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choosing comps

Skyrocketing prices aren’t happening everywhere

March 23, 2021 By Ryan Lundquist 9 Comments

The market is ultra hot, but it’s NOT the same speed everywhere. It’s tempting to impose the idea of a blazing market on every single neighborhood and property type, but that’s a quick way to get into value trouble. Let me share exactly what I mean by looking at the condo market. If you are not local, are you seeing something similar in your area? 

BIG POINT: The condo market is NOT showing skyrocketing prices like the rest of the single family market this year.

1) Slower price growth The median price for single family detached homes in 2021 is up a whopping 18.3% so far in the Sacramento region. In contrast, condos are only up 9.7% so far. Yes, I just said they’re only up 9.7%. I know how that sounds, but that’s about half the growth we’ve seen in the rest of the market. In short, condos have definitely been increasing, but the speed is WAY slower.

2) Condos are still moving quickly though: Even though condo prices aren’t rising as quickly, they are still selling about as fast as single family detached homes. This reminds us the market moving quickly doesn’t always mean we’re seeing rapid price growth.

3) The pandemic x-factor: Everyone wants that perfect backyard paradise to quarantine in style (especially with a pool). This sounds like a rosy made-up narrative, but the stats actually back it up. If you didn’t know, condo sales volume dropped 10% from 2019 to 2020 in the Sacramento region, so clearly buyers turned their gaze away from condos. 

4) BUT condos represent affordability today: So far in 2021 condo volume has been up slightly for the first two months compared to last year. Remember, condos represent one of the most affordable products in the market, so with skyrocketing prices in the single family detached world, a condo may represent a more viable option for some buyers today. Keep in mind there aren’t many condo sales each month, so we need a few more months to see if this is a solid trend or just a fluke for the first two months. In other words, don’t write home over this, but let’s stay tuned because this could be interesting. 

APPLICATION STEP: When valuing properties in today’s lopsided market, be sure to look at actual comps and pendings in the neighborhood rather than imposing a hot headline on the market. 

By the way, here’s a YouTube Live conversation I had with Matt the Mortgage Guy yesterday. Enjoy if you wish (it’s an hour).

Thanks for being here.

Questions: What stands out to you about the points above? What are you seeing out there right now? I’d love to hear your take.

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Filed Under: Market Trends Tagged With: affordability, Appraisal, Appraiser, choosing comps, condos, different speeds, rapid appreciation, regional appraisal blog sacramento, Sacramento Appraisal Blog, sacramento housing market, slower growth for condos

The skinny on accessory dwelling units

June 10, 2020 By Ryan Lundquist 33 Comments

I’ve been getting a ton of questions lately about accessory dwelling units, so I wanted to talk through some of the bigger issues. Skim to questions that sound interesting or take some time to read. Enjoy if you wish.

What is an accessory dwelling unit (ADU)?
There are lots of definitions out there. In short, an ADU is typically a detached or attached dwelling unit meant for independent living, so it includes a sleeping area, bathroom, and cooking area. California, Sacramento County, and other areas may describe ADUs a little differently. 

If a unit doesn’t have a kitchen is it an ADU?
An ADU must have a cooking area. Otherwise we’d call it something else. Personally I’d probably call it a casita, but that’s just me. Anyway, if a builder constructs an “ADU” and it only has a bedroom and bathroom without a kitchen, we just wouldn’t call it an accessory dwelling. 

WEEKLY MARKET UPDATE: By the way, here’s my weekly video market update called Why aren’t home prices dropping? Watch below or here.

Is my pool house an ADU?
Probably not. Remember, if the pool house doesn’t have a kitchen, bathroom, and there is no sleeping area, it clearly doesn’t qualify as an ADU. I think sometimes if we step back and recognize we’re calling something a “pool house” too, that’s probably a clue that it’s something else.

What other words are used to describe an ADU?
There are countless words such as granny flat, casita, in-law quarters, mother-in-law apartment, garage apartment, etc… This could vary from market to market and person to person.

Is it okay to lump the square footage of the accessory unit into the square footage of the main house?
No. This happens all the time in real estate listings, but if you have to step outside the house into something else, it’s really not proper to include that other space in the square footage of the main house per ANSI standards. Think about it logically too. Imagine a 1,600 sq ft home with a 400 sq ft ADU. Is this really a 2,000 sq ft house? Nope. Maybe the market will pay the same price as other 2000 sq ft homes, but that’s beside the point because we’re fundamentally dealing with a smaller home with an ADU rather than one larger home. These are two different things, right? The problem becomes if we only choose 2,000 sq ft comps we haven’t really proved what a 1,600 sq ft home with an ADU is worth.

