower than the most recent sales and listings indicate. Thus I recommend getting some training this year, taking some stellar CE, or connecting with some locals who you think are getting it right (By the way, if you’re local, I teach a 2 or 3-hour class called “How to Think Like an Appraiser”. May I do a training in your office?)
  8. Change what you say about the market as the market changes: It’s easy to speak fluently in clichés or say the same thing about the market for years. Agents do this by saying “it’s a good time to buy and sell” even if it isn’t, and appraisers do this by always indicating in their reports that values are “stable” with a “balanced” supply of inventory (even if that’s not the case). When we look closely at trends and begin to see what the market is doing, we can change what we say to our contacts and clients. Moreover, we might even price more effectively and give better real estate advice.
  9. Bubble Obsession: Values were massively inflated ten years ago, yet we still have this obsession about getting back to “the good ‘ol days”. Was it really that good to see huge price increases only to have the housing market collapse around us? Do we want to get back there? Nah, I think we can do better. This is why I recommend real estate professionals to be aware of bubble issues, but also find other interesting things to talk about and share. I’m absolutely not saying to ignore the market or be dishonest, but only find a balance so we don’t perpetuate a fear or worry about what may or may not happen to values in the future.
  10. Consider your future clients: One of the best things to do when considering the future of real estate is to think about who your clients might be as the market changes. Based on the way the market is moving, who do you think your clients are going to be in 2016 and 2017? What will your database need over the next two years? Are they going to be looking to buy, sell, rent, get married, get divorced, invest, do a short sale, get back in the market, remove PMI, sell a parent’s home, move up, build an accessory dwelling for an aging parent, downsize, settle an estate….?

I hope this was helpful.

Thank you sincerely for reading. I cannot tell you how much I appreciate you letting me share a few thoughts each week.

Questions: What is point #11? Which one resonated with you the most? Do you think we’re in a “bubble”? (I’ll share my thoughts if someone asks)

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4 temptations to avoid when it comes to cost vs value in real estate

If you spent $50,000 on a 15 ft statue of Yoda in your front yard, do you think you’d get $50,000 back in value? A Star Wars fan might wet his pants and quickly offer a premium for the house, yet what would everyone else pay? That is the bigger question. We all know there is a difference between cost and value. Cost is the price of something, while value is what it is actually worth. We understand this logically, yet there often seems to be a disconnect between cost and value in the actual real estate market, which is why this conversation is important. Let’s look at some temptations to avoid as well as tips to get the most value out of improvements. I’d love to hear your take in the comments below.

cost vs value in real estate - by sacramento appraisal blog

Temptations to avoid when it comes to cost vs value:

  1. Treating Cost & Value the Same: Value can be much different from cost, right? This means a $47,000 home remodel might not lead to $47,000 in value. Or $75,000 in extensive landscaping might not command a $75,000 price premium. Or a $150,000 accessory dwelling built in the backyard may not automatically boost value by $150,000. Or a built-in pool that cost $35,000 to install may not lead to…. you get the point. We can always consider the cost and quality of something when we are trying to come up with a value, but at the end of the day we have to answer this question: How much are buyers actually wiling to pay for it? An owner might say, “I spent $136,000 on this rehab, and the appraisal came in low”, but if the appraiser used solid comps and made proper adjustments, the real issue could be the full cost of the rehab is not showing up dollar for dollar in the resale market (it’s actually not as easy as you’d think to get dollar for dollar).
  2. Letting Emotion Trump Data: What are homes actually selling for in the neighborhood? We have to look at sales to inform us about the resale market since sales help tell the story of what the market has been willing to pay. This is especially true when considering the ARV (after repair value) of a house that is going to be flipped (or even remodeled). It’s far too easy to get trapped into a formula like this: cost of acquisition + cost of remodeling + profit = value. But the truth is we need to look at the resale market first. What are remodeled properties actually selling for in the neighborhood? Once we have a good sense of the numbers we can then take steps back to determine if the acquisition cost and/or a rehab costs make sense or not. Thus an investor might pass on a house because the deal doesn’t make financial sense, or an owner might decide to scale back that extensive remodel.
  3. image bought and used with permission by 123rf dot com smDistracted by Shiny Objects: It’s easy to feel so excited about putting in the latest upgrades, that we actually miss value. In other words, we can get distracted by the glow of the new shiny features that we fail to ask whether buyers are going to pay for those features or not. For instance, someone might install $70,000 worth of energy-efficient features, but will buyers pay for that in the resale market?
  4. Projecting Other Neighborhoods on Yours:  What works well in one neighborhood may not work in a different area, so it’s important to not project one neighborhood on another. For instance, I appraised a house in a first-time buyer neighborhood that had VERY extensive upgrades. The owner had it listed over 25% higher than even the highest competitive sale so he could recoup his costs (it was way overpriced). The unfortunate reality here was instead of letting other remodeled homes in the neighborhood guide the owner on what type of upgrades to select, the owner instead put the best stuff from the region into this one house.

Tips for getting the most value out of upgrading your home:

  1. Buyer Expectations: Be in tune with what buyers expect in the neighborhood for upgrades. What are they actually willing to pay for? One way to know this is to visit open houses and talk with neighbors so you can see what others have done (and then see if their homes are commanding higher prices).
  2. Let Neighbors Overbuild: Don’t do more than others have done in the neighborhood. It’s far better to benefit from upgraded homes around you rather than be that one over-the-top property.
  3. Know your Location: Be realistic about your neighborhood so you are doing the right upgrades for the location.
  4. Consult a Professional: Talk with a reputable real estate agent or consult with an appraiser before you remodel so you get a better idea of where your dollars might be best spent to maximize value and appeal. This step is often not considered, but if you’re spending tens of thousands or hundreds of thousands of dollars, why not reach out to the real estate community before you break ground?

NOTE: Homes are not just about resale value. Owners should do what they want to their homes and enjoy them. But if you do plan on selling, maybe keep these things in mind.

I hope this was helpful.

Questions: Would you pay more for a Yoda statue in your front yard? What is Temptation #5 or Tip #5?

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