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How do we value a brand new house in an old neighborhood?

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What do we do with a brand new house in an old neighborhood? Can it sell for more? How much more? I’ve been asked several times about this lately, so I wanted to pitch in some thoughts. Anything to add?

Some things I would do and consider when valuing a new home:

1) Immediate neighborhood: In an ideal world I’ll find a few recent examples of brand new homes on nearby streets. But if not I would search through years worth of sales in the immediate neighborhood for something that was newer in age. Even if I found older sales from years ago, my goal would be to compare these brand new homes with other similar-sized older homes at the time. How much of a percentage price difference was there if any?

2) Surrounding market area: If there are no sales in the immediate neighborhood I’d search competitive areas in the surrounding market. Did buyers pay a price premium in other places? Remember, it might be easy to cherry pick “comps” from brand new subdivisions or infill projects, but that’s not really the same thing as being totally surrounded by older homes, right?

3) New development: Next I’d take a look at the premium for new construction in the surrounding local market. For example, two weeks ago someone asked me how to value a brand new home in an older part of West Sacramento. I recommended points 1 and 2, but also said it would be wise to look in the newer portions of West Sacramento to see what brand new homes are selling for compared to homes that are just 2-3 years old in the same development. The premium we see in the new subdivisions might not correlate perfectly with an older neighborhood, but it’s still data. For instance, imagine we found there was a 10% price premium for brand new homes in the new area. At the least that might help us decide not to apply a 20% price premium in the older neighborhood we’re working in. Know what I’m saying?

4) Price ceiling: It’s possible of course to build something magnificent that might sell for big money in some parts of town, but we cannot forget the reality of price ceilings. In other words, there is probably a price limit buyers are willing to pay in an area before moving on elsewhere. Where is that ceiling? That’s worth asking and researching.

5) The wrong one & modern homes: Just because something is brand new does not mean it’s going to fetch top dollar. If it’s the wrong type of house for the neighborhood, buyers might actually pay less for the property. It’s like when someone builds a plain earth-tone stucco tract home in a classic area with Tudors and Bungalows. Despite being new it might actually sell with a price discount if it doesn’t have any hint of era charm for the neighborhood. On the other hand there are modern homes popping up all over Sacramento and beyond that seem to defy this idea. These homes definitely don’t blend into the neighborhood at all in terms of design, but they’re still fetching high prices. Keep in mind though modern homes tend to carry wide appeal, so they are often able to break the mold of the neighborhood and still command a price premium because of their style. In short, modern homes are not vibeless tract homes, so it’s not really the same thing.

6) Other: What else would you add to this conversation?

I hope this was interesting or helpful.

Tips for talking with appraisers [WEBINAR]: This week I recorded a 20-minute webinar for real estate agents on tips for talking with appraisers. Check it out here (or below). Thanks Tina Mitchell for the invite to do this.

Questions: Anything else to add? What’s #6? What have you done when valuing that brand new home in an old area? I’d love to hear your take.

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Cherry-picking comps & being connected to the neighborhood

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On paper it looked like value was going to be so much higher. Why? Because comps to the north were easily 10-20% higher, and even Zillow came in $100,000 above the appraisal (ahem). The big cause of such a legitimately lower appraisal boiled down to one thing. Location. Today I want to show a situation where a small section of the neighborhood was blocked off from the rest, and it was a big deal for value. Have a look below and let me know what you think. Anything to add?

land park neighborhood sacramento

The value issue: As you can see, this pocket of housing in the Land Park neighborhood isn’t accessible from the rest of the neighborhood besides a frontage road next to I-5. In other words, this section is disconnected. What sort of impact is there (if any) for being cut off from the rest of the neighborhood?

land park neighborhood sacramento 3

Methodology when only 5 sales in 5 years: When appraising something in this section, there were zero sales over the past 2 years and otherwise only 5 sales in the previous 5 years. This means I had to really study older sales to understand how value works. Here are the five sales:

land park neighborhood sacramento 4

What I ended up doing was comparing sales in this small pocket with similar sales at the same time in other areas of Land Park. Also, my goal was to find other patches of housing in the expanded neighborhood that seemed to sell at the same level. If I could find other areas selling at similar price points through the years, then current sales in those areas are probably my best comps for today.

land park neighborhood sacramento 5

land park neighborhood sacramento 6

Conclusions: After looking through all five sales I observed the following:

1) Some of the lowest prices: This small housing patch has some of the lowest prices in the neighborhood as shown with the yellow dots in the graph below.

Land Park trends by Sac Appraisal Blog

2) 10-20%+ easily: If I were to cherry pick “comps” directly to the north, there is easily a 10-20%+ price difference for otherwise similar houses. The truth? Location matters. So does being connected to the rest of the neighborhood. In some cases a few streets that are disconnected might not sell differently than the rest of the market, but it could also be a big deal like the example above. The truth is if we cherry-picked nearby higher sales, the value would’ve been inflated by $60-80K+. 

3) Limited by 90 days: It’s tempting to only look at the past 90 days of sales, but that can be far too limiting – especially in a situation like this. Also, a 5-minute comp check isn’t realistic. At times we might spend hours researching before beginning to understand how the immediate neighborhood compares to the rest of the market. We might even call colleagues and seek out other opinions too.

4) True comps: Other patches of housing in Land Park that tended to command similar prices were very busy streets or homes having a huge influence from nearby commercial properties (or heavy fixers that would have otherwise sold at much higher levels in average condition). I don’t say this to be negative about any of Land Park, but only to be objective as an appraiser trying to explain how value works in some areas compared to others.

I hope that was helpful.

Two classes I’m teaching in May: By the way, I’m teaching a class at SAR in a few weeks called How to Think Like an Appraiser. I’m also doing a blogging class. Click here for details.

Presentations - sm

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

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Three dangerous ways to choose comps

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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

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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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