How I appraised a property with a non-permitted garage conversion

How do we value a non-permitted garage conversion? Today I wanted to share a real life example of a property I appraised. I’ll keep things fairly brief because it’s impossible to get to everything in just one post. Though I do have a 10-minute audio clip for more depth on conversions. Any thoughts?

UPDATE: Read part 2 of this post HERE.

garage-conversion-sacramento-appraisal-blog

Garage Conversion Formula: It would be nice if there was a one-size-fits-all value adjustment we could apply to any conversion, but that’s not how it works because conversions vary tremendously in size and quality – not to mention some neighborhoods accept them and others really don’t.

Golden Data: In this case the conversion was nicely done and was even on a crawl space like the rest of the house. I searched the neighborhood for garage conversions over the past few years and literally found none. But I did have one very lucky bit of data since the subject sold four years ago on MLS as an arms-length sale. This means I was able to look back in time and find how the subject fit into the context of neighborhood prices.

garage-conversion

What I wrote in my report: Based on the previous sale in 2012, it is clear the market recognized the subject property’s extra size as square footage and paid for it as such in the marketplace. The lack of permits on the garage was definitely disclosed in MLS. At the time of the sale in 2012 the market was willing to pay about $15,000 (6%) less for the subject property compared to otherwise similar homes that had a garage. In today’s market were no recent sales with a garage conversion, so the appraiser used historic data to give a downward $15,000 adjustment to Comps 1-3. The garage adjustment would really be reasonable anywhere between $15,000 to $20,000, but since the subject has been upgraded extensively in recent years it made sense to adjust at the lower end of this range since upgrades lessen the negative for not having a garage.

If I didn’t have a previous sale: Without a previous subject sale, I’d need to find other garage conversions in the neighborhood or search in a competitive area of town to try to find a reasonable adjustment for the lack of a garage (and lack of permits). In some cases I would maybe consider the cost to turn the conversion back into a garage – especially if the conversion was shoddy or minimal to cure. Still other times I might ponder the cost to permit the conversion or the cost to actually build a garage if there is space to do so. Remember, the adjustment at $15,000 made sense here, but it could be FAR DIFFERENT in other situations.

Garage Conversion Video: This audio clip is ten minutes or so and could be good as background noise while working. Watch below (or here).

Note on permits: As an appraiser it’s a liability to assume everything in a non-permitted conversion was done to code. What if I recognized value for a conversion but then in the future an owner had to rip out the non-permitted area? Can you see why some appraisers (and lenders) won’t give value to something unless it was permitted? Yet we still have to ask, “Is the market willing to pay something for this non-permitted area?” This is not an easy question to answer, but it is vital nonetheless. Hopefully we can find some comps, but more than that we need to disclose everything clearly, use logic and professional judgement, and maybe reach out for opinions of other trusted professionals too.

Questions: How do you deal with garage conversions? Any other insight? Did I miss something? I’d love to hear your take.

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Why a property’s previous sale can really matter for an appraisal

Paying close attention to a property’s previous sale can be a big deal. I know it’s tempting to say value is all about the current market, but sometimes looking at the past can help us understand the present. Here are some reasons why I pay attention to previous sales. Any thoughts?

previous sales matter to appraisers - sacramento appraisal blog

5 things to consider about a property’s previous sale:

