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appraiser methodology

When a home is almost three bedrooms (but technically only two)

November 8, 2017 By Ryan Lundquist 16 Comments

Imagine a house that used to be three bedrooms until the owner converted one room into a den. Is there a big hit to value now? Will the appraiser only give credit for two bedrooms? Let’s consider some thoughts below. Anything to add?

1) Big deal for value: First off, there can be a huge difference in value between a property that has three full bedrooms and one that only has two bedrooms with no other space that could possibly be used as a bedroom (such as a den). A three-bedroom unit simply has more utility and marketability, so when appraising a classic two-bedroom property I definitely want to take an “apples to apples” approach in my comp selection by finding other two-bedroom homes since those ones are most similar in appeal.

2) Buyers see the bigger picture: Sometimes we see homes that technically only have two bedrooms because a buyer selected a builder’s “den option” or maybe a seller removed a closet in the third bedroom. We’d be right to classify these homes as 2-bedroom properties, but at the same time my sense is if there’s an extra den or office that can be easily converted to a bedroom, buyers see the bigger picture of the house without getting too stuck on one less closet. Thus we can probably compare a house like this with other three-bedroom homes more than classic two-bedroom homes. Though we have to consider any impact to value for the lack of a closet.

EXAMPLE 1: A seller closed up a bedroom closet to use the space as an office and is now concerned an appraiser is not going to give him credit for the extra “bedroom.” Since there isn’t a closet, an appraiser will likely label the home as two bedrooms, BUT the appraiser will also recognize the house can very easily have an extra bedroom with the addition of a closet. Since the house is so much closer to being a three-bedroom home, it would be very limiting to only use classic 2-bedroom comps (see #3 below too). In other words, buyers see the big picture of a house and they probably aren’t going to expect a massive price reduction over one simple closet being removed.

EXAMPLE 2: I was asked how to value a 2-bedroom house that was close to 3000 sq ft and there were no other “comps” that size with only two bedrooms. But the thing is this house had extra space that could easily be converted to a third and fourth bedroom with the addition of closets. In situations like this it’s so easy to get locked into a rigid comp search and only look at two-bedroom homes. I’m a big fan of “apples to apples” where possible, but sometimes we have to step back and look at properties like buyers do. In this case there were multiple offers on the home because buyers were seeing the bigger picture of value rather than getting wrapped up in two closets missing. It’s possible this home could still sell at a discount, but let’s not start comparing it with significantly smaller two-bedroom “comps” either because that’s not what buyers are doing.

3) Logic and adjustments: Whenever we see a difference in bedroom count it’s easy to give a canned value adjustment. So without any research we hear, “The value difference between a 2-bedroom and 3-bedroom home is $20,000.” Okay, maybe that number works sometimes, but let’s step back and think like logical buyers. If looking at a home that has a den option that is otherwise similar to a traditional bedroom, it might cost around $2,000 to add a closet. In a situation like this does it really make logical sense to give a $20,000 negative adjustment? In other words, would buyers truly penalize a property at $20,000 because there is technically no closet? I would venture to say most buyers are probably not going to expect a huge price discount for such a minor cost-to-cure.

4) The market might not care: Sometimes the market doesn’t show much of a price impact for only having two bedrooms. We see this in 55+ communities, but we might also see it with architecturally interesting properties where prospective buyers might not need extra bedrooms. This is a good reminder to step back from being trigger-happy about giving the same value adjustment since the market doesn’t always make an adjustment.

5) Pro tip on downsizing: I recommend not turning a 3-bedroom to a 2-bedroom house. I see this happen when an owner wants a larger master bedroom, but it’s a quick way to lose marketability (and maybe value).

I hope this was helpful or interesting.

Think Like an Appraiser Class (I’m teaching): By the way, I’m doing my favorite class on Dec 7 from 9am-12pm called How to Think Like an Appraiser. We’ll talk through comp selection, making adjustments, tips for talking about value, and what to do in various scenarios. Details here.

Questions: What is #6? Do you have any stories or examples to share about the value difference (or lack thereof) between bedrooms? Anything else to add?

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Filed Under: Appraisal Stuff Tagged With: 2 vs 3 bedroom, adjusting for bedroom count, appraisal methodology, appraiser methodology, bedroom count, giving value adjustments, House Appraiser in Sacramento, Sacramento Home Appraiser, three-bedroom, two-bedroom, what is a bedroom

Cherry-picking comps & being connected to the neighborhood

May 3, 2017 By Ryan Lundquist 14 Comments

On paper it looked like value was going to be so much higher. Why? Because comps to the north were easily 10-20% higher, and even Zillow came in $100,000 above the appraisal (ahem). The big cause of such a legitimately lower appraisal boiled down to one thing. Location. Today I want to show a situation where a small section of the neighborhood was blocked off from the rest, and it was a big deal for value. Have a look below and let me know what you think. Anything to add?

land park neighborhood sacramento

The value issue: As you can see, this pocket of housing in the Land Park neighborhood isn’t accessible from the rest of the neighborhood besides a frontage road next to I-5. In other words, this section is disconnected. What sort of impact is there (if any) for being cut off from the rest of the neighborhood?

land park neighborhood sacramento 3

Methodology when only 5 sales in 5 years: When appraising something in this section, there were zero sales over the past 2 years and otherwise only 5 sales in the previous 5 years. This means I had to really study older sales to understand how value works. Here are the five sales:

land park neighborhood sacramento 4

What I ended up doing was comparing sales in this small pocket with similar sales at the same time in other areas of Land Park. Also, my goal was to find other patches of housing in the expanded neighborhood that seemed to sell at the same level. If I could find other areas selling at similar price points through the years, then current sales in those areas are probably my best comps for today.

land park neighborhood sacramento 5

land park neighborhood sacramento 6

Conclusions: After looking through all five sales I observed the following:

1) Some of the lowest prices: This small housing patch has some of the lowest prices in the neighborhood as shown with the yellow dots in the graph below.

