Some advice for sellers in an aggressive market

Dear Sellers,

The market feels aggressive out there and you’re probably going to get multiple offers, but let’s have some real talk. Last week I wrote an open letter to buyers, but today I want to share some perspective to help your end of the transaction. Whether you are in Sacramento or elsewhere, I hope this is useful. Any thoughts?

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Advice for sellers in an aggressive market:

1) Don’t get high on the headlines: It’s easy to read articles that say “the market is hot” and then ignore data in the neighborhood. It’s as if we see something in print and price according to the headline instead of actual sales and listings. Right now there are no shortage of articles saying “Sacramento is one of the hottest markets in the nation”, so be careful about getting distracted by the headlines.

2) Don’t aim for the unicorn: It’s easy to price for that one magical unicorn buyer who is going to pay more than anyone else for some reason, but I would advise you to price based on recent similar sales and similar listings that are actually getting into contract. I find some sellers say things like, “A cash investor from San Francisco is going to swoop in and pay top dollar for my property.” Yeah, maybe. But what might also happen is you sit on the market instead of sell because you priced for a mythical buyer instead of a real one.

3) Be careful to not treat the contract price as holy: We like to think there is something holy about a contract price as if price negotiation is finished when a contract is written, but that’s simply not true. If a buyer finds repairs are needed or if an appraisal rightly comes in lower than an inflated contract price, it may be prudent to reduce the price.

4) Remember the difference between “comps” and sales: We like to think all sales are “comps”, but there is a difference between properties that are actually comparable and ones that are simply sales. It’s easy to get distracted by a few high sales in the neighborhood, but if they are nothing like your property, then don’t give them much weight and pay the most attention to homes that are actually similar to yours. In simple terms, if your home was an apple, what have other apples sold for in the neighborhood? Don’t price your apple according to orange or banana sales.

5) Be aware of appraisals being scrutinized: If you haven’t sold a home in years, know the lending world has changed from what it used to be over ten years ago. These days lenders scrutinize appraisals like never before, so be careful about accepting an offer that is incredibly high if there is no way it is going to appraise that high. Of course if the buyer has cash to make up the difference, then you are fine. But if the buyer is strapped for cash, then the highest offer probably isn’t your best option. This is why many agents tell sellers to look for the strongest offer instead of the highest one.

6) Don’t hijack price per sq ft: One of the biggest pricing mistakes sellers make is to take a per sq ft figure from another sale down the street and use that figure to price their property. Here’s the thing though. There isn’t just one price per sq ft figure that applies to every single property in a neighborhood. For example, in East Sacramento the price per sq ft range for all sales last year was $169 to $552. So when a seller says, “Let’s use $552 to price my property,” my question would be, why not $551? Or why not $525? What about $436? Or maybe $278? We can quickly get a price that is far from reasonable if we are only looking at price per sq ft. Keep in mind smaller homes tend to have a much higher price per sq ft too (which I explain with my Starbucks cup analogy). My advice is to pay attention to price per sq ft, but don’t forget to look at actual similar sales in the neighborhood.

east sacramento price per sq ft range - sacramento appraisal blog

7) Try to be objective about your house: Buyers are going to look at your home with a microscope, which means they’ll see the wonderful things as well as the faults. Remember, it’s easy to get sentimental about your property because you have a history there, but memories can also be a mask for not seeing flaws. A seller recently told me, “My house is the most well-built one on the block” (the same builder built the entire tract). Another seller said, “My house is really unique for the neighborhood, which is why it’s worth so much more” (it was totally outdated though). Agents are trying to tell these sellers to price lower because that’s where the market is, but both these homes are likely going to be overpriced because the sellers cannot get past their own subjective views.

8) Be FHA-ready: One in four homes in Sacramento county sold with an FHA loan last year, so it’s a good idea to have your home ready for an FHA appraiser if you think your home might go FHA. Your agent can most likely bring you up to speed on some repairs that might be required or maybe look over an FHA list. Keep in mind 34% of all homes under $300,000 went FHA in 2016 in Sacramento County and the current FHA loan limit is $474,950. This is also a reminder that financed offers are closing escrow and actually far outweighing cash transactions.

