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It’s not all about square footage in real estate

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A bigger house is always worth more, right? It’s really easy to fall into the trap of believing that, but it’s not always true. Let’s talk about it.

Myth: Extra square footage is always worth more.

1) Single story vs two story: Sometimes a large single story will sell for more than a larger two-story. This isn’t always the case, but in some neighborhoods we see this dynamic. So just because a 2-story is larger doesn’t mean it’s more valuable (or a good comp).

2) 55+ Community: In a 55+ community we sometimes see more emphasis on floorplan instead of square footage. Larger models still likely command higher prices, but at the same time the market doesn’t seem as sensitive to square footage differences like we see in other neighborhoods. For example, here are two models in Sun City Lincoln Hills with a 107 sq ft difference. Normally that might not mean much in a typical neighborhood, but it looks like there’s a pretty decent value difference here. On paper it seems like these two models could be perfect comps since they are so close in size, but that might not be the case. 

3) Layout: At times a house with a better layout will sell on par with a larger house with a less desirable layout (even outside a 55+ community). What I mean is buyers might pay the same for a 1,400 sq ft house with an open layout compared to a 1,700 sq ft house with a less open floorplan. This dynamic isn’t always easy to spot in MLS photos, and that’s why it’s so important for agents and appraisers to communicate. I recommend agents to open up conversation with appraisers about the listing (without pressuring to “hit the number”). What feedback did you get from potential buyers? What were buyers attracted to? Is there anything special about the house or neighborhood? When it comes to layout, this is often an “insider detail” that’s frankly easy to miss, so I can’t emphasize how important it is to communicate about this if it’s a relevant factor.

4) Dangerous to always adjust: It’s easy to get trigger-happy about making value adjustments whenever we see a square footage difference. Can you relate? But sometimes a square footage adjustment might not be needed. My advice? Be careful about always giving an adjustment and be cautious to not routinely give the same exact adjustment too. Try to look to the market to see if there should be an adjustment or not, and then proceed.

I hope this was interesting or helpful.

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

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What appraisers think about increasing the contract price to cover closing costs

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Is it going to be an appraisal problem if the buyer asks for a 3% credit back? Well, let me back up. Let’s imagine the original offer was $300,000, but through written negotiation the price has now increased to $310,000 with a $10,000 credit back to the buyer. Is that an issue? Here’s some quick thoughts.

1) Yeah, it looks bad: In some senses I think many of us would subjectively look at a situation like this and think, “Yeah, it looks bad. It seems like the price was just inflated so the seller can net more money.”

2) Contract vs market: While it’s easy to judge situations like this, we have to remember value is not found in the contact. It’s found in the market. Thus as an appraiser I need to be objective about contract negotiations. Even if I think the contract price was inflated to help the seller net more money, I still need to objectively look to the market for the proof of value. In other words, are similar properties selling around $310,000 without credits and concessions? If so, then value looks strong at $310,000. Maybe the buyer and seller were originally in contract too low, so it would be a shame for me to have put more weight on the contract than looking to the market for the answers. Yet if all the comps and pendings are at $300,000 or less, then value isn’t really supported at $310,000. Thus just because it would be convenient for a buyer or seller to negotiate the price up does not mean value is there.

3) After the contract: Sometimes a buyer and seller will negotiate a contract price up after the appraisal is already finished. Then the appraiser is asked to consider changing the appraised value. My advice? Do your price negotiations up before the appraiser gets involved. I think most appraisers are not going to amend the value to “hit” the new contract price after post-appraisal negotiations.

I hope that was interesting or helpful.

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

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Explaining how price per sq ft doesn’t work (with a Lamborghini)

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If there’s one conversation to master in real estate, it’s explaining how price per sq ft works. Or rather how it doesn’t work. In the past I’ve used Starbucks cups and even toilet paper to explain things, but today let’s use price per pound. What do you think? Let me know.

Seller: I used price per sq ft to price my property.

Me: That’s great. Did you pick the right number?

Seller: What do you mean?

Me: Imagine your neighbor just bought a Toyota Camry for $24,000. If we do some quick math, she paid $7 per pound based on the weight of the car.

Seller: Okay.

