4 temptations to avoid when it comes to cost vs value in real estate

If you spent $50,000 on a 15 ft statue of Yoda in your front yard, do you think you’d get $50,000 back in value? A Star Wars fan might wet his pants and quickly offer a premium for the house, yet what would everyone else pay? That is the bigger question. We all know there is a difference between cost and value. Cost is the price of something, while value is what it is actually worth. We understand this logically, yet there often seems to be a disconnect between cost and value in the actual real estate market, which is why this conversation is important. Let’s look at some temptations to avoid as well as tips to get the most value out of improvements. I’d love to hear your take in the comments below.

cost vs value in real estate - by sacramento appraisal blog

Temptations to avoid when it comes to cost vs value:

  1. Treating Cost & Value the Same: Value can be much different from cost, right? This means a $47,000 home remodel might not lead to $47,000 in value. Or $75,000 in extensive landscaping might not command a $75,000 price premium. Or a $150,000 accessory dwelling built in the backyard may not automatically boost value by $150,000. Or a built-in pool that cost $35,000 to install may not lead to…. you get the point. We can always consider the cost and quality of something when we are trying to come up with a value, but at the end of the day we have to answer this question: How much are buyers actually wiling to pay for it? An owner might say, “I spent $136,000 on this rehab, and the appraisal came in low”, but if the appraiser used solid comps and made proper adjustments, the real issue could be the full cost of the rehab is not showing up dollar for dollar in the resale market (it’s actually not as easy as you’d think to get dollar for dollar).
  2. Letting Emotion Trump Data: What are homes actually selling for in the neighborhood? We have to look at sales to inform us about the resale market since sales help tell the story of what the market has been willing to pay. This is especially true when considering the ARV (after repair value) of a house that is going to be flipped (or even remodeled). It’s far too easy to get trapped into a formula like this: cost of acquisition + cost of remodeling + profit = value. But the truth is we need to look at the resale market first. What are remodeled properties actually selling for in the neighborhood? Once we have a good sense of the numbers we can then take steps back to determine if the acquisition cost and/or a rehab costs make sense or not. Thus an investor might pass on a house because the deal doesn’t make financial sense, or an owner might decide to scale back that extensive remodel.
  3. image bought and used with permission by 123rf dot com smDistracted by Shiny Objects: It’s easy to feel so excited about putting in the latest upgrades, that we actually miss value. In other words, we can get distracted by the glow of the new shiny features that we fail to ask whether buyers are going to pay for those features or not. For instance, someone might install $70,000 worth of energy-efficient features, but will buyers pay for that in the resale market?
  4. Projecting Other Neighborhoods on Yours:  What works well in one neighborhood may not work in a different area, so it’s important to not project one neighborhood on another. For instance, I appraised a house in a first-time buyer neighborhood that had VERY extensive upgrades. The owner had it listed over 25% higher than even the highest competitive sale so he could recoup his costs (it was way overpriced). The unfortunate reality here was instead of letting other remodeled homes in the neighborhood guide the owner on what type of upgrades to select, the owner instead put the best stuff from the region into this one house.

Tips for getting the most value out of upgrading your home:

  1. Buyer Expectations: Be in tune with what buyers expect in the neighborhood for upgrades. What are they actually willing to pay for? One way to know this is to visit open houses and talk with neighbors so you can see what others have done (and then see if their homes are commanding higher prices).
  2. Let Neighbors Overbuild: Don’t do more than others have done in the neighborhood. It’s far better to benefit from upgraded homes around you rather than be that one over-the-top property.
  3. Know your Location: Be realistic about your neighborhood so you are doing the right upgrades for the location.
  4. Consult a Professional: Talk with a reputable real estate agent or consult with an appraiser before you remodel so you get a better idea of where your dollars might be best spent to maximize value and appeal. This step is often not considered, but if you’re spending tens of thousands or hundreds of thousands of dollars, why not reach out to the real estate community before you break ground?

