Three dangerous ways to choose comps

It’s easy to get into value trouble when choosing comps, and today I want to highlight three ways to do that. I’ve observed each of these methods very recently, which is why I hoped to kick around some ideas together. I could have just as well entitled this post, “Three ways appraisers DON’T choose comps.” Any thoughts?

choosing comps for appraisal - sacramento appraisal blog

Three dangerous ways to choose comps:

1) Price: When putting a value on something, searching by price is a quick way to NOT see the full picture. For instance, if we pull comps for a $750,000 sale by looking at all sales between $725,000 and $775,000, what we end up getting is a limited view of one price range. Have we truly found any similar properties or just the ones that have sold in that range and happen to support the contract price? The danger of searching by price is we can end up letting a few high sales impose a value on a property instead of letting similar homes paint a picture of value. This is why sometimes appraisers disregard the “comps” they are given from the real estate community because they are only similar in price rather than square footage, age, condition, location, upgrades, etc… If you are in the habit of searching by price in MLS when pulling comps, I might recommend searching by square footage instead (or by a parameter you think will help you make quality comparisons).

2) Capitalization Rates: The 2-4 unit market has been heating up in the Sacramento area. In fact, the new Yardi Matrix 2017 Winter Report says multi-family rents in Sacramento will grow by 9.6% this year. If that’s how things shake out, we’ll basically have seen a 30% increase in rent over the past few years. Wow!! Anyway, I’m finding news of the hot rental market is causing some 2-4 unit properties to be priced according to unrealistic cap rates instead of realistic comps and rental income (or even realistic cap rates). What I mean is sometimes comments in MLS say “check out the 8% cap rate” when the neighborhood really isn’t getting rates that low. Maybe surrounding properties are showing rates closer to 9-10%. This might not seem like a big deal, but when we plug an 8% rate into the cap rate formula instead of a realistic 9-10% rate, the value can be substantially different. My advice is to be cautious about imposing a cap rate on a property.

3) Price Per Sq Ft: In real estate it’s easy to see a sale down the street and then apply the price per sq ft from the sale to the subject property. But what if the price per sq ft doesn’t make any sense for the subject? The truth is smaller homes tend to have a much higher price per sq ft than larger ones, and dissimilar homes might actually have a far different price per sq ft too. Thus my advice is to be cautious about imposing a certain price per sq ft on a property when searching for comps. Let’s pay attention to price per sq ft figures, but at some point we have to ask the question, what are similar properties actually selling for? By the way, if you haven’t seen my Starbucks cups analogy, it’s a fun way to think about price per sq ft. 

The Big Idea of Imposing: All of these methodologies essentially help impose a value on a property because we end up applying a metric or price range to comp selection instead of looking for what is truly similar. Thankfully there isn’t only one way to search for comps, but no matter what we do it’s important to try to be objective and discover value rather than doing something that might impose value on a property. Know what I’m saying? By the way, here is how I tend to choose comps as an appraiser just in case you’re peeved I only told you what not to do.

Blogging Class on Thursday: In a couple of days I’m teaching a two-hour class at SAR called Successful Real Estate Blogging. This will be incredibly practical and my goal is for you to leave with insight on how to be effective. Click HERE for details.

I hope that was helpful or interesting.

Questions: Did I miss anything? Anything you’d add? I’d love to hear your take.

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10 tips for pulling comps on a tricky property

The cookie cutter properties are the easy ones. But have you ever felt like you were just guessing at the value when dealing with something unique? Or maybe it seemed like you were throwing darts at a dartboard to come up with a number. What do we do when properties are different from the rest of the neighborhood? Let’s kick around some ideas below. I’d love to hear your take in the comments too.

pulling comps on a tricky property - sacramento appraisal blog - image purchased from 123rf

Here’s what I tend to say for how to pull comps on tricky properties:

