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concessions

Real estate trends to watch in 2019

January 3, 2019 By Ryan Lundquist 20 Comments

What’s the real estate market going to do in 2019? Let’s talk about some of the bigger emerging trends in Sacramento and beyond. You can quickly scroll or spend a few minutes digesting things. Anything to add?

TRENDS TO WATCH IN 2019:

Affordability: We’ve had seven years of price increases without dramatic wage growth, so it’s no surprise one of the most pressing issues today is affordability. This is true for buying and renting.

Buyers gain power: It’s been a sellers’ market for years, but buyers have been gaining more power as price growth has slowed. Unless we see something happen to reverse the slowing, I expect buyers will continue to gain more power this year. If sales volume persists to slump, then it will turn into a full-fledged buyers’ market.

Uncertainty about future: For the past two quarters we’ve watched sales volume slough in many markets throughout the country. Was this simply a dull year or is it something more? Buyers seemed to take their foot off the gas pedal. Will they step back on? That’s the big question, and we’ll have to watch closely over the next two to three months to know how the market is going to unfold.

This is a poll I ran on Twitter yesterday. I know it’s only one random sampling, but it reminds me of an uncertain vibe I’ve noticed. When I ask people what they think the market is going to do I get quite a few, “I’m really not sure” answers. It seems like many people are floating the idea the market could be flat or experience something very modest – whether up or down.

Mortgage companies merge: In 2018 we saw some mortgage companies merge as a way to hold on in this market, and I expect we’ll see more of that in coming time. The reality is certain companies are struggling because the refinance market died off and sales volume was weaker last year.

Color: The word on the street is we’ll keep seeing color complimenting gray. For reference, the Pantone color of the year is Living Coral. I’m not saying this orange-ish shade is going to be splashed everywhere, but maybe we’ll see it at some point. In 2016 the color of the year was a shade of blue, and we’ve certainly noticed blue in kitchens. I suppose the color of the year could be like the cerulean belt scene in The Devil Wears Prada where we mock the color until years down the road we realize we’re actually wearing it… Not that I wear cerulean belts.

Looking for an exit: Some homeowners are concerned about a “bubble” and they sense the top is near, so they’ll be looking to exit “before it’s too late.” This doesn’t represent everyone, but some have been waiting for the right time to list and they’re feeling more ready. I expect this will be more pronounced for those in a place to downsize or move out of state. The struggle for others is it’s expensive to sell and buy again in the same market, so it becomes easier to stay put. For locals, I’d watch for Bay Area migration to Sacramento as the dream is to exit a higher-priced market and purchase in a lower-priced area. And Texas, we are the “Bay Area” buyers to you.

Overpricing: Sellers struggled with overpricing in 2018 and I expect they’ll continue to struggle – though hopefully not as much. It’s normal to see sellers want to price higher, but the problem lately has been sellers pricing for a more aggressive market from the past instead of today’s slower market. And of course sellers have been aiming for “unicorn” buyers instead of real buyers.

Laws for Cannabis: Recreational cannabis is now legal in 10 states and medicinal use is legal in more than 20 additional states. Whether you like it or not, this is a trend, and we’re bound to see more states jump on board as cannabis is normalized. I don’t say this as an advocate, but as an observer paying attention to potential impacts to the real estate market. Locally I’m expecting at some point to see other cities besides Sacramento change their zoning code to allow commercial cannabis cultivation. Think about it this way too. With so much talk of a coming recession, it’s hard to imagine city councils are not considering this move to secure future tax revenue.

Emergence of concessions: Sellers have been in the driver’s seat for years, so they haven’t been in the habit of giving credits to buyers or offering concessions, but this year could be different as buyers presumably gain more power. Sellers are going to have to get used to the idea that they won’t have multiple offers on every deal and they might have to offer credits, make repairs, etc… to get escrows closed.

Smart homes: As Wi-Fi doorbells, security cameras, smart thermostats, and voice-activated light bulbs become common, we’re only going to see more “smart” features in homes.

Energy efficient construction: Green is all the rage and we’re seeing laws change to usher in more energy-efficient technology. For instance, in 2020 in California solar panels are going to be required on roofs for new construction.

Flipping seminars: There will be no shortage of celebrity flipping seminars this year to teach the “secrets” of getting rich in real estate.

Pickier buyers: Buyers are patient about finding the right house, they’re more informed than ever about price trends, and they have higher expectations about condition and location. In a market where buyers seem poised to gain power, it only makes sense to see them grow more finicky as they have a greater selection of homes to choose from.

Crowded for real estate pros: We’ve seen explosive growth in the number of real estate professionals. This makes for a crowded and competitive market – especially in light of slumping volume. I’d expect 2019 to begin to weed some people out of the market if there isn’t enough pie to feed everyone.