NOTE: Homes are not just about resale value. Owners should do what they want to their homes and enjoy them. But if you do plan on selling, maybe keep these things in mind.

I hope this was helpful.

Questions: Would you pay more for a Yoda statue in your front yard? What is Temptation #5 or Tip #5?

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The relevance of listings in a slower real estate market

Everyone knows appraisers use sales during an appraisal, but how do listings fit into the picture? What can listings tell us about the market?

The Scoop on Listings: Paying attention to listings is critical for both appraisers and the real estate community because they can help us see what the market is doing. Think about it this way. Sales show us what the market used to be like 30 to 60 days ago when these properties first got into contract, but listings help us see what the market is like right now. In other words, sales are pieces of history to illustrate the immediate past, but listings more accurately reflect the temperature of the current market.

snail in a race photo 2 - bought by sacramento appraisal blog and used with permission

On top of using three sales, appraisers are basically required to use 1 or 2 listings for most lenders. This means appraisers will need to include a couple active or pending listings in the report that support the appraised value. Keep in mind appraisers may or may not use listings in private appraisals for divorce, estate planning, litigation… If a market is increasing, listings will likely be priced higher, and if a market is cooling or declining listings are probably going to be priced lower than the most recent sales. Sometimes though listings are simply pried too high as shown below:

fair oaks neighborhood

This graph of neighborhood sales shows listings are priced significantly higher than the most recent sales. Part of the issue in this neighborhood is there are not many listings, which can skew the median price. But the thing is a number of neighborhoods in the Sacramento area are showing a similar trend right now with listings priced too high. As you can see, current sales are higher than they were during the beginning of the year, but the market has actually flattened out lately in many areas. This is why higher priced listings don’t always mean value is truly at that level. Sometimes when a market slows down it takes a bit of time for listings to get in sync with the change that happened. Are buyers actually making offers at those higher prices? Does it seem reasonable for value to be that high? Has something changed in the market so that current listings are legitimately marketable at higher levels? The same is true for low-ball listings or short sales. Just because a property is priced that low does not mean the market is that low.

A few thoughts about listings in Sacramento right now:

  1. Many listings are simply overpriced. The market is very price sensitive, so if the price isn’t right, it’s going to sit.
  2. Just as one sale does not make the market, one higher or lower listing does not make or break value either.
  3. There are lots of price reductions right now, but remember there are lots of pendings too, which shows the market is still competitive. Inventory may be higher, but it is still not very high.
  4. More housing inventory will slow down the market, which means it’s not the type of market to try to price it like it’s 2013 (when the market was really hot and inventory was declining). Buyers have more selection and they’ve become a bit more picky, which is something sellers need to consider.

4 temptations when a real estate market slows down:

  1. Use older sales that sold at higher levels to substantiate a higher contract price.
  2. Ignore current listings that are priced lower and might actually better reflect the housing market.
  3. Use listings that are priced higher to gauge the market even though these higher listings are not moving at that price.
  4. You get into contract at a high level and expect a higher appraisal despite data not supporting those prices any longer.

Question: Anything else you’d add?

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How to use MLS to know how the market is moving

How can you know right now what the real estate market is doing? What would you say if a client asked you about the market this month? You could probably rattle off some generalities about an increase of inventory and how sales are always lower in January and February. OR you could give them a few specific stats very quickly. Let me show you how.

Scroll Quickly: This post looks like it is a long read because of all the images, but it’s really not. It’s more of a demonstration than anything. I hope you like it and find a nugget or two of usefulness.

First off, do a “Standard” search from the main navigation bar.

standard search in MLS

Next select your criteria. If you want to do a search for the current month, enter the first date of the month in each field. Be sure to only select “1 house on lot” and “Sacramento” for county (or whatever counties you are searching). Then click “Statistics”.

