5 reasons why an appraiser CAN appraise a property above the highest sale

Can a property be appraised above the highest sale in the neighborhood? A real estate agent friend was told recently by an appraiser that the house could not be appraised above the highest sale because that is what Fannie Mae says. Is that true or not? Let’s consider some of the following points.

Curtis Park neighborhood in Sacramento - Sacramento Appraisal Blog

5 reasons why a house CAN be appraised above the highest sale:

  1. The Horse’s Mouth: Fannie Mae does not say appraisers cannot appraise a property above the highest sale. I’m not sure if the appraised value in this case was on point or not, but the appraiser was simply not correct regarding the supposed rule by Fannie Mae. Whenever someone states, “Fannie Mae says….”, I recommend asking the person what page of the Seller’s Guide he/she is referring to.  🙂
  2. Increasing Market: If a market is increasing in value, there is going to be a legitimate time where buyers are simply willing to pay more than most recent sales or even the highest sale. This is especially true when inventory is sparse and interest rates are low. This reminds us too that appraisers don’t make values increase, but rather measure when the market changes.
  3. Lower Sales: Recent sales may have closed at lower levels, but there is no rule that says appraisers have to use the newest sales. In fact, even Fannie Mae states the appraiser may need to use older sales rather than newer ones. Sometimes lenders tell appraisers to use sales within the past 90 days, but that type of rule is not consistent with Fannie Mae, and it might stand in the way of a good appraisal too. For instance, if two distressed short sale models closed last month, but there are ample model match sales from prior months (and current model match listings at higher levels too), it’s probably best to ignore the two recent lowball sales since they don’t represent the market. Remember also that one or two sales do not make or break a market.
  4. Zero Sales: The appraiser in this case said Fannie Mae prohibited the appraised value from being above the highest sale. But what if there were zero sales over the past year? Would that mean current value is bound to where sales were at last year? Nope. It can be tricky to see the market when there are no recent sales, but it can be done with time and skill.
  5. The Best: The house being appraised might be the best on the block or have a feature that pushes it over the top of recent prices. Thus it can make reasonable sense to see a home appraise for more than the others. Of course just because someone thinks a home is the best thing ever does not mean the market is willing to pay the highest price ever. Also, keep in mind every neighborhood has a price ceiling, which means buyers will inevitably only pay so much in that neighborhood before moving on to a different area.

BRACKETING: Please know I’m not trying to give the appraiser a hard time or throw any appraiser under the bus (I love my fellow appraisers), but I did want to offer the above points because there is space for some conversation. While the appraiser was incorrect about Fannie Mae’s rule, I do appreciate the appraiser being aware of the concept of bracketing. Bracketing is basically when appraisers will use some superior sales and some inferior sales to help establish value for a property. This can be a good practice when choosing potential comps because it helps us see the higher and lower ends of a competitive market. Bracketing is not always possible (see points 2-5), but it can help support a value or adjustments. For instance, if valuing a fixer property, we would want to use at least one fixer comp so we know what the market was actually willing to pay for a fixer. Otherwise if we only use remodeled homes for comparison, we are left sort of guessing what the downward adjustment should be for condition. Is it $20,000, $30,000, $50,000, $100,000, etc….? The best way to know what the adjustment should be is to find actual fixers in the market. How much of a discount for condition is there between remodeled homes and fixers? The same holds true for figuring out the value of a built-in pool. Rather than guessing at the value (say $10,000), if we look at competitive home sales with and without pools, we can begin to extract a price buyers have been willing to pay. In other words, if we bracket sales with and without pools, it helps us begin to see the market.

how to think like an appraiser biggerHOW TO THINK LIKE AN APPRAISER (class I’m teaching): Locals, if you are around on July 16th, I’d love to have you come by the Sacramento Association of Realtors for a class I’m teaching called “How to Think Like an Appraiser”. This will be three hours of relevant conversation (and we’re going to have some fun). This is perfect for new agents as well as veterans. My goal is to leave you with insights to apply to your listings and tips for working with appraisers. Register here.

Question: Any thoughts, stories, or points to share? I’d love to hear your take.

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How do appraisers come up with value adjustments for a busy street?

We all know most buyers are going to pay less for a home on a busy street. But how much less? Is it really only something minimal like $5,000 or $10,000, or is it much more substantial? Knowing how to come up with adjustments is critical for anyone working in real estate, so let’s walk through a two-step example below to shed some light on how appraisers might approach a busy location.

busy street in real estate appraisal

The Temptation: It’s easy to use the same adjustments in every neighborhood and in every market, but there is no one-size-fits-all adjustment that will work in every case. This is why we need to know how to research the market.