Land Park trends by Sac Appraisal Blog

2) 10-20%+ easily: If I were to cherry pick “comps” directly to the north, there is easily a 10-20%+ price difference for otherwise similar houses. The truth? Location matters. So does being connected to the rest of the neighborhood. In some cases a few streets that are disconnected might not sell differently than the rest of the market, but it could also be a big deal like the example above. The truth is if we cherry-picked nearby higher sales, the value would’ve been inflated by $60-80K+. 

3) Limited by 90 days: It’s tempting to only look at the past 90 days of sales, but that can be far too limiting – especially in a situation like this. Also, a 5-minute comp check isn’t realistic. At times we might spend hours researching before beginning to understand how the immediate neighborhood compares to the rest of the market. We might even call colleagues and seek out other opinions too.

4) True comps: Other patches of housing in Land Park that tended to command similar prices were very busy streets or homes having a huge influence from nearby commercial properties (or heavy fixers that would have otherwise sold at much higher levels in average condition). I don’t say this to be negative about any of Land Park, but only to be objective as an appraiser trying to explain how value works in some areas compared to others.

I hope that was helpful.

Two classes I’m teaching in May: By the way, I’m teaching a class at SAR in a few weeks called How to Think Like an Appraiser. I’m also doing a blogging class. Click here for details.

Presentations - sm

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

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Filed Under: Appraisal Stuff Tagged With: adverse location, appraiser methodology, choosing comps, comp selection, how to choose comps, Land Park, next to freeway, no recent comps, no reent sales, real estate appraisal sacramento, Sacramento Land Park neighborhood, sacramento real estate values, thinking like an appraiser, tips for comp selection

Three dangerous ways to choose comps

January 17, 2017 By Ryan Lundquist 21 Comments

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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Filed Under: Appraisal Stuff, Resources Tagged With: appraisal methodology, appraisals in Sacramento, appraiser methodology, cap rates, capitalization rates, choosing comps, comp selection, Price per sq ft, sacramento appraisers, sacramento home values, searching by price

Four things to remember about the value of a larger lot

April 4, 2016 By Ryan Lundquist 12 Comments

The lot is huge, so it must be worth more, right? But how much is it really worth? Let’s look at four quick points to consider when it comes to lot size. Don’t miss the two images at the bottom of the post too. I’d love to hear your take in the comments.

larger lot size in real estate - sacramento appraisal blog - image purchased from 123rf and used with permission

Four things to remember about the value of a larger lot:

  1. It’s about what the market will pay: The best way to know what a larger lot size is worth is to start comparing similar homes with and without larger lots. What is the price difference? If we can line up a few examples, we’ll probably begin to see a reasonable range of value emerge. Keep in mind there might not be any recent larger lot sales, but you can easily look at the past few years of neighborhood sales as well as sales in a competitive market. Value could be exponentially higher for the larger size, but then again it might be less than we’d think. At the end of the day we have to look to the market for the answer though since it all comes down to what buyers are actually willing to pay for the difference in size.
  2. Usefulness: When dealing with a larger lot we have to consider the usefulness of the extra space. What if the larger lot size was located in the front yard? Could there be a difference in value between a huge backyard and a large front yard? What if the lot had a funky shape that made most if it unusable? What if the larger lot was located right next to the highway compared to the interior of the neighborhood? What if there was an easement running through the lot that essentially cut the usable space in half? From a value standpoint we have to consider the effective usable lot size and make sure we are choosing comps with similar utility.
  3. New construction: Remember, builders tend to charge more for a “lot size premium” or “lot elevation premium” when a house initially sells, but this premium may or may not exist in the resale market years down the road. The owner might expect to sell for more, but what are homes with similar features actually selling for in the resale market? That’s what our focus needs to be.
  4. The temptation to give an adjustment: It’s tempting to give a lot size value adjustment any time we see a difference in size. Thus when we see a lot that is 6534 sq ft and a lot that is 8000 sq ft, we automatically apply an adjustment. Or if we see something that is 4356 sq ft and a lot that is 6500 sq ft, we’re tempted to use a price figure we think makes sense. But we have to ask ourselves, would buyers really make the adjustment? (adjustments are supposed to be based on the behavior of the market (buyers)). It’s easy to be trigger-happy about giving adjustments like this, but we have to remember there is no such thing as an adjustment that is going to work for every single neighborhood, price range, or market. In short, if the adjustment is incredibly minor, maybe it’s better to just not give it in the first place.

I hope this was helpful. Now two quick images.

lot utility - sacramento appraisal blog

Example of Finding an Adjustment: Assume these two model match sales have a similar location, upgrades, and condition. Now how much is the extra lot size worth based on actual sales? Remember, it’s ideal to find a few examples instead of just one so our results are more meaningful.

lot size example - by sacramento appraisal blog

Questions: Anything else to add? What is #5? Did I miss something? I’d love to hear your take.

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Filed Under: Appraisal Stuff, Resources Tagged With: appraiser methodology, appraisers and adjustments, choosing comps, lot size adjustment, lot utility, Real Estate Appraisals, Sacramento appraisals, site utility, value of a larger lot, where adjustments come from

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