9) The market isn’t the same at every price range: We like to think the market is doing the same thing in every price range and neighborhood, but that’s not true. For instance, the market under $300,000 is more aggressive than the market above $1.5M. Thus the market could be “hot” in one price range or neighborhood and cool in another. This is important to remember because all day long we read about how hot the market is in Midtown and how rents are rising there, but that same dynamic might not be present in your neighborhood.

10) Listen to your agent: In a market that feels aggressive it’s easy to ignore pricing advice from agents, so some sellers price at completely unrealistic levels. Despite values showing upward pressure in many price ranges, we are not in a market where you can command whatever price you want (even with anemic inventory). So if your agent is telling you where the market is and showing you similar sales and listings, ask yourself why you are not listening.

I hope this was helpful.

Sincerely,

Ryan

Questions: What piece of advice resonates with you? What is #11? Did I miss something? I’d love to hear your take.

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What you need to know about Fannie Mae’s Collateral Underwriter

Have you heard of Fannie Mae’s Collateral Underwriter yet? It’s coming in a matter of days on January 26, and it’s been called an “appraisal time bomb” by some, while others say it’s no biggie. Today I want to give you the scoop on what it is as well as some of the potential impact it might have.

Fannie Mae is watching appraisers closely - by sacramento appraisal blog - image purchased and used with permission

What is Collateral Underwriter?

Collateral Underwriter (CU) is a property appraisal review tool created by Fannie Mae to help mortgage lenders manage risk.

What will Collateral  Underwriter do?

  • CU performs an automated risk assessment on appraisals geared toward Fannie Mae and returns a risk score, flags, and messages to the submitting lender. CU will provide a risk score for the appraisal of 1-5 (1 being the lowest risk and 5 being the highest).
  • CU will analyze comparable sales selected by the appraiser and recommend alternatives.
  • CU will compare adjustments the appraiser has given with what other appraisers have done in the same area (Fannie Mae has been mining data from over 12 million appraisals since 2011, so they definitely have some data at their disposal).
  • CU will use census block groups to analyze market trends.
  • CU will review specific information in each appraisal such as the sales price, lot size, bathroom count, bedroom count, age, location, size of the basement, condition, quality of construction, view, and GLA (gross living area). In 2011 Fannie Mae mandated appraisers to begin using UAD codes in their reports to describe all of these elements. You may have read a report and thought, “Why the heck is the appraiser saying the property is in ‘C4’ condition? What does that even mean?” Well, that is a Fannie Mae UAD code to describe a specific condition, and now that Fannie Maw has over 12 million appraisals in their system with these codes, it has allowed Fannie Mae to give birth to the CU review tool.

Fannie Mae Collateral Underwriter - Data Mining Image Purchased and Used with Permission - by Sacramento Appraisal Blog

5 things to know about Fannie Mae’s Collateral Underwriter:

  1. Fannie loans only: CU is only used for loans geared toward Fannie Mae, and not for divorce appraisals or any other private appraisals. CU is also not used on 2-4 unit properties or “drive-by” appraisals.
  2. Not FHA/VA: CU is not used for FHA and VA loans (I’d be shocked if they didn’t adopt it later though).
  3. Commentary: The CU tool does not read any of the commentary by the appraiser, which can be key to understanding comp selection, adjustments, and the final value.
  4. Neighborhood boundaries: CU uses census block groups for data analysis instead of specific neighborhood boundaries that may be readily understood in the market. Pulling data from the right neighborhood can make a HUGE difference in a valuation, don’t you think?
  5. Adjustments & comps: Fannie Mae has heaps of data to compare to any new appraisals that come into the system. Not only do they know about sales in the neighborhood, but they also know which comps other appraisers have used, and even value adjustments given by other appraisers. CU knows if an appraiser says a comp is in good condition (C3) in one report, but then says it is in fair condition (C5) in a different report. CU will pay special attention to comp selection, adjustments, and the final reconciliation of value.