Getting rid of appraisers: Over the past couple years we’ve seen an increase in appraisal waivers and there is currently a move to not require appraisals under a certain threshold. There is a clear agenda to start using “evaluations” instead of traditional appraisals. This is a big deal and removing one of the systems of checks and balances (the appraisal) as the market slows might not be the best idea ever… Read more here.

Creative financing: Last but not least, underwriting has been strict for years, but lenders are feeling the sting of the refinance market drying and sluggish sales volume. Do you think there might be more pressure to loosen lending standards to help fuel more business? Right now lenders hold tremendous power and what they do in coming time can shape the next few years. If they help buyers artificially afford higher prices through creative financing, that can only inspire price growth or stall the slowing trend. Sounds healthy, right?

I hope that was helpful or interesting.

Questions: What else do you think will be important in 2019? Did I miss something? I’d love to hear your take.

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Filed Under: Market Trends Tagged With: 2019 real estate predictions, affordability, buyers gaining power, buyers market, cannabis, concessions, creative financing, energy efficiency, exit market, getting rid of appraisers, lenders, mortage companies merge, picky buyers, Real estate agents, real estate bubble, real estate market in 2019, Sacramento Home Appraiser, sellers market, slowing real estate market, smart homes, uncertainty

An appraiser’s take on that $250,000,000 house

January 24, 2017 By Ryan Lundquist 26 Comments

Have you seen that house for sale at $250,000,000 in Bel Air? After checking it out I’m certainly taken aback with its features, but I also have some things on my mind as an appraiser. Let’s kick around some ideas together. Any thoughts?

Bruce Makowsky BAM Luxury Development

Image Source: Bruce Makowsky/BAM Luxury Development

1) Listings vs Sales: Let’s be real. This listing isn’t a big deal unless it sells. If it only sits on the market at $250M, then it wasn’t a $250M house. We say things like, “This is the most expensive house in the United States,” but it really might only be one of the most expensive listings unless it sells.

2) Fat Concessions: This house comes with enormous concessions. According to Bloomberg, the listing comes with “150 pieces of original artwork, $30 million worth of classic cars (owner’s estimate), a dozen high-performance motorcycles, and a deactivated helicopter.” At the very least the owner is giving the buyer $30M in personal property, so it starts to sound like we might be dealing with a $220M house instead. This is exactly why appraisers ask agents if there were any concessions or credits in the contract price. Would the house have sold at the same price if the personal property was not included? In other words, did the sale at $500,000 only close that high because there was a $50,000 car included in the sale? If all the comps are around $450,000 and there is one “Lone Ranger” at $500,000 (with a car), then we probably have to subtract that car out of the purchase price if we’re going to use it as a comp. Here’s more information on concessions.

3) Publicity & Overpricing: For the sake of conversation let’s assume this house is overpriced. On one hand the benefit of the sensational figure of $250M is the property has generated an incredible amount of publicity. That’s huge in real estate because it can help find the right buyer. But on the other hand, if publicity doesn’t lead to contracts, then it’s really just temporary attention. It’s like Eddie Murphy’s former house in Granite Bay that was listed for $12M in January 2014. The property got some air time and print for sure, but guess what? After 954 days it is still on the market for $12M. Thus we remember the importance of being priced realistically according to the market. Does the price line up with other competitive sales and current pendings / listings? Or is the property priced far differently than anything else that is similar? Whether values are increasing or declining, we have to ask these questions and pay close attention to realistic comps (that’s what an appraiser is going to do). In this case I really don’t know if the property is overpriced, but the inclusion of personal property  at $30M+ is a tell that it might be.

4) Bathroom Adjustment: This home has 38,000 sq ft and a whopping 21 bathrooms, so if we see a comp with 20 bathrooms, we should make a value adjustment, right? I mean, we were taught by our mentors to give a standard $5,000 or $10,000 adjustment any time there is an extra bathroom, so there has to be one. Okay, hopefully you get I’m being facetious. This example reminds us to not give token made-up adjustments for differences in bedroom count and bathroom count unless it’s really reasonable to do so (and there is support to do so in the market). In this case I would be shocked to see someone adjust such a petty amount because it’s not like billionaires walk in there and say, “Shoot, I would’ve paid $10,000 more if there were at least 22 bathrooms.” More on adjustments here.

I hope that was helpful or interesting.

Questions: What else stands out to you? What is #5? I’d love to hear your take.

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Filed Under: Random Stuff, Resources Tagged With: appraisers asking about credits, Bel-Air, concessions, giving value adjustments, listings vs sales, overpriced, overpricing, publicity, Sacramento Appraiser

Why do appraisers ask real estate agents about concessions?