Me: Now imagine a different neighbor wants to buy a Lamborghini. It’s been his dream since middle school, but it’s way out of his budget. Well, not any longer though since he just learned the price per pound for a vehicle is $7. He can now afford the Lambo. Pretty cool, right?

Seller: It doesn’t work that way. 

Me: Exactly. Why not?

Seller: You can’t use the price per pound from a Camry to price a Lambo. Those are two completely different cars.

Me: Well said. And in the same way we can’t borrow a price per sq ft from a dissimilar property down the street and arbitrarily use it to price your house. That’s a bit like using Camry stats to price a Lambo.

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UPDATED on 2/08/2018 (“Picking the right number”): Someone read this post and thought I was saying price per sq ft is a good metric to use. That’s definitely not what I’m saying. To be fair I think I can see why this person thought that because I mentioned “picking the right number” in the conversation above. I’m not suggesting there is a right number to choose, and that example question is really only a device to help move conversation forward (rather than something to be taken literally). The big point here is choosing a random price per sq ft to price a property is a really bad idea. I suggest actually paying attention to similar sales more than anything. Does that make sense? I hope so.

This car example isn’t intended to tackle all aspects of price per sq ft. It’s simply a way to start conversation. Read more on price per sq ft here.

Mastering this conversation: I highly recommend for real estate professionals to master this conversation. If you don’t like the car example, that’s fine. My sense is it’s critical though to have a few examples at hand to quickly explain how price per sq ft works (and doesn’t work). Why? Because when sellers overprice it’s often because they’re hung up price per sq ft.

I hope this was interesting or helpful.

Questions: Does this work? Why do some sellers and real estate professionals get hung up on price per sq ft? Did I miss something?

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The danger of overpricing & chasing real estate unicorns

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Overpricing. It happens all the time in real estate – especially in today’s market. I get where sellers are coming from because we’ve had so much glowing real estate news for more than five years. But that doesn’t mean we’re in a market where you can command whatever price you want. 

Chasing the unicorn: Many sellers are pricing their properties too high. It’s as if they expect record-breaking prices and multiple offers every time because of how “hot” the market is. Homeowners get so fixated on the idea of a fiery market that they price for that one unicorn buyer who’s going to mysteriously pay more than anyone else. This “unicorn” will ignore all recent sales and listings and magically offer 10% higher than anything. In Sacramento the idea is a Bay Area “unicorn” will swoop in with fat stacks of cash and totally ignore similar comps that are selling for less. It’s nice when sellers get lucky like that, but in today’s market buyers are actually much more finicky about price. Despite a legitimate housing shortage we don’t have a market where buyers are willing to pay crazy prices that are totally disconnected from reality. In other words, we don’t have a market where pricing for the “unicorn” makes good sense (unless you want to sit on the market instead of sell). Take a look at the image below that shows price reductions over the past 24 hours in the Sacramento region. These 78 properties have been priced too high for the market.

My advice? Price for the real market instead of the unicorn. Give the most weight to similar sales and similar listings that are actually getting into contract.

Aspirational pricing: If you aren’t familiar with the term aspirational pricing, Jonathan Miller coined this phrase. It’s a great way to describe the phenomenon of sellers fixating on prices that are simply disconnected from the real market.

10 reasons why sellers overprice:

1) Hot headlines are imposed on the price instead of looking at comps. 

2) Dissimilar sales are used as “comps” to price the home.

3) Too much emphasis is put on price per sq ft instead of actual comps.

4) A property is priced like it doesn’t have a busy street or adverse location.

5) Sales from a higher-priced area are “cherry-picked” to price the property.

6) The seller is too subjective and feels “my house is better.”

7) The owner believes the cost of any upgrades should be paid for by buyers.

8) A more aggressive trend from a lower price range is assumed to be present at a higher price range.

9) It’s a tricky property and not easy to come up with a price.

10) What else?

My article in Comstock’s: By the way, I wrote an article in Comstock’s Magazine this month on the value of upgrades. Check it out if you want.

I hope this was interesting or helpful.

Questions: Are you seeing sellers price for “unicorns”? What reasons do you think sellers overprice? Did I miss something?

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