Fannie Mae Collateral Underwriter - by Sacramento Appraisal Blog

Potential Impact of Fannie Mae’s Collateral Underwriter:

  1. Unknown: The truth is we don’t really know how CU will impact the market. It could be a game-changer for the mortgage industry and appraisal profession, or it could feel like the same old same old.
  2. Slower loan process: As CU is implemented, expect a learning curve, and thereby a slower loan processing time. It’s going to take some time for lenders, appraisers, and underwriters to work out the bugs.
  3. More conservative appraisals: One of the unintended consequences of CU may be more conservative appraisals.
  4. Headaches for appraisers: The fear among appraisers is that lender clients will now come back to say, “CU has identified 20 other comps in this census block. Why did the you not use these?” Hopefully that will not happen (assuming the appraiser did a good job of course), but increased scrutiny will be bound to cause appraisers to spend more time responding to CU.
  5. Higher cost for consumers: If CU does end up putting more work on appraisers, it may lead to higher appraisal fees. After all, more work requires more time (which is money).

Advice to the Real Estate Community:

  1. Real Estate Agents: Make sure your clients know how strict the underwriting process has become for appraisals. I’m not saying you need to sit down with your clients and watch Fannie Mae’s CU tutorial (that’s probably a quick way to lose clients). All I’m saying is this is one more reason to price properties correctly since the appraisal is going to be even more scrutinized now. Also, if you accept an offer that is clearly out sync with neighborhood values, the lender is going to have a ton of data at their disposal about neighborhood values – even if the appraiser happens to “hit the number” somehow.
  2. Appraisers: Many appraisers are gravely concerned about CU, though many lenders have been reaching out to say, “Hey, we’ve already been scrutinizing you, so don’t worry about this.” Only time will tell how this will impact business and the industry. All we can do is choose the best available comparables and make reasonable market-supported adjustments. There will be a learning curve to know how to avoid red flags so to speak, but explaining why we made adjustments and supporting those adjustments will be a big theme this year for lender work. The bottom line is appraisers will need to add more commentary in their reports. If you are making the same adjustments in every single report regardless of the location of the property, it’s time to stop that because adjustments vary depending on the neighborhood. If you are struggling to support adjustments, it may be a good year to find a mentor as well as take some quality continuing education. If you do not know how to graph sales, make that a top goal this year. On the other hand, if you are an experienced appraiser, find ways to be a mentor to other appraisers by answering their questions – whether on forums or in person. As I said in 10 things appraisers can do to improve the appraisal industry, “Too many appraisers think they are right about everything, but at the end of the day being right doesn’t help anyone grow. Find ways to share your knowledge and build others up.” Lastly, if it ends up costing you more time to do your work, it may be time to consider raising your rates.

Helpful Links:
Fannie Mae’s Collateral Underwriter Home Page
Collateral Underwriter FAQ (pdf)
Collateral Underwriter Fact Sheet (pdf)
Into to Collateral Underwriter Recorded Tutorial
CU Risk Score, Flags, & Messages (Recorded Tutorial)

Questions: How do you think Fannie Mae’s Collateral Underwriter will impact the market and/or the appraisal profession? Anything else you’d add? I’d love to hear your thoughts.

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5 New Year’s Resolutions for the Real Estate Community

Have you ever dropped the ball on one of your New Year’s goals? We’ve all been there. That’s why I want to suggest some goals that are actually highly attainable. Here are some suggestions for New Year’s resolutions for the real estate community. I see these things all the time, so I thought it would be worth mentioning. By the way, I’m a humble guy and this is coming from a good place. Let’s improve in big and small ways to find profound success this year.