What if the square footage in a listing includes the ADU?
We see this quite a bit. I get it because the listing is advertising the total size of all structures on the lot. I just hope there is an asterisk or explanation somewhere in the listing that the square footage represents both the house and the accessory unit. This is important for clarity, maybe liability, and it helps appraisers be more informed when choosing comps. In short, just because it’s listed a certain way in MLS doesn’t mean the market or appraisers will recognize all the space as gross living area.

What if Tax Records shows the ADU in the square footage?
That happens. But just because Tax Records shows the property as 2,000 sq ft doesn’t mean that is what is legal or the way the market sees the units. If you want to know what is permitted it’s probably a good idea to rely on the building department (and hopefully they have good records).

It’s an ADU because it looks like one, right?
It’s key to understand what something is. I recall a unit permitted as a residential office even though it looked like a full-fledged second living space. It had a kitchen, bedroom, and bathroom, but the one thing it lacked was a permit to be an ADU and to be rented. This is where permits matter greatly. If it looks like a duck and quacks like a duck…. Well, it’s not always a duck when it comes to being an accessory unit. An owner might say, “This was fully permitted.” But the real question is, “What was it permitted as?”

How do you value a property with an accessory unit?
That’s a big question. I wrote a separate post about that. In short, I would look at it like a puzzle and consider lots of factors including comps, rental income, and lots of other logical points. 

How many accessory units can one property have in California?
On a single family lot you are allowed one ADU unit as well as one JADU (Junior Accessory Unit at 500 sq ft max). Here is an informative piece from CA for Homes. Please check code in your local area of course too.

Is a single family home with an ADU considered a duplex?
No. There is a difference. I wrote about that here. The struggle is how the lending community and appraisers talk about accessory units vs full-fledged two-unit properties isn’t always the same as the way a city or county thinks about these units. There is also a value aspect to consider. Typically each unit in a traditional two-unit property contributes very significantly to the value whereas as an accessory unit is often “accessory” to the value. In other words, an ADU might not sway value as much for a single family home compared to say taking away one of the units in a traditional duplex.

How do you find comps?
This gets a little tricky because in MLS these units are often called a range of things. Personally I search the property description field and I’ll see what comes up when I type in words like granny flat, accessory unit, ADU, second unit, in-law quarters, etc… Sometimes I even search for two homes on one lot because these units are sometimes listed that way. However, in a map search in MLS you can go to the “other structures” field and then select “guesthouse.” That’s what I did in the image below and look how many properties came up when looking at the past five years of sales. Granted, some of these pins aren’t truly accessory dwellings because they’re a pool house, bonus outbuilding, she-shed, etc.., but this is a great start nonetheless.

What about CC&Rs and rent?
In some areas an accessory unit might not be able to be rented per CC&Rs. If California law has recently superseded this, someone can let me know (people have been emailing me to say California law has, but I haven’t seen anything definitive yet to show these units can be rented (I will update this portion of the post when I hear more)). Otherwise I’ve encountered scenarios where a neighborhood’s CC&Rs will mandate a guesthouse can only be occupied by family members and is not allowed as a rental. I’m not a lawyer, so I cannot speak to any legal issues. I’m just saying before advertising a structure’s rental income in a listing or appraisal, be sure you know the structure can be rented. This might affect value, right?

What do you think about an ADU assessed at the cost of the unit?
I see this happen quite a bit. This isn’t a knock at any Assessor of course. It’s possible that buyers would pay the full cost to build in the resale market, but very often the market doesn’t pay dollar for dollar. In short, if you feel the assessed figure is too high you’re going to need to find out the process to dispute the assessment and show market support for your value opinion. Keep in mind I’m talking about a brand new accessory unit because when it is built you’ll get a supplemental assessment in the mail. As always, if there is nothing to argue, don’t argue. If you do feel value is off though, then be diplomatic and support your opinion with data. Or hire a local appraiser to illuminate market data (the appraiser cannot be an advocate for you though).

I hope this was interesting or helpful. Thanks for being here.

Questions: What else do you wonder about ADUs? Or if you work in real estate, what do you get asked? I’d love to hear your take.

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Filed Under: Appraisal Stuff, Resources Tagged With: accessory dwelling unit, ADU, ADU or second unit, appraisal of ADU, choosing comps, granny flat, how to, in-law quarters, include ADU as square footage, questions and answers, Sacramento ADUs, second unit in backyard, secondary dwelling unit, Square footage

Can you use brand new sales from the builder as comps?

August 21, 2019 By Ryan Lundquist 13 Comments

I get asked this question all the time. “What do you do for comps when a home is only one year old? Can you compare it to brand new homes from the builder?” Here are a few things on my mind.

