How do appraisers account for a difference in age between comps?

There are so many factors to consider when valuing a property. Anyone who works in real estate knows this. So how do we account for a difference in age between comps? Does age matter? Should we make any value adjustments? Someone asked me this recently, so I figured it was worth kicking around the issue together. I’d love to hear your take in the comments below.

difference in year built in the appraisal report - sacramento appraisal blog

Question: How do appraisers account for a difference in year built? Do appraisers give an adjustment when to comps there is an age difference?

Answer: Here’s my take. Most of the time buyers tend to buy based on condition instead of age. Thus if there is a difference of a few years or so within a subdivision, it might not have any impact on value as long as the condition is similar. For instance, in some tracts we see an age range of 1977 to 1983. If one house was built in 1977 and another in 1983, and they are in the same condition, it’s unlikely to see the 1983 home command a value premium unless for some reason it has a higher quality or if it is located on a stronger street. Sometimes buyers are actually not even aware of the age of the home. They’re really just looking at the neighborhood and buying what is there. Do you agree?

My $500 Adjustment: I’ll admit when I first began appraising I used to adjust $500 per year on all comps in every appraisal because that’s what I was taught to do. In very technical terms, this valuation methodology is…. bogus. After all, a $500 adjustment per year certainly doesn’t apply to every neighborhood, every market, or every property type. These days though I rarely make any adjustment for year built since most of the time I’m looking at condition instead. However, if the age gap is too large, there may be a difference in value, and we we have to begin asking if we should even be comparing the homes in the first place. For instance, is 1977 vs. 1990 a good comparison? What about 1990 vs. 2003? Maybe not because we might be dealing with a different quality of construction, different tracts, or different markets. But at the same time, we might see homes in one area were built in 1955 and another nearby area has homes built in 1972. If there is no price difference observed between both areas, then the homes may easily be competitive despite their age gap. The thing we need to do though when valuing a 1955 home is to be sure to find 1955 sales instead of just 1972 sales (this helps prove the market really does pay the same amount for both ages).

Subjective Mush: I know this begins to sound very subjective, but there is no rule out there when an adjustment is needed other than when buyers at large have clearly paid more or less because of a feature. In reality it can be tempting to make value adjustments for every single distinction, but sometimes it’s best to not force adjustments by remembering the market isn’t so sensitive as to warrant a price reaction for every single difference. However, a good rule of thumb when searching for comps is to take an “apples to apples” approach. This means we start by searching for similar-sized homes with a similar age rather than choosing newer or older sales that really might not be competitive. I know this sounds basic, but when we keep the fundamentals in mind, it keeps us sharp (right?).

Brand New Homes: As I mentioned recently, we do need to be careful about comparing brand new homes with ones that are even a year or two old because brand new homes tend to sell at a price premium. This means despite only 1-2 years difference in age, we might see a pretty big difference in value.

I hope this was helpful.

Questions: Anything else you’d add? When do you think age does matter to buyers? Any stories or examples?

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Why no value adjustment is sometimes the best adjustment

It has to add value, right? It’s tempting in real estate to make upward adjustments in our valuations whenever we see a feature that is remotely positive. Our thinking is that buyers have to be willing to pay something for that special feature, so we should give it a little value boost. But sometimes making no adjustment is the best thing to do. Let’s look at three quick examples.

no value adjustment given - sacramento appraisal blog

Three examples where no adjustment could be the best move:

  1. Duplex with Large Lot Size: We get used to giving value premiums for larger lot sizes for single family homes, but a larger lot size for a duplex is often not a positive gain for the property. Assuming the lot cannot be built on or divided, the extra space really costs more for the owner to manage, and that can actually diminish cash flow for the property. Imagine a duplex on 0.75 acres, while every other similar duplex is on a postage stamp lot. If there is no difference in the rent between all the duplexes, and the larger lot is not useful for building, there probably isn’t a value premium for that extra lot size. In fact, the larger lot may be a nuisance because of the cost of extra landscaping maintenance or even illegal dumping.
  2. Location Across from a Park: It’s always worth more to be located across from a park, right? Not necessarily. While a park location might feel like an asset, if it’s also located on a busy street, the negative of the busy location might balance out any positive gain for the park location. Or if a park is known for loitering or criminal activity, it might not be desirable at all to live across the street from it. This is why it is telling to hear home owners talk about their park location. At times they love it and wouldn’t trade it for the world, but other times it’s a clear negative. Of course market value is not just about one owner’s perception, but the entire market. How would most buyers respond to the location? This is where we have to look at neighborhood sales over time to see if there is any price difference between park sales and non-park sales.
  3. Condo with a View of a Lake: Imagine a condo with a view of a lake. We would all assume the lake view is worth more than a non-lake view, but what do the neighborhood sales and listings tell us? Is there any price difference at all? If the vast bulk of properties in the condo development are all rentals, and there is no difference in the rental value for the lake view vs. the non-lake view, then the lake view is not an asset. This real life scenario came from a conversation with a mentor recently.