  1. Requirement to Explain: If you didn’t know, appraisers are required by USPAP (our uniform standards) to analyze and report the past 36 months of sales or transfers of the subject property. Thus analyzing a prior sale can be a normal and even mandatory part of the appraisal process.
  2. Context: A previous sale can sometimes give tremendous insight into how the market responded to the subject property. This is especially true if a property is unique or funky. What did the subject property compare to at the time of its previous sale? How did it fit within the market? Digging deeply into neighborhood sales can help us answer these questions and maybe even influence the comps we choose for today’s value.
  3. Clues into Adjustments: A prior sale can give clues into how much we might need to adjust for certain aspects of the property. For instance, if the subject is located on a busy street, a previous sale might help us see if that was a big deal or not compared to other neighborhood sales. Or maybe the subject property has a very large lot for the neighborhood, and prior sales can help us gauge how much of a premium there was if any. Or imagine a house is twice as large as anything else in the neighborhood. Let’s find some current comps of course, but let’s also look to the past too. Can we maybe glean some value context by seeing what buyers were actually willing to pay for this beastly home in the past? Maybe so.
  4. Comp #4: Appraisers can use the subject property as a comparable sale in reports. Not that appraisers need permission, but according to Fannie Mae, “The subject property can be used as a fourth comparable sale or as supporting data if it was previously closed” (B4-1.3-08). I’ve done this on occasion when a property is unique and data is limited. After all, what is more comparable than the subject property itself?
  5. Past vs. Present: If there was a previous sale in the past, we can probably milk it for some perspective, but let’s remember we ultimately have to let the current market speak to us instead of imposing the past on the present. After all, the market might be different today due to a change in zoning, change in buyer demand, gentrification, etc… It’s worth noting too sometimes sales in the past simply sold for way too much or way too little.

Example: Here is a graph I made for an appraisal I did recently that was going to court. The subject sold three times in the past at a mid-range of the competitive market. Does the history of sales help build credibility for why I reconciled the value to the middle range? I think so.

context for value with graphing - by sacramento appraisal blog

Tip for Agents & Owners: If something has changed about the property since the previous sale, be very intentional about talking with the appraiser about the change (please use my Info Sheet for Appraisers). Also, I recommend opening up discussion about the nature of the prior sale so the appraiser can have more information and maybe make a judgment call about the sale (especially if the property sold too high or too low for some reason).

I hope that was helpful.

Questions: How do you use previous sales when you value properties? What is #6? Did I leave something out? I’d love to hear your take.

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How school boundaries impact real estate values

The quality of a neighborhood school can make a huge difference with real estate values. Yeah, I know that’s a Captain Obvious statement, but let’s talk about that. Last week I was reminded yet again how powerful school boundaries can be, so I wanted to share an example of this concept and then kick around some ideas. I’d love to hear your take in the comments below.

school boundaries and real estate values - sacramento appraisal blog

Do you look at school ratings? While appraising something in the Didion school boundaries in the Pocket area of Sacramento, I looked up greatschools.org to find Didion had a rating of 8 while neighboring schools in the neighborhood had a rating of 3 and 4. Could there be a difference in value depending on which school your home feeds into? Maybe so.

Ratings from Great Schools and Real Estate - by Sacramento Appraiser Blog

Do school boundaries matter? Okay, so Didion clearly has a higher rating, but do we actually see properties sell for more? Agents regularly say there is a value premium, but is there really? I decided to create a quick visual by comparing similar-sized sales from the surrounding neighborhood with ones in Didion territory. What do you see?

Pocket and Didion Market Trends - by Sacramento Appraisal Blog 2

The black dots that represent Didion show us these homes tend to sell toward the top of the neighborhood market. This tells us buyers are clearly in tune with the school system in the neighborhood and they are clearly paying higher prices to be in this niche.