Builders vs you: It’s important to step back and understand that builders are able to let buyers customize features in a house, and that’s a big deal. This is one of the alluring things about buying a new home, and it’s not something a typical seller is going to do. Thus right away a builder has more power than an owner in the resale market.

Fading premium: Just as buyers tend to pay a price premium for a brand new car, the same thing happens in real estate. And just like a car begins to depreciate when it’s driven off the lot, the same thing happens with a home. When you’ve lived in a home, it’s no longer 100% brand new, so it may not command that same price premium in the market.

The market doesn’t care about your rear landscaping: I often hear, “But my home is better than the brand new ones because I put in rear landscaping. The builder models don’t have a rear yard.” That may be true, but the market might not care about that. The premium a buyer is willing to pay for a brand new house could still likely outweigh your rear landscaping (assuming we’re talking about standard landscaping).

Credits & incentives: Let’s remember builders can offer credits and incentives to close deals and keep prices high. When a market starts to soften especially, we have to ask what concessions are being included to continue to boost prices higher. This is key to understand because if brand new homes have padded prices, they probably aren’t ideal examples of what the market is really willing to pay. Here’s the better question. What would the market pay without all the concessions?

Resale homes rule: In an ideal world we want to find other homes that are one or two years old. Is there any price difference between the new models and resale homes not sold by the builder? That’s the big question and I realize it could be a fat chance we’re going to find something. But don’t be afraid to look through multiple years of sales too. Even if you have an older sale from a few years ago you can compare it to other newer ones at the time. How much of a price difference was there if any? Did the new ones still sell for more? Don’t forget to look to other competitive new developments in town too. You might get some insight there when it comes to brand new vs newer homes.

Keep an eye on the new stuff: I’m not saying to ignore new sales altogether or even to not use them. We should keep an eye on them for sure. Let’s just be cautious about flippantly choosing three brand new sales from the builder and calling it a day without really thinking through whether there is a price difference between brand new vs newer. If I was appraising in this situation I would hope to find at least one resale home somewhere, but I’d also be fine using brand new homes as comps too (but they might need an adjustment down).

The market: Keep in mind there are situations where the market may have gone up, but if the owner also lost some value due to a fading new construction premium, it’s possible the home might not sell for more than it was purchased for.

I hope this was helpful or interesting.

Questions: Which point resonates with you most? What did I miss? Any stories to share?

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Filed Under: Resources Tagged With: Appraisal, Appraiser, appraisers, brand new homes, choosing comps, comp selection, House Appraisal, methodology, new car vs new home, new construction, tips for choosing comps

Photoshopping & price per sq ft in real estate

June 4, 2019 By Ryan Lundquist 21 Comments

I have a new way to explain how price per sq ft works in real estate. It’s helpful but maybe a little creepy too. No matter what, we need word pictures in real estate to explain concepts, so let’s chat.

The big idea: Using a price per sq ft figure from a different house is sort of like photoshopping someone else’s body on your own. It just might not fit.

Instagram model vs dad bod: Think about it this way. When we use a price per sq ft figure to price a home it can be like taking an Instagram model’s body and putting it on a dad bod. It just doesn’t belong or fit. The problem is we’ve imposed something entirely different on another thing, and it looks awkward. The same holds true in residential real estate when we hijack a price per sq ft figure from a dissimilar house down the street and use it to price a property. Thus if we’re not careful we can end up pricing a “dad bod” home like it was an Instagram model simply because we priced according to model metrics instead of other dad bod sales… Okay, let’s not take this analogy any further. Do you catch my drift though?

Pick your poison: This example isn’t intended to tackle all aspects of price per sq ft, but only help stir conversation. I actually use Starbucks cups and Lamborghinis too, but that’s just me. My advice? Use what works for you.

One more thing. I’m writing as a guy who is currently on a diet, so I’m definitely not poking fun at the reality of dad bods.  🙂

I hope this was helpful (and not too creepy).

Is Blackstone selling? I see Invitation Homes (Blackstone) has a handful of properties listed on the market right now. These could be non-performing assets of course, but we have to ask if they are starting to sell off some inventory too. Stay tuned.

Sign giveaway: Last week I wrote about people who are leaving the market, and I’m giving away the shabby chic signs I made on this Facebook post.

Video: Here’s a video I made to talk through the danger of abusing price per sq ft. Enjoy if you wish. It’s about six minutes.

Question: Does this example work? How do you explain how price per sq ft works in real estate? I’d love to hear your take.

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Filed Under: Appraisal Stuff Tagged With: appraisal advice, appraiser in Sacramento, choosing comps, comp selection, overpricing, Price per sq ft, price per sq ft explanation, pricing mistakes, pricing too high, Sacramento Appraiser

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