Here are a couple key points and steps:

1) The best comps don’t need adjustments:

Freeport Blvd Sales in Sacramento

The first thing we want to do is look for sales and listings on the same street. When we have similar sales with roughly the same location, these properties tell us exactly what the market is willing to pay. There is no guessing and no need to use many other sales because we essentially have the best examples of properties that have already been vetted by the market. If we pull sales or listings from a superior street, it’s easy to minimize the adverse location. But if all the sales on the busy street are coming in substantially lower than surrounding sales, the market has spoken. If you don’t have recent sales, you can look at much older sales on the same street, and study other nearby sales at the time to see how much of a value impact there was. If there are zero sales on the subject street, find a competitive busy street in the market area (or maybe even a commercial location or something quasi-similar). There has to be something out there. Also be sure to look at actives, pendings, expired listings and withdrawn listings since they can sometimes give clues on value.

2) Comparing busy vs. not busy:

freeport 2

This is where we take a good look at any potential price difference between sales and listings on busy and not busy streets. We have to make sure we are comparing “apples to apples” so to speak, so pay close attention to size, condition, upgrades, lot size, layout, garage space, etc… The goal is to match up several sales instead of just one example because this helps us have a better context of support. In truth we might end up coming up with a range of value for what we think the adjustment should be too. That’s okay. Just ask yourself where your property realistically fits on the range of value spectrum.

freeport 2b

The Verdict: There haven’t been many recent sales in the immediate area lately, which makes it a more involved process to establish value. But even with these older sales, the value difference is fairly large, right? When looking at sales on Freeport Blvd vs competitive sales on typical streets, it looks like the value range is easily anywhere from 25-50K+. If we spent more time on this, we could hone in on a tighter range, but you get the point, right?

NOTE: I am not saying this is the adjustment to give. This is simply a quick snapshot of the market right now for the sake of illustrating a methodology. Remember that these properties on Freeport Blvd also back to public transportation too.

I hope this was helpful. I’d love to hear your take in the comments below.

Questions: Any further insight or stories to share? How have you seen an adverse location impact the value of a property?

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6 things to remember when valuing a newer home in an older neighborhood

How do you value a new home in an old neighborhood? Here are six things I keep at the forefront of my mind when approaching this situation and choosing comps. What else would you add? I’d love to hear your take in the comments.

New vs Old Homes in a Neighborhood - by sacramento appraisal blog

  1. Premium: There is usually a premium for new construction. Just as buyers pay more for that new car smell, buyers will typically pay more for a home that has never been lived in.
  2. Fading Premium: However, the premium for new construction fades VERY quickly. This is important to keep in mind because any premium paid when the house was built a few years ago may not exist in today’s resale market.
  3. Infill Location: If the newer home is part of an infill project, it might have a bad location since the best locations were probably already built out. Moreover, infill projects tend to have tiny lots compared to larger ones found with older properties.
  4. Quality: Sometimes newer homes may not have the same quality as older homes, which reminds us new is not always more valuable. Other times though new homes are far superior to the surrounding area.
  5. Conformity: Does the property fit in with the neighborhood in terms of design and size? Or does it stand out in a bad way? The principle of conformity is a very relevant dynamic in real estate, and whether a property fits in the neighborhood or not can impact its value.
  6. Neighborhood Acceptance: Sometimes neighborhoods go through a period of change where it becomes more acceptable for older homes to be torn down and newer bigger ones rebuilt (East Sacramento). Other times it is not common or acceptable, so a new home might look like a sore thumb.

When valuing a newer home next to older ones, it’s easy to automatically assume it’s worth more. Yet we have to ask, how does the market see this new property? Is the market willing to pay more for this or not? What are buyers looking for in the neighborhood? The proof is in the data, so often times we need to dig deep for comparable sales. It might even be helpful to search through the past several years of sales to find something else that was new. What was comparable to the new property at the time of its sale? Did it sell with any premium? Or did it sell right on par with other older homes? Be careful of course when interpreting new construction comps since sometimes newly constructed homes are loaded with concessions and credits, which can inflate the price.

Questions: What’s number 7? Any other thoughts or insight?

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How do you value an attached unit when there are no recent sales?

I get quite a few calls from the real estate community about pricing attached units. The conversation tends to go like this:

Agent: Ryan, I’m working on pricing a halfplex, and it’s not easy.
Me: I feel your pain.
Agent: There aren’t any recent halfplex sales in the neighborhood, and my unit is larger than others too. What should I do?
Me: You should probably just guess and hope you’re okay on value.
Agent: What??
Me: I’m kidding. Let’s talk about it.