The Point: Sometimes it’s tempting to give a positive value adjustment because we feel there simply has to be one. But there actually might not be one. Maybe the market doesn’t behave the way we think it should, or maybe the market in one subdivision trends differently than a nearby subdivision. This underscores the need to watch neighborhood sales and listings closely to try to let the data speak to us rather than let our assumptions trump the data.

Marketing to Millennials Event: Locals, I wanted to invite you to an event I’m moderating at the Sacramento Association of Realtors on May 6 at 12pm. It’s called Marketing to Millennials, and it’s all about how to connect with Millennials in your real estate business. This generation too often gets a bad wrap from so many sources, but how can you connect with them and serve them best in business? There will be a guest speaker and four panelists. Make sure to say “hi” if you can make it. Read more here (pdf) or sign up here.

Question: What other examples can you think of where a positive value adjustment wasn’t needed (even though it seemed like one should be given)?

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The slowish real estate market in January

January is usually a slow real estate month. That’s nothing shocking. Yet it’s always interesting to see how the market begins to maybe get a sense for where it might go during the year. Today let’s take a look at 6 specific areas of the market in Sacramento, which will help us understand and explain the way things are moving.

Longer on purpose: If you’re new to subscribe (thank you), most of my posts are not this long. But twice a month I break down the trends so we can better see the market. Most of my other posts are general enough to apply anywhere in the United States. Is your market similar though? I’m curious.

Two ways to read this post:

  1. Scan the talking points and graphs quickly.
  2. Grab a cup of coffee and spend a few minutes digesting what is here.

the story of the market in january

Email me if you want the graphs: If you would like all the graphs in this post (and 15 more), send me an email (make sure to write “I want the market graphs” in the header). You can use some of these in your newsletter, on your blog, and in other social spaces. See my sharing policy for 5 ways to share.

1) The reality of the slower seasonal market right now:

seasonal dip in sacramento

It’s easy to freak out this time of year when values take a dip. It can feel the market is falling apart when we see price figures decline. Yet the market almost always softens at the end of the year and in the very beginning of the year. Knowing this can help you communicate well with clients and even plan for business. Remember that sales stats usually see a huge uptick in March, and this signifies the Spring market. Technically most of the sales in March actually get into contract in February though, which reminds us the Spring market hits its stride in February.

2) The median price softened by 3% last month:

price metrics since 2014 in sacramento county

context for median price since the real estate bubble by sacramento appraisal blog

median price and inventory since 2013 - by sacramento appraisal blog

The median sales price took a 3% dip in January to $256,000. It might sound extreme to see the market soften this much, but last year saw the same exact 3% dip as you can see in the image above.

3) It took an average of 60 days to sell a house in January:

DOM in Sacramento County

On average it took 60 days to sell a house last month in Sacramento County. This is up from 48 days one year ago in January 2014, but down from about 90 days in January 2012.

CDOM in Sacramento County - by Sacramento Appraisal Blog

It’s important to realize the market is not the same at every price range. In other words, some price ranges tend to take longer to sell than others. Generally speaking, the higher the price, the longer it takes to sell. Keep in mind there were only 9 sales at 750K-1M and two above 1M, so take those stats with a grain of salt.

4) Sales volume hit its lowest point in 8 years:

sales volume in Sacramento County

Sales volume was at its lowest point in 8 years last month. On one had that sounds alarming, but it’s really the story of the market these days. Last year saw slightly more sales at this time, so this year isn’t anything out of the ordinary for the current market. Volume is simply down right now as a whole, and we can look at this as the new norm for a while until the market can handle more inventory and more demand (when the economy improves).

january sales in sacramento county

It’s easy to get sensationalistic about having such a low volume of sales last month, but the graph above shows 15 years of January sales in Sacramento County. What do you notice? January almost always comes in last place for sales volume. In short, don’t freak out.

sales volume in fall and winter through 2015 - by sacramento appraisal blog

Lastly, remember to consider what usually happens in February. Sometimes February is right in sync with January, but other times there is slightly more volume. We’ll see what this year brings, but knowing how the market works makes you an asset to clients.