2014 february search in mls

What Stats to Look For: After clicking “statistics” you will see quite a few numbers. What should you be looking for? Some of the most important ones are number of listings, number of pendings, number of sales, average days on market and median price (I take median price with a grain of salt though until about 7-10 days after the month is over since data can be VERY skewed until all the sales numbers are in). Click on the image below to see what the screen looks like when you hit “statistics” above. The image was too large to fit in my column.

2014 February so far 530

So What is Happening in February? Based on the image above we are seeing more listings than sales, but a large number of pending sales. Whenever there are more listings than actual sales, it’s a sign that inventory is increasing. Yet the number of pending sales also tells us that buyers are definitely hungry for real estate. Also, if you’ve been following trends you’ll notice that the average days on market is about ten days less in February so far than last month. This tells us buyers are getting into contract more quickly. The median price has increased so far in February, but again take that with a grain of salt until the month is over.

What About all of 2014? If you want to search data for the past two months (all of 2014), simply enter January 1 as you starting point. Keep in mind you could also search by city, zip code or even do a polygon search in MLS and then hit “statistics” so you know what is happening in a very specific neighborhood.

2014 january and february search in mls

Click on the image below to get a sense of how the market has been so far in 2014 in Sacramento County. As you can see there are far more listings than sales so far, but there are almost 2300 pending sales.

2014 so far 530

2-22-14- 7amFresh Coffee & Quick Glances: By the way, I’m sure everyone has seen and used the 24 hour market watch widget on your MLS home screen. I recommend looking at this whenever logging in because you can get a quick sense of what is happening in the market. So grab your cup of coffee, turn on your screen and take 10 seconds to scan listings, sales, pendings and price reductions/increases. Over time this can help us stay in tune with the market. Are there more listings than sales coming on the market? How many price reductions are there? This is a good temperature of real estate.

If this was helpful, feel free to forward the post.

Questions: Any thoughts? What are you seeing in February so far?

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Unpacking the Elk Grove real estate market

What’s been happening in the Elk Grove real estate market? Let’s take a look at all sales over the past few years and unpack some data too.

Analysis of 36 months of sales in Elk Grove:

  • Prices have clearly declined over the past three years.
  • Short sales have increased through the years (see my post yesterday for specific percentages for short sales and foreclosures). 
  • Foreclosures have decreased in percentage over the past three years.
  • Typical non-distressed sales tend to sell at higher levels than bank-owned (REO) and short sale properties. The blue dots above represent all typical sales, and the top end of the market is dominated by blue. That says something, don’t you think?

Current real estate data in Elk Grove:

  • 41% of all sales in Elk Grove last year were bank-owned.
  • 32% of all sales in Elk Grove last year were short sales
  • 693 sales in Elk Grove over past 90 days.
  • 340 current active listings
  • 272 current active short sale listings
  • 392 current active short sale contingents (in contract already)
  • 409 pending listings
  • $68,250 was the lowest sale (only 14 sales under $100K)
  • $1,330,700 was the high sale.
  • There were two sales above $1,000,000 over the past year. One house was nearly 5,500 square feet on 17 acres and the other was nearly 7,000 square feet on 5 acres.
  • 10.3% unemployment rate in Elk Grove (March 2011)
  • 12.6% unemployement rate in Sacramento County (March 2011)
  • Median price levels for both the 95624 and 95758 zip codes are currently hovering around 2001 levels. The median price for 95624 in March 2011 was $224,900 and the median price for 95758 in March 2011 was $182,600.

The market in Elk Grove is competitive right now since there are many properties in contract (contingent status) or already pending. Prices are lower than they’ve been in years, so buyers are absorbing properties. However, with an unemployment rate at 10.3% and the market still being considered distressed due to a high level of foreclosures and short sales, property values have been struggling still in many pockets of Elk Grove. 

Let me know if you have any questions or insight.

If you have any real estate appraisal, consulting, or property tax appeal needs in the Greater Sacramento Region, contact me at 916.595.3735, by email, on our appraiser website or via Facebook.