What is a halfplex? If you are located in another part of the country, you might call an attached home something else, but in the Sacramento area we say “halfplex” (sort of like half a duplex). The home below is a halfplex because it is connected to the house next door by the garage and a wall inside. Moreover, the parcel line runs through the center of the connecting wall in the garage, so each unit is individually owned and has its own lot.

tips for valuing a halfplex

It’s not always easy to value certain properties – especially when sales are sparse. This is why it’s important to have a solid valuation methodology clipped to your real estate utility belt so you can apply it as needed.

Tips for Valuing a Halfplex (Attached Home):

1) Apples to Apples: An attached home should be compared to other attached homes because a buyer looking for a detached unit is usually NOT simultaneously in the market for an attached one. It’s just a different type of house. Moreover, there can be a huge value difference between attached vs. detached.

2) Start in the Immediate Neighborhood: You’ll want to find halfplex (attached) sales in the immediate neighborhood so you are sure what buyers have been willing to pay in the area. If you go out too far looking for “comps”, it’s easy to miss the immediate market by assuming that values are similar in other tracts. I recommend using the Polygon tool in Sacramento MLS so you can actually draw exact neighborhood boundaries in the immediate subdivision to be sure you are only getting data from those boundaries. You might want to start looking at sales over the past 6 months and then go back to one year. In an ideal world you will have a ton of sales, but we all know that doesn’t always happen.

TIP: In addition to sales, be sure to look at both listings and withdrawn listings in the immediate neighborhood to get a fuller picture of neighborhood values.

start small before searching further away for comps - sacramento appraisal blog

3) Look at Older Sales in Immediate Neighborhood: Be sure to look back over the past few years or so in the immediate neighborhood so you can see gain a better context for the halfplex market. You probably won’t use these oldies as comps in a listing presentation (or appraisal), but they still might provide a fantastic context because you can either add or subtract value to older sales based on what the market has done over time.

4) Previous Subject Property Sale: Has the subject property sold previously? If so, look up sales at the time to see what it was comparable to in the neighborhood? Moreover, how has the market changed since it sold previously? Be sure to give more value weight to recent sales and current reasonable listings, but be aware of any previous sale to help create context. Remember the condition of the subject property might have changed over time, and pay attention to the nature of the previous sale (maybe it sold for too little or too much).

5) Competitive Sales in Other Tracts: In some areas of town there are simply few attached homes, so you may need to go out several miles to find comps. The problem of course is that if you travel too far, some neighborhoods might have higher or lower prices, so be aware of value adjustments that might need to be made. As a rule of thumb, try to look in areas where you think a buyer might realistically considering hunting for a home if the subject property was not available. You can double check how comparable other neighborhoods are by comparing older sales in the immediate neighborhood with older sales in neighborhoods that are further away. For instance, if you have an older sale that closed at $250,000 in the immediate neighborhood, how much did similar-sized halfplex sales in further places sell for at the time? If the neighborhood that is further away ends up being very similar in price when comparing historical sales, there is a good chance current sales in the further neighborhood could help tell you what the current market is willing to pay for your neighborhood.  Be careful to not just look at one sale though because one sale does not make or break the market. Having a few data points is best so you know you’re not just looking at an outlier.

what is a comp - sacramento appraisal blog

6) Detached Units in Immediate Neighborhood: Be aware of what other detached units are selling for in the neighborhood. If there are very few recent sales, I recommend going back in time to find out what the price difference was between halfplex (attached) sales and similar-sized detached sales in the immediate neighborhood. Then once you understand the price difference in the past neighborhood market, come back to today’s market. What are similar-sized detached sales currently selling for? This may help you see what attached units should theoretically be selling for. Remember, this is definitely a back-burner approach to value, and it’s not the first step, but it can still provide context.

7) Bottom of the Market: Where is the bottom of the market in the immediate neighborhood? There is a good chance that halfplex (attached) units tend to sell toward the bottom of the price range compared to similar-sized detached units. I’m not saying all halfplex units are going to sell for dirt cheap, but only that they tend to be marketed toward the lower end of the price ladder in many neighborhoods.

I hope that was helpful. If you’re interested in more details, see How to choose comps like an appraiser.

Photo Credit: The first photo is from Roseville & Rocklin Realtors Steve & Heather Ostrom (thanks).

Question: Anything else you’d add? I’d love to hear your take in the comments.

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