December 1, 2014 By Ryan Lundquist 10 Comments

Being an appraiser is sort of like being Magnum PI. Well, I guess it’s just the same except for the tropical island, mustache, red Ferrari, and short shorts. I’m kidding. On a serious note though, appraisers are vaguely similar in one regard in that they investigate details. This brings us to our topic today. Why are appraisers always asking real estate agents about concessions in the purchase price? And how do appraisers use this information?

magnum PI

What is a concession? “A sales concession is cost or consideration given by a seller to motivate the buyer to complete the purchase” (homewyse.com). In other words, the seller is offering something to the buyer to help get the deal done.

Why do appraisers ask about concessions? There are two reasons why appraisers need to know about concessions. First, there is a place on the appraisal form for appraisers to list any concessions for the comps, so it’s a matter of filling out the form correctly. Secondly and more importantly, appraisers need to understand what impact any concessions might have had on the purchase price of the comps. Would the comps have sold at the same level if there were no concessions? That is essentially what the appraiser is asking so the appraiser can figure out how to make value adjustments to the comps.

sales concessions - sacramento appraisal blog

Common concessions: Some of the most common concessions include the seller offering help with closing costs, paying for HOA fees, including personal property in the sale, or giving credits for repairs. We see this in new construction all the time where a builder will offer $10,000 to help pay for the buyer’s closing costs. While this might be the only listed concession, if a builder has also offered $15,000 in “free” design options (upgrades), that’s also considered a concession. On the financing end there are concessions too such as interest rate buydowns or other below-market rate financing.

Examples of Sales & Financing Concessions Straight from Fannie Mae:

  • loan discount points;
  • loan origination fees;
  • closing costs customarily paid by the buyer;
  • payment of condo, PUD, or co-op fees or assessment charges;
  • refunds of (or credit for) the borrower’s expenses;
  • absorption of monthly payments;
  • assignment of rent payments; and
  • inclusion of non-realty items in the transaction.
  • (Examples taken from page  615 Fannie Mae Selling Guide Nov 2014)

Do appraisers adjust comps when the subject property has concessions? No. Adjustments are NOT made to comps if the subject property has concessions padded into the contract (or outside of the contract). Adjustments are only given to comps if there should be an adjustment given (see below).

credits - sacramento appraisal blog

When are adjustments given to comps? Appraisers will adjust for concessions to a comparable sale when concessions ended up impacting the final sales price of the comp. Would the comp have have sold at that level without the concessions? If an appraiser researches neighborhood sales and notices the sales with credits to buyers are selling at higher levels, then clearly credits are boosting those prices. In this case an adjustment would be made to the comparable sale for whatever amount the concession boosted the sales price to be sure the subject property’s appraised value reflects the market instead of padded prices from the comps with concessions. Keep in mind an appraiser doesn’t have to adjust the full amount of the concessions. It all comes down to how much of an impact, if any, the concessions had on the purchase price. Sometimes an appraiser might not make any adjustment at all.

 Tips for Real Estate Agents:

  • Be Specific in MLS: Disclose any concessions in MLS. Be specific and write a sentence if need be instead of writing “CLA” (Call Listing Agent). You will get less phone calls from appraisers too if you include more specific information.
  • Be Cautious of Padding: Be realistic about padding concessions above market value. If a property listed at the top of the market, and now you are writing or accepting an offer that pads the list price with an extra 3% above that price, realize this may push you into “no man’s land” where the property cannot appraise that high. Sellers always want to net more, but when a market slows down, it’s not always possible to get those higher prices.
  • The Truth: If asked about concessions, please tell the truth so appraisers can consider if there is any adjustment needed to the comps. If appraisers use bad information on the comps, it can lead to the wrong value for the subject property. If there are confidentiality issues about sharing these insider details, just let the appraiser know that.
  • Know How it Works: Remember that appraisers do not make adjustments if there are concessions in your listing they are appraising. They are only making adjustments to the comps if needed. Your seller can offer substantial credits back to the buyer for your listing, and no adjustment will be given because of that. However, the key is that there are comps out there that support your contract price (comps without boosted prices from concessions too). If your contract price reflects market value, that’s good news for your seller.

I hope this was helpful.

Questions: What type of concessions do you see most commonly in purchase contracts? How have you seen concessions impact the price on a property?

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Filed Under: Appraisal Stuff, Resources Tagged With: communicating with appraisers, concessions, credits, Fannie Mae, financing concessions, Home Appraiser, House Appraiser, Magnum PI, questions appraisers ask, sacramento appraisers, seller concessions, talking to appraisers

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