5 Things to Remember about Schools & Real Estate Value:

  1. Know the school boundaries: One of the fastest ways I’ve been able to obtain school boundaries is through GreatSchools.org. I type in the name of the school, click on the map, and then observe boundaries and even ratings of surrounding schools (just like the image above). Obviously the website could be wrong, but it’s a good start.
  2. Don’t trust MLS comments: Properties are sometimes identified incorrectly in MLS, which is why we have to double-check by looking up various websites or even calling the school district.
  3. Choose comps attending the same school: Since value can be different depending on the school, it’s important to choose comps that have the same school influence (if possible). Many times a tract subdivision only has one school, so that makes it easy when choosing comps. But in the case above there are several school options, which means if we aren’t in tune with the neighborhood market and the school system, we just might pick the wrong comps.
  4. Don’t adjust based on GreatSchools ratings: As much as I like GreatSchools.org, at the end of the day I wouldn’t make a value adjustment because Didion has an 8 rating and other nearby schools have a 3 or 4. After all, I don’t want to impose the idea that one area sells for more or less because of a rating. If there really is a value difference, I’ll likely be able to see that in the sales. Or better yet, I can just choose comps that go to the same school so I don’t even have to worry about figuring out a value difference.
  5. Communicate about the school: If you are an agent, spend an extra minute studying school boundaries so you know for sure what school(s) your home feeds into. Your knowledge can come in particularly handy too when talking with appraisers. If the school boundaries are a big deal for value, I recommend highlighting this when talking with appraisers (or using my Appraiser Info Sheet to do so). Appraisers, it’s easy to miss details like school boundaries, so it might be a good idea to bookmark a few sites to help quickly see boundaries and/or ratings.

I hope this was helpful.

Questions: What is point #6? Did I miss anything? Do you have any other tips for finding out about school boundaries? Any stories about buying a house and paying more or less because of the school? I’d love to hear.

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If the real estate market did shift…

The new buzz word in real estate is SHIFT. Everywhere I go I hear this word, and it seems like every other article is about a coming change in the market. Thus the question becomes, how would you recognize if the market did begin to shift? What signs would you look for? Let’s kick around some ideas below and I’d love to hear your take in the comments. Any thoughts?

change sign - purchased by sacramento appraisal blog by 123rf dot com

Key points when considering a market shift:

  1. Markets go up and down: Just like the stock market, gold, or any other commodity, at some point real estate values will go up and at some point they’ll go down. Bottom line.
  2. See it first in the listings: When the market does eventually “shift”, we’ll see the change in the listings before the sales. This means properties will begin to struggle to sell at the same level as the “comps”, which will lead to price declines. This underscores the importance of paying close attention to pendings and listings to see the current market. Granted, every year someone says, “the market is declining” when the fall season begins to unfold because values begin to soften. Just be aware there is a difference between a normal seasonal softening and a definitive declining trend.
  3. Word on the street: One of the ways we’ll know the market has changed is the real estate community will feel it in the number of offers, feedback from buyers and sellers, more credits being given to buyers, etc… We can always look at stats, but there is something powerful about the word on the street from real estate insiders.
  4. The previous peak: It’s always interesting to see how close or far prices are from their high point ten years ago, but there isn’t any rule that says prices have to get back to their height for a decline to happen.
  5. Watch higher & lower prices: The market isn’t always doing the same thing at every price range or in every neighborhood. When it comes to values declining, watch the top and bottom carefully because one of them might change direction before the other. Which one?
  6. Other metrics: I included an image below to talk through some of the metrics we might watch to know the market is softening. Again, these things all tend to happen during the fall months every year, but no matter what time of year we are not likely to get to full-fledged value declines without passing through a softening stage. Be sure to watch the sales to list price ratio too (I forgot to include that in the image).
  7. The power of lenders: Values have increased these past four years, but wage growth has been more or less stagnant. This means some buyers will now begin to struggle to afford higher prices. The temptation for lenders is to develop more creative financing to help buyers keep playing the game. Does anyone else think Kenny Loggins’ Highway to the Danger Zone would be good background music for this point?
  8. Future clients: This conversation can feel stressful for those who work in real estate because a change in the market can lead to a change in clients. Yet markets always change, so that’s something we can be prepared for, right? Blockbuster Video had a lucrative operation until they didn’t adapt to the way the internet changed the DVD rental landscape. When it comes to business we can spend so much time holding on to the way things have been that like Blockbuster we don’t take steps to adapt and position ourselves to be Redbox or Netflix so to speak. Here are two questions to continually ask: Who are you clients going to be in the future? What are your clients going to need in the next few years?

Signs of a soft market

I hope this was helpful.

Questions: What is point #9? What other metrics can we watch to see the market change? Anything I left out? I’d love to hear your take.

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