When the market feels aggressive…

The market feels aggressive out there. I don’t know about you, but I’m having so many conversations about rising prices at the lower end, a shortage of inventory, and even low appraisals. So I wanted to share some of the talking points floating around out there and give some commentary too. Here’s a list of things coming up in discussion lately (it’s longer on purpose). Anything to add?

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One buyer vs market value: Value is what a buyer is willing to pay. I hear that statement quite a bit, but what one buyer is willing to pay could represent an individual’s value rather than market value – which is what appraisers are gauging.

Front-loaded market: Most of the value increases are usually found in the beginning of the year. Thus if values went up 5% last year, that means we probably saw about a 1% increase per month during the first two quarters of the year. But if the bottom of the market increased by say 12%, then we saw a 2% monthly increase. Of course some months might see greater appreciation rates than others.

sacramento appraisal blog

The need to respect pendings: Sales tell us about where the market used to be when they got into contract 60-90 days ago, but pendings tell us about the temperature of the current market. This is why we have to respect pendings. For instance, during a recent appraisal of a fairly original home in South Sacramento I saw some properties close around $230,000 less than six months ago, and now similar ones are getting offers galore at $245,000+. The tricky part is I don’t know the exact price and terms of a pending unless I call the agent (and he/she tells me). 

One sale or pending doesn’t make the market: Let’s remember value in a market is not based on one high sale. In today’s market if a buyer paid $25,000 above appraised value, for instance, an appraiser has to consider if that property at $25,000 above everything really represents the market or just one buyer willing to pay more. This is a reminder that appraisers and agents have to “appraise the comps” so to speak. We can’t just blindly accept the final sales price of a comp without understanding the back story of why it closed that high. The same holds true with pendings as we can’t base an entire valuation on one “lone ranger” that is higher than anything else.

South Sacramento

Upward adjustments by appraisers: Value adjustments can be given by appraisers to account for an increasing market. These adjustments can be figured out with graphs, analyzing sales and pendings, talking to real estate agents, etc… This is what I did with the South Sacramento property above as my comps were 2-6 months old, but the market was 4-6% higher easily because the pendings were all trending higher. The truth is if I didn’t give upward adjustments my value would have reflected the past instead of today’s market. Some appraisers might not give a specific upward adjustment, and I won’t split hairs over that so long as an increase in value is accounted for somehow in the appraisal.  

Appraisers aren’t hired to “hit the number”: A lender hires an appraiser to assess whether a loan should be made or not. Thus if a buyer offers an unrealistic price, the buyer might be willing to pay that amount, but if the house cannot sell for that price to the rest of the market, it doesn’t make sense for the lender to make the loan at that level. In this regard it’s reasonable to see appraisals come in lower than some of the high offers we’re seeing.

Multiple offers don’t always mean aggressive increases: Just because there are many offers doesn’t mean values are increasing rapidly. In some price ranges we are seeing clear increases in value and other prices ranges feel a bit flat. Realistically though there are likely to be multiple offers in about every price range (more at the lower end). This is a good reminder that at times there is a difference between how the market feels and what it is doing (actual data).

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Different trends different neighborhoods: It’s easy to project what is happening in one neighborhood onto another or use one sweeping cliché to describe all locations and price ranges, but we have to look at actual numbers in each neighborhood to understand what the market is doing there.

Informed buyers: Having low inventory is creating some aggressive offers out there, and while buyers are willing to overpay to a certain extent for the right property, they won’t literally pay any price just because “nothing is on the market.”

Not easy to interpret: If we’re honest it’s not always easy to interpret what the market is doing – especially when things seem crazy with multiple offers and bidding wars. This is a good reminder to be humble because the market isn’t always wrapped up in a neat little perfectly decipherable package. There are things we can expect of course and seasons of the year, but the market is still distinct and sometimes even surprising. Let’s be real about that.

A perfect season for communication: This is a perfect market to foster excellent communication between real estate agents and appraisers. Agents, sticks to the facts and tell the story of the marketing of the property when talking to appraisers. Feel free to use my Appraiser Info Sheet (local agents, I love when you use this). In any price range where values are changing quickly, insight from agents can really help appraisers. On that note, Appraisers, glean insight from agents by finding time to make phone calls and asking the right questions about comps and the subject.

Reconsideration of value: I did a presentation recently on tips when asking an appraiser to reconsider the value. If anyone wants a copy of it, just send me an email (lundquistcompany @ gmail  dot com). You can also read this post.

Hindsight makes everyone sound smart: When in the thick of a “hot” market it’s not always clear what the exact trend is, but after a few months when more stats are published everyone and their Mom sounds like a real estate expert. #truth

Questions: Anything else to add? What else are you seeing out there in the market right now? I’d love to hear your take.

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What’s your housing shtick?