5) Housing inventory increased last month (technically):

inventory in sacramento county  Since 2013 - by sacramento appraisal blog

Inventory increased last month to 2.61 months of housing supply. This is slightly higher than it was one year ago, and exponentially higher than 2013 when there was only one month’s worth of homes for sale. Remember that inventory is the relationship between the number of active listings as of the first of the month divided by sales from the previous month. This means if there are VERY few sales in a month, inventory will actually sound much higher than it actually is. In short, an inventory at 2.61 months sounds like it’s on the higher side, but being that sales volume was really low last month, this figure at 2.61 doesn’t really mean the same thing as it would in the summer when there are far more sales.

months of housing inventory by sacramento appraisal blog

Housing inventory is never the same at every price range. This reminds us yet again there are many markets within a market. In this case, the higher the price, the more inventory there is.

inventory during fall and winter 2 - by sacramento appraisal blog

number of listings in sacramento - January 2015 - by home appraiser blog

6) Interest rates continue to decline:

interest rates by sacramento appraisal blog since 2011

Low interest rates are like fuel for the housing market since they create more demand by drawing buyers into the market. That is what happened in 2012 when rates went below 4% (for the first time ever), and it’s likely going to get some buyers off the fence right now.

interest rates by sacramento appraisal blog

Real estate is never just about supply and demand. There are so many “layers of the market” that are working to impact the direction of values. I hope this was helpful to create some context and conversation.

Share: Please feel free to share this link with clients, and see my sharing policy for 5 ways you can share my content so we’re on the same page about what it means to “share”.

Questions: What are you seeing out there? How does the market feel to you? Anything you’d add?

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Real estate, water and the guy without a front lawn

Are you ready to pay a higher water bill in coming months? I shudder to think about more money leaving my wallet yet again, but it seems inevitable for water companies to raise rates and create mandatory restrictions because of the severe drought we’re having in California. That’s why this home owner without a front lawn is starting to look pretty smart. This guy is hands-down going to save money, but most of all he may be ahead of the curve in case severe lawn watering restrictions come into play. Yes, it’s still not as common to see xeriscaped front yards, but wouldn’t you say it’s growing in popularity? Might the drought spur on more yards like this?

front yard during a drought - by sacramento appraiser blog

The Drought & Real Estate: The truth is the drought in California can definitely impact real estate. Over time buyers are simply going to have to think about water usage during their real estate decisions. How much is it going to cost to fill and operate a built-in pool? How much is that expansive front yard going to cost to keep green? Will buyers pay more if the front yard has been dialed in already to save water? Will buyers pay a premium for water-saving appliances, instant tankless water heaters, or water efficient toilets or faucets? Will a golf course view be worth less if the “greens” are brown? Will builders struggle to get new construction off the ground because of water shortages? These are relevant questions.

layers of the market that create value - cake by Joy Yip

Cake, Water & our Wallets: I talk constantly about how the real estate market is like a multi-layered cake since there are many layers of the market that impact or create value. We know it’s obvious that things like inventory, interest rates and cash investors can strongly influence the direction of values, but we should add the cost of water as a layer of value since it is bound to be something buyers more readily consider in coming time. Granted, I doubt the cost of water will sway the market like interest rates can, but it is nonetheless a consideration and something to keep on our radar. Most of all, until there are severe restrictions in place and the cost of water dramatically increases, we may not see too much sensitivity in the market. Whenever our wallets are hit though, that’s when change can come.

parcel mullet word - sacramento appraisal blogParcel Mullet: By the way, since we’re on the subject of lawns, it seems natural to ask if you’ve incorporated the word “parcel mullet” into your real estate vocabulary yet. Heather Ostrom and I coined this term during a Twitter conversation two years ago, and the word was recently mentioned in Inman News, The Chicago Tribune and on Word Spy. Enjoy.

Questions: In what ways do you think the drought can impact real estate? How have you seen buyers respond to front yards without lawn? Any tips for water conservation?

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