  1. Deep Research: If a property is challenging, how far back in time have you looked? Sometimes we say things like, “I’ve scoured everything,” when in fact we’ve only glanced the past 3 to 6 months of sales. If we are dealing with something funky, we might have to look at years worth of sales to find something similar. Finding older similar sales is important because it helps us see how a challenging property fit into the local market. You can thus use older sales for research or include them in a report or CMA (and make an adjustment up or down depending on how the market has moved).
  2. Previous Subject Sale: Has the subject property sold before? If so, what did the subject compare to at the time? Finding comps for prior sales might be a clue into how the subject property fits into the context of the market. Of course it’s important to remember the previous sale might have closed too high or low.
  3. That One Feature: Often a home might be fairly standard, but what makes it difficult to value is an extra feature that is less common for the neighborhood. Maybe it’s a huge barn, accessory dwelling, or a studio above a garage. This is where we have to try to find something that is similar enough so we can gauge what the market has actually paid for that feature (since the cost of the feature might be way more than the actual value it adds). Remember, we might not be able to find something exactly the same, so we’ll have to be okay with similar, which is alright as long as we are looking at two things that are truly competitive. As an example, we might be able to find four neighborhood sales with accessory dwellings over the past couple of years and then compare those sales with otherwise similar homes (but without an accessory unit). As we start to compare prices, we can try to extract a percentage or dollar amount for what the accessory unit contributed to the overall sale, and then apply that in today’s market.
  4. Competitive Areas: If sales are extremely sparse in the subject neighborhood, where else would a buyer consider purchasing? You might try looking there for recent sales. Make sure the neighborhoods really are competitive though, and the way you’ll know that is if prices have been similar over time in both areas.
  5. Bottom & Top: Sometimes when dealing with a really funky 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 is likely to fit (I know, that might be a wide range, but it’s better than nothing).
  6. Ask for Advice: One of the best things to do when valuing a tricky property is to ask for advice. Seek out others who have valued something like that before and ask for wisdom. What did you do? Who did you talk to? Where did you go for comps? What challenges did you face?
  7. Target Buyer: It’s often useful to consider who a target buyer might be so we can gauge how that representative buyer might approach the property.
  8. Range of Value:  When a property is out-of-the-ordinary, it’s useful to see value in a range. We like to be so precise about value, but the best thing we can do at times is to give a range of value based on research. Thus instead of saying, “The value is $550,000 exactly”, we might say “A reasonable value range is $530,000 to $560,000”. This can work well for agents to communicate value for a unique home, but it can also work well with appraisers for doing certain types of private appraisals or consulting work where a precise value is not needed (a lender is going to want an appraiser to select a specific value).
  9. Test the Market:  You can do all your homework on a property and still not be sure the value is where you think it is. Sometimes when a property is unique, it’s good to go in with research or maybe even hire an appraiser, but at some point the property needs to be exposed to the market. After all, the market will tell you what it’s worth.
  10. Walk Away: On occasion the best thing to do is walk away from a property. Appraisers get this because we know we are not 100% qualified to value all properties. For example, I am not qualified to appraise the Capitol building in Sacramento, sports arenas, The White House, or a few hundred acres of almond groves in the Central Valley (not at this time anyway). Recognizing our limitations keeps us humble and it’s key for building credibility with clients. This also underscores how the best answer to value can sometimes be, “I do not know what it is worth. I have some ideas, but I think we need to test the market.”

I hope this was helpful.

blogging classBlogging Class I’m Teaching: I’m teaching a class coming on April 12 at SAR from 9-11am. It’s called “Successful Real Estate Blogging“, and I’ll be talking through the nuts and bolts of effective blogging. This will be extremely practical, and my goal is for you to take action (rather than just listen to me talk shop). I’d love for you to be there. See the attached image for more info. Let me know if you have questions.

Questions: Anything else to add? Did I miss something? I’d love to hear your take.

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Why it’s important to think of new homes just like new cars

A couple years ago my family bought a 2012 Camry. Let me tell you, being a guy that is 6’0″ tall, it sure is nice to have more leg room compared to a tiny Sentra we also own. Though I’ll admit I gave up my truck when we got the Camry, and it’s just not the same thing trying to transport 2x4s in a sedan from Home Depot for my building projects.

A Relevant Analogy: Anyway, I have an analogy to share today about new homes and new cars. As new construction has been taking off again in the Sacramento area and many other places, I’m finding some home owners and even some real estate agents aren’t in tune with the difference in value between new homes and ones that are even just one year old. Let’s take a look below.

new construction and cars - by sacramento appraisal blog

As you can see, there is a striking difference in value (price) between a brand new Camry and one that is just two years old. Just as buyers pay less for older cars, the same is true in real estate. The moment a house is built and occupied, it loses that fresh “never been lived in” premium that buyers pay more for.