It’s easy to fall into the trap of saying one thing about the housing market. Just as a comedian has a shtick, or regular performance, we can get into the routine of talking about real estate based on one big idea about what the market is doing or will do. Let’s consider some examples. Which one(s) are you? Any thoughts?

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Doom & Gloom:  The market is going to crash like it did 10 years ago.

Corrector:  Values will correct but not implode.  

One-Metric Wonder: The market will turn as soon as this one thing happens.

Normal: The market is normal and not in a “bubble”.

Mr. Buzzword: The market is headed toward a “shift” in the future.

Polly Pollyanna: It’s always a good time to buy and sell. Everything is always good.

Specific Year Guy: This year is going to be the one where values turn.

Mrs. Cyclepants: The market has a 7 year cycle and it’s about up.

Foreclosure Prophet: Another foreclosure wave is coming. Just wait.

Headline Regurgitator: This person says whatever the latest headlines say.

Spinster: Any negative aspect of housing is spun into something positive.

The Feeler: I feel like the market is strong and will be in the future.

Crystal Ball: This is exactly what the market is going to do.

Broken Crystal Ball: Nobody knows the future including me.

If we’re honest we might identify with several shticks above. That’s okay. I’m not saying there’s something wrong with that, but let’s be challenged to consider what we say and not get locked into conveying only one thing about the complex housing market. Moreover, let’s be cautious about imposing clichés and ideas on the market because it’s easy to miss trends that way. At the same time let’s not be naive by refusing to consider the future. My advice? Pay attention to the numbers and know them well enough to quote, know what is normal and not for the time of year, remember that values might be moving differently in various price ranges and neighborhoods, and find ways to talk about current values in specific terms while keeping an eye on the future (instead of focusing entirely on the future).

My knee & market update post: Some of you may know I hurt my knee in a snow tubing accident 10 days ago. I have an MRI next week, but for now the doctor thinks I may have torn my meniscus. Anyway, I normally do my big market update between the 10th and 15th of the month, but I can’t swing it this week since I took last week off and I’m basically playing catch-up with all my reports this week. I’m just grateful to be at my desk again. Anyway, I will be 100% up and running (not literally) next week, and I’ll get to my big update then. Thanks for your understanding.

Questions: Which shtick stands out to you most? Any others to add? Did I miss something? I’d love to hear your take.

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How much value does a huge backyard shop add?

A friend asked me a great question this week. How much value does that huge shop in the backyard add? He wasn’t sure how to pull comps, so I scratched out a few thoughts. Anything to add?

large workshop or garage value - sacramento appraisal blog

1) The market: Can buyers use whatever the structure is? Will they pay for it? These are good questions to ask. At times home owners build things that are so specific to their own needs that the market really might not even want it (or maybe buyers will simply use it for something else). I think of Michael Jackson’s Ferris Wheel at Neverland Ranch or a $125,000 recording studio in the backyard of an area of Sacramento where values are about $225,000. There might be one buyer out there willing to pay a premium, but does that one buyer really represent the market? Remember, lenders are going to lend based on the market.

2) Find something similar: The best way to uncover value for a large workshop is to find a few examples that have sold. Keep in mind we might not find something exactly the same, but we have to do our best to find something we might think of as competitive. In a rural market there are likely many examples, but in a residential market we might have to pour through years worth of sales to find a large workshop, detached garage, or some other competitive structure. We can then compare these sales to others in the neighborhood at the time. How much of a price premium was there if any? For example, I did a search in the Tahoe Park neighborhood and found some large detached structures by looking in MLS under Garage (I selected 3 and 4 detached), # of Garage Spaces (I selected more than 3 spaces to see what structures I could find), and Other Structures (you can select things like “Workshop Building” or “Outbuilding” under this category). It can be tedious to search in MLS, but sometimes it’s surprising how quickly something will come up.

Tahoe Park search

3) Cost: Let’s consider the cost of the structure so we are in tune with quality. This doesn’t mean the market is going to pay more just because it was expensive, but the market will likely recognize quality and pay more for something that is nice (and usable). Home owners often want the market to pay the full cost of whatever was built, but there’s a fat chance of that happening because when people buy something used they tend to expect a discount.

4) Make Something Up: I’m kidding on this one, but I will say at times in real estate we have to use professional judgement when data is extremely limited. This sounds so wishy washy, but there is something to knowing a market and coming up with a range for what we think a group of buyers might realistically pay. In this case we might not give a specific value adjustment for the structure, but we can always consider the value of it in our final number. What I mean is we might see a range of value in a neighborhood for similar properties and end up reconciling the final appraised value for the subject property toward the higher end of the range because the subject has more assets. Be careful on this point though (and don’t spend two minutes on research and simply go straight to #4).

Questions: What is #5? Did I miss anything? How would you figure out the value? 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?

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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.

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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).

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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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