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comp selection

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

How do you know how much the market has gone up?

July 24, 2019 By Ryan Lundquist 19 Comments

I’ve been getting this question quite a bit lately. How much has the market gone up? How do you figure that out exactly? This is something we consider all the time when pulling comps, which is why it’s so important. Let’s talk about it. 

NOTE: This post is longer because there’s lots to say. You can still skim the bold headings though if you wish.

Here are a few simple things I do to gauge value changes:

1) Look for comps: The best thing we can do is look to the comps for the answers. More specifically, look for the price difference between sales in the past compared with properties that are currently getting into contract.

To gauge a change in value I recommend comparing similar properties from the past to similar properties now. This is often done with sales from last year vs this year, but here’s an example of several years ago with this year. If you’re in a tract neighborhood you might consider comparing a few different similar-sized models from the past with those same models today. If you’re not in a tract area, just compare competitive sales from the past with competitive sales today.

In this example above I looked up a 2,734 sq ft model in South Sacramento and in 2015 this model was selling for about $330,000 while today the most recent sales have been $400,000 (backs highway) and $412,000. There is a pending at $419,126. Ultimately we could say the market has gone up by $80,000 to $90,000 or about 24% to 27%. It might seem odd that I’m looking up 2015 sales, but in this case the subject property sold in 2015, so I was attempting to figure out how much the market changed since then.

When lining up all data from 2018 through 2019 it’s really clear we’ve seen price increases, right?

2) Sales last year & this year: We can also try to find some sales that sold last year and then re-sold this year. I realize if we’re lucky we might find only one or two examples at best. I’m not talking about flips where remodeling has occurred, but an example like the one below where it sold in the exact same condition.

In this example we see the market has shown about a 2% uptick in value over the past year. Of course we have to understand whether these sales sold at reasonable levels. After all, if either sold too high or too low, then it’s probably meaningless data. Ultimately sales like this can be clues into the market (more on this below too).

3) Stats programs: Some people might use fancy excel spreadsheet programs where competitive neighborhood data can be exported to show price changes over time. I don’t personally use something like this, but it’s not a bad idea if it helps you get a good picture of a neighborhood market. If you use something like this, please comment below.

4) Create visuals: I’m a visual guy and it helps me see the market by creating visuals. I find myself spending a good chunk of time on #1 and #2 above as I’m pulling comps, but I also use this step to compliment those steps. If you want to learn to make graphs, here’s a tutorial. If you’ve been thinking about this, why not go for it? Creating images has been revolutionary for the way I see the market and explain it.

CLOSING TIPS:

1) Be careful about zip code data: If you’re pulling data from a zip code or county, just remember trends shown in a larger area may or may not apply equally to every neighborhood or price range (or property type). This is why I don’t look at my recent big market update, see price metrics are up 3-4% this year in the region, and then use that number for every neighborhood. Nope. I advise knowing the larger trend very well, but don’t impose that trend on a smaller area without doing research.

2) Not just one example: It’s dangerous to base a value conclusion on only one example. This is why I wouldn’t look at my example in number two above and definitely state the market has increased by 2%. One example is best considered a piece of the puzzle, and it’s important to find other pieces before understanding the puzzle.

3) The stock market & competitive data: In the stock market you can have different stocks going up, down, and sideways all at once. The same thing happens in real estate. This is exactly why I strongly recommend you look at competitive data in neighborhoods. For example, if you are valuing a 1,200 sq ft house, make sure you are looking at examples of similar-sized homes to understand that market segment instead of 4,000 sq ft homes in the same neighborhood. Otherwise if I only look at larger homes that might be a little more stagnant, I could miss the fact that the bottom of the market is increasing much more rapidly than the top end.

4) Declining market: It’s been years since we’ve had a declining market, but this same methodology above can help you measure the market when prices are declining too.

5) Seasons: When looking at older sales let’s remember the seasons in which they sold. Thus last year I might give a 2% adjustment in a neighborhood for a property that sold in June, but I could give a 5% adjustment for something that closed in December because it sold when the market was down further during a dull fall season.

6) Being quick & reconciliation: There’s not just one way to do this, and there aren’t quick answers. We have to dig in. Most of all, we might choose a few different ways to study the market and then reconcile our findings. What I mean is I might do all of the steps above, get slightly different answers for each step, and then piece them all together (reconcile them) when I use a comp in a report and make a specific adjustment to that comp. In other words, if I adjust a comp up by 2% or 4% or whatever the number is, I’m coming to the table with some sort of rationale or support for why that adjustment makes sense.

I hope this was helpful.

MARKET UPDATE VIDEO: Here’s a video to walk through the growing and slowing market in Sacramento. Enjoy if you wish.

Questions: What do you think of the steps above? Anything else you’d add? What do you do?

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Filed Under: Appraisal Stuff Tagged With: comp selection, House Appraiser, how much has the market gone down, how much has the market gone up, how to make scatter graphs in excel or gnumeric, making graphs, market update in sacramento, pulling comps, pulling data in real estate, Sacramento Home Appraiser, steps in appraisal process, tips for 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

When there’s no other manufactured homes in the neighborhood

October 23, 2018 By Ryan Lundquist 19 Comments

What do you do if you’re trying to value a manufactured home and there aren’t any comps in the market? I’ve been asked this a few times lately, so I wanted to pitch in some thoughts.

PUZZLE APPROACH: There isn’t one easy way to approach this, so when appraising something challenging I tend to look at a property like a puzzle where my goal is to find clues into value by considering a number of factors.

THINGS TO CONSIDER:

1) Older sales: There might not be any recent sales over the past 3-6 months, but what about older sales? There’s nothing wrong with looking at sales over the past few years and then figuring out how much the market has changed since those properties sold. This is exactly what I did when appraising a manufactured home in Carmichael recently. There were no recent sales and the most relevent one I could find was from 2016. I used that sale and simply adjusted for the market increasing in value over time.

2) Competitive markets: If sales are sparse in the neighborhood or city, why not look to competitive markets? When appraising in Carmichael I looked to Fair Oaks, Orangevale, and Citrus Heights. Of course I didn’t blindly choose sales. No, I had to be thoughtful about comp selection by making sure the other areas really were selling at a similar level. After all, there are portions of the other locations that could easily sell for more or less than portions of Carmichael.

Beyond one mile? Remember, it’s okay to use “comps” outside of a one-mile radius, but it’s suspect to cherry-pick higher sales further away when there are better (and lower) ones nearby. Here’s a good saying. It’s not how far you can go for comps, but where you should go.

3) If it was stick built: In my experience manufactured homes usually sell for less than stick-built homes. Duh, thanks Captain Obvious. But for the sake of being objective I’m leery about saying stuff like, “It’s going to sell for less than a stick-built home every time”. Anyway, my point is I can ask what the subject might sell for if it was a stick-built home in the neighborhood. Then at least I have a figure in mind as to what the highest possible price might be for the subject.

4) Subject sale: Has the subject sold in the past? If it was a reasonable sale at the time, it might give clues into value. What other locations were competitive at the time? Did it seem to sell toward the higher or lower end of the competitive market? Did it sell for more or less than other stick built homes?

5) Manufactured vs stick built: What’s the price difference between manufactured and stick built homes? That’s a good question. It’s not easy to answer if we don’t have sales in the market, so this is where we might look to a nearby market with more manufactured homes (not ones found in mobile home parks). When comparing manufactured vs stick-built homes, what sort of percentage price difference do we see? I’m not saying we should just take a percentage like this and apply it to stick-built “comps” in the subject neighborhood, but there could be some data here we might end up using. Remember, this is a piece of the puzzle or clue into value rather than the entire solution to value.

6) Ask for advice on finding sales in MLS: One of the challenges with manufactured homes is knowing how to find them in MLS. I suggest starting a map search as I show below. You might also do a single family home search and type in “manufactured” in the property description to see if anything comes up. Ultimately it might be worth it to ask a few colleagues how they find stuff in MLS.

7) Bottom & Top: Sometimes when dealing with a challenging property we have to ask ourselves where the top and bottom of the price market is in the neighborhood. At the least this gives us some context for where the value of the subject property might fit. In Carmichael I looked to the market and saw the lowest sales were closer to $300,000 and the highest competitive sales were just above $400,000. I realize this is a huge range, but at the least this gives me something to work with. Also, if my value is coming in below the bottom of a reasonable range, that’s a prod for me to keep digging for better comps and data (unless there’s a reason why the value should be lower).

8) Land value: Let’s not forget about land value. It’s worth asking what the site would sell for if it was vacant. This isn’t the main approach to value, but it’s a piece of the puzzle. The problem is if I’m relying heavily on one manufactured home comp in the market, but land value alone is more than that comp sold for, then maybe that one “comp” sold for too little.

CLOSING THOUGHTS: It really is like a puzzle when valuing something without the benefit of recent similar sales. My advice? Try to piece together many details like the ones above to help collectively paint a picture of value.

I hope that was helpful.

Photo credit: Thank you Realtor Sandy Muzinich for letting me use photos.

NEW VIDEO MARKET UPDATE: A couple of days ago I made a video to talk through the latest stats. It’s 10+ minutes and I talk through prices, inventory and sales volume. Enjoy if you wish.

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

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Filed Under: Appraisal Stuff, Resources Tagged With: bottom of the market, Carmichael, choosing comps, comp selection, Fair Oaks, Greater Sacramento appraisal blog, how appraisers choose comps, Manufactured Home, MLS, no comps, Orangevale, questions to ask, stick-built home, top of the market

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