A Conversation About New Construction and a “Low” Appraisal:

Owner: I live in a new neighborhood and I’m frustrated the appraisal came in low at $360K. I was expecting it to be $400K.
Me: Tell me about your situation.
Owner: The appraiser didn’t use the newest comps. I even walked over to the sales office and there are several recent sales at $400K. My house is only one year old and we spent about $10,000 in rear landscaping too. The 2013 models don’t even have rear landscaping.
Me: What are 2012 models like yours selling for? That might give you a good picture of value.
Owner: [ Silence ]
Me: Real estate is sort of like buying a car. The moment you drive the car off the lot, it depreciates in value. You just cannot sell a car built in 2012 for as much as a brand new model. Just as buyers pay more for a car that has never been driven, they also pay more for a home that has never been lived in. There is usually a striking value difference between brand new homes and model matches that sold even one year ago. The value difference can sometimes easily be 10% or more.

If you’re in a similar situation, I hope this helps give some context. At the same time, if you think the appraiser still got your value wrong, check out how to challenge a low appraisal. On the other hand, if your Assessor is valuing your home at the same level as brand new homes, it may be worth appealing your property taxes.

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

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10 things to double check after getting the appraisal report

You have an appraisal in your hands, but did the appraiser do a decent job or not? What should you look for to measure quality? Here are some of the bigger factors to consider as you read over the appraisal report, whether you’re a home owner, Realtor or loan officer.

  1. Neighborhood boundaries in the appraisal reportNeighborhood Boundaries: Are the neighborhood boundaries listed in the appraisal correct? It can make a big difference if the wrong comps are used from inferior or superior neighborhoods.
  2. Comp Selection: Are sales in the appraisal report competitive to the subject property? Are they a good representation of properties a buyer might consider purchasing instead of the subject property? That’s what a “comp” is after all. Using the wrong comps is a good recipe for value issues.
  3. Adjustments: Are dollar adjustments in the appraisal report reasonable and based on the way buyers see the market? Or do adjustments seem off-base? For example, sometimes I see a $10,000 adjustment for condition to account for the total difference between a bank-owned fixer and a renovated arms-length sale. That’s suspect in my book (because it’s so low).
  4. squate-footage-on-appraisalSquare Footage: Is square footage in the appraisal report relatively similar to official records or to what you know to be true of the property? There are many reasons why it could be different, but assuming Tax Records has the correct gross living area, it’s important to double-check in case the appraiser mismeasured the house. This happened to an investor client recently and the appraiser had to re-measure the house (which added $5,000 to the value).
  5. Missing Items: Is there something the appraiser left out that might contribute to value? I’m not talking about the appraiser not mentioning your custom switch plates or the new light fixture in the kitchen, but something more notable that really carries some weight (barn, outbuilding, bathroom, bedroom, pool, etc…).
  6. Location: Pay close attention to the location of comparable sales in the appraisal report. Are any comps located on busy streets, near commercial properties or other adverse locations? Were adverse locations of comparables noted in the appraisal report? A neighbor recently showed me an appraisal on her house and I pointed out a few instances where the appraiser didn’t note comps backing to a main street with heavy traffic flow. Ignoring adverse locations can essentially produce inaccurate appraisals.
  7. Distressed Sales: Were only distressed sales used in the appraisal report? Did these sales appear to sell at a discount? If these foreclosure sales (or short sales) did sell at a lower tier of the market, did the appraiser account for the discount? There is often a price difference between distressed sales and traditional sales.
  8. Trends: Are market trends in the appraisal report accurate? For example, if the market has been going up, but the appraiser says the market is going down, that could present some issues with the final value. If the appraiser does not understand what is unfolding in the market, that could lead to bogus adjustments in the appraisal report.
  9. YodaUpgrades: Were all improvements listed in the appraisal report and accounted for in the final value? The appraiser won’t make a dollar adjustment in the report for every single update, but the final value should consider improvements. Keep in mind of course that not all improvements contribute to value. For example, a 10-ft Yoda statue in the backyard probably won’t be a huge plus (even though you think it’s awesome).
  10. Making Sense: Does the final value make sense in light of the comps in the report, adjustments, the neighborhood real estate market and the entirety of the appraisal presentation? The appraiser should have presented a case for value and explained why the value was reconciled to a certain level in the report too. If it’s not clear, it would be good to seek an explanation.

Should you challenge the appraised value? A trained eye used to seeing appraisal reports can quickly unpack these items, but this list might seem overwhelming to a home owner not used to reading appraisals. Ultimately, after looking through the report, and you feel there are red flags that watered down your value, you ought to consider challenging the appraisal (use this format in case it helps). However, you should only put together a “reconsideration of value” if you feel the value in the appraisal report is truly off-base. Remember to focus on big-ticket items too – not just spelling errors.

What issues have you discovered when looking at appraisal reports? Any stories, insight or scenarios to share?

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Twitter, subscribe to posts by email or “like” my page on Facebook