  1. abbreviation for Carbon-Monoxide-Detector - by sacramento appraiser blogAbbreviate Carbon Monoxide Detector Correctly: If you didn’t know, carbon monoxide detector is shortened to CO – not CO2. If you want some clever ways to remember that, check out 5 Ways to Remember Carbon Monoxide is “CO” instead of “CO2″.
  2. Pronounce “REALTOR” Correctly: I am not a grammar snob by any stretch, but I wanted to point out a common error. REALTOR is often pronounced as “REAL-A-TOR” even though there is actually no extra “A” in there. It is correctly pronounced as “REAL-TOR”.
  3. share-posts-on-social-mediaMore Listening on Social Media: The online sins of the real estate community are overselling and self-promotion, so listening to conversations and a focus on building relationships on social platforms is definitely something relevant. Join the conversation by asking questions, being personable and sharing helpful information rather than overly promoting your products.
  4. Step off the Toxic Platform for Appraisers or Agents: There is often enmity between appraisers and real estate agents – as if they are mortal enemies. Part of this is understandable because both parties are doing different jobs for the same transaction, but it crosses the line when either party speaks from a platform of hostility toward the other group. I hear agents bash appraisers and talk about them like they are village idiots. Likewise, I hear appraisers talk about real estate agents like they are uneducated morons. This is not professional – especially in a public forum. We can do better. Yes, there are issues with low appraisals as well as subpar agents, which means there is a place to complain. However, when complaining becomes a shtick or lifestyle, that’s not a fun place to live. If you find yourself continually ranting about appraisers or agents, it may be worth finding ways to step off that toxic platform and avoid being a perpetual complainer. Besides, it’s good for life and business to be positive.
  5. Other: What resolution would you suggest for the real estate community? Comment below.

I hope this year is unfolding well for you so far. Happy New  Year!!

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7 reasons why buyers offer more than a house is worth

Have you noticed how some listings are receiving multiple offers at list price even though they are priced way too high for the neighborhood? I’m talking about the type of listings where agents and others all think, “There’s no way in heck it’s going to appraise that high.” But buyers are still offering at list price and even above. What does this tell us about the market?

Possibilities for why buyers offer full price even when the list price is REALLY high for the neighborhood:

  1. Value: The market has increased in recent months.
  2. Strategy: Since inventory is so tight in the Sacramento area, buyers feel the need to offer at list price or above to get into contract.
  3. Rejection: Buyers have become burned-out from getting their offers rejected, so they’re offering at higher levels to help compete with other buyers.
  4. Cash Competition: There is so much cash in the market, so financed offers need to find a way to be more attractive to sellers (higher offers can help).
  5. Money: It’s really cheap to borrow money right now, so taking out a larger loan is not as big of a deal.
  6. Financing: When buyers finance nearly all of their purchase (FHA), they’re essentially spending someone else’s money. It’s a whole lot easier to offer more when you’re not spending your own money, right?
  7. Good Deals: Many buyers still remember how high prices used to be, so offering more in today’s market still feels like a deal because current values are far lower in the post real estate “bubble” burst.
  8. Other: What do you think?

Housing Inventory in Sacramento County - Graph by Trendgraphix - posted on Sacramento Appraisal Blog

My take as an appraiser: Having multiple offers can be one indicator for how the market sees a property, but it’s not the end-all fool-proof metric for determining value. For example, 10 offers at list price sounds sincerely convincing on paper to establish value, but we also must sift through factors above to try to understand the motivations of buyers – not to mention consider competitive sales and other market metrics. After all, as mentioned above, there are many reasons why a buyer or group of buyers might offer more for a property than it is actually worth.

Listing a property at any price level: I was talking to an investor friend recently about how he could pretty much list his properties at any price level right now (relatively speaking), yet still generate multiple offers due to scarcity of supply. This isn’t true in every case of course, but it’s definitely a realistic dynamic in the Sacramento area real estate market.

All things considered, it’s easy to blame appraisers when appraisals come in “low”, and there are certainly scenarios where appraisers should be blamed. However, in cases like this where offers are unrealistically high for the market, the appraisal probably should come in “low”, right? By the way, check out a previous article if you need help challenging a low appraisal.

Anything you’d add? Any stories to share? Realtors, have you seen listings get into contract far above what you think is realistic? What advice would you give to buyers trying to get an offer accepted these days?

SacBiz Journal Mention: By the way, I was quoted in a Sacramento Business Journal article last week on a related topic of “Homebuyers starting to pay higher prices as investor market dominance wanes.”

If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook