When value is higher on one street than another

The cookie cutter tract homes are the easy ones, but sometimes value can change dramatically from one street to another – especially in older eclectic areas. Maybe you’ve seen this before after pulling comps and finding a huge disparity in prices. Today let’s look at an example of this happening to me recently. Any thoughts? I’d love to hear your take.

value higher on one street - sacramento appraisal blog

Values are sometimes all over the place, and that’s exactly what I saw when appraising a house in Carmichael. Take a look below at the graph. How do you think the subject street fits into the market?

Subject street in Carmichael - Sacramento Appraisal Blog

Value Conclusion: When we look at the graph with over 17 years of neighborhood sales, it’s clear properties on the subject street tend to compete toward the mid-to-higher end of the market range (even when they aren’t all that updated). Keep in mind every sale on the graph is between 1600-2100 sq ft, so we are looking at a tight range over a long period of time. You can also see there is a range where most properties have been selling between $350,000 to $500,000 lately.

Some tips for seeing the market in eclectic neighborhoods:

1) Pay close attention to subject street sales: There were 7 available sales for me to look at on the subject street over the past two decades. This might seem limiting, but it’s much better than zero, and ultimately it means I have seven data points that might help me see the context for how the subject street fits into the market. Of course we always have to use good professional judgment and not get caught up in giving too much weight to very little data. 

2) Look through years of data: In an eclectic area where values seem to be all over the place it’s a good idea to study the market by looking at years of sales. The goal is to know how value works and be able to see which streets or types of properties are fetching price premiums. When looking at areas like Fair Oaks, Carmichael, and East Sacramento, this is very key. In this case I appraised the subject property around $450,000, but there were sales within blocks that were coming in between $350,000 to $375,000 with seemingly superior upgrades too (probably why Zillow had this one at $378,000). After studying the market and carefully comparing previous sales on the subject street it was clear the subject street sales were competing at a higher price tier compared to other streets. It would have been a shame if I hastily pulled up three “comps” and brought this one in at $350,000 when the market was clearly willing to pay more.

3) The feel of the street: On paper it might look like we are pulling good “comps”, but then after driving by other streets we might see a lower quality of construction, or unkempt homes, or maybe a negative influence from commercial property.

4) Real estate community: It’s helpful to talk with other real estate professionals who know the neighborhood. I find most real estate agents and appraisers are actually pretty helpful when you call to say, “Hey, I have a question. May I bend your ear for a minute?” I realize not everyone is receptive to talking (lame), but that doesn’t take away the importance of building good relationships in the real estate community so we can exchange information. My advice? When people call you, be the type of person you wish everyone else was. Bottom line. All things considered, it is worth noting we still have to be careful not to impose someone’s perception of the market on our value. So let’s seek insight from others, but let’s also not forget to look at actual data and support the value we say exists.

5) Learn to graph so you can see the market: The graph above was part of my research and it helped me visualize the market. I know, here I am mentioning graphing again, but I only do that because it’s revolutionized the way I see the market. Anyway, here is a tutorial I made for learning to make a basic scatter graph in Excel. If you didn’t know, there are a couple of programs you can use to quickly export neighborhood data from MLS to make graphs. I might suggest looking at Don’s 1004MC program (for locals and some other states (right now his site is down)) and Trendsheet (covers many states). These programs are built for appraisers, but I tell Realtor friends all the time to consider using them and just skip the appraiser stuff. 

UPDATE: I was asked by several people in the comments and by email how to make a graph like the one above, so I made a video tutorial. Check it out here or below.

I hope that was useful or interesting.

Questions: What is #6? Did I miss anything? How do you figure out if there is a value premium for a certain street? How do you avoid choosing the wrong comps? I’d love to hear your take.

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How to pull comps like an appraiser

The right comps make all the difference. How do appraisers pull comps? I scraped the surface of this topic a few days ago in a class I taught, and I wanted to unpack it a bit further today. There is sometimes a striking difference between how appraisers and agents approach this topic, so being on the same page a bit more will probably be an advantage. I hope this helps. I’d love to hear your thoughts below.

choosing comps like an appraiser - by sacramento appraisal blog

These following steps sound very detailed, but applying them is really a matter of making quick decisions during an MLS search.

7 steps when pulling comps in a neighborhood

  1. Start with Tight Boundaries: Pull sales and listings from the very immediate neighborhood first. It’s better to start out smaller rather than begin with a wide area such as a one-mile radius or an entire MLS area. I recommend using the Polygon tool in Sacramento MLS so you can actually draw exact neighborhood boundaries to be sure you are only getting data from those boundaries. After all, if you search by radius, you’ll inevitably pull in data that doesn’t really reflect the immediate neighborhood. Practically speaking, if you don’t know where to draw boundaries, just start searching as close as possible to the subject street, try not to cross major streets or school district lines, and keep an eye out for big age pulling comps 2 - image bought and used with permission by sacramento appraisal blogdifferences in the neighborhood since values might change for newer homes. Sometimes an aerial view on Google Maps can be helpful because you can see a clear difference where one tract starts and another begins because the roof colors are different.
  2. View all Recent Sales & Listings: Look at all sales over the past 3-6 months as well as current listings. This will help give you a quick understanding of the neighborhood price spectrum and which types of houses have sold at the top and bottom of the market. If there are few recent sales, be sure to go back one year or so for reference just so you are sure about what the market has done over time. For instance, if there are only fives sales over the past 90 days, it’s easy to miss the market if you only look at these sales. What if the these five properties sold too low? Or what if the most recent sales were lower in light of the cyclical real estate market (softer sales in the Fall). Remember that current listings might tell us if the market is different from previous sales. If the listings are higher, maybe the market increased. If the listings are lower, maybe the market has softened. Or if the listings are the same, but they aren’t selling, the market has probably softened. You can also look at expired listings also to get a sense of the temperature of the market.
  3. Use an “Apples to Apples” Approach to Search for Similar Homes: Now it’s time to dig into similar-sized homes. I recommend searching by square footage since that is what tends to guide most buyers. You can add and remove about 10% on each side of the square footage. This means if your house is 1800 sq ft, a good range is probably 1600-2000 sq ft. Of course sometimes data is sparse, so you simply need to work with what you have. But comparing something that is significantly different in size really isn’t a good methodology. In cases like that it’s probably better to use an older similar-sized sale rather than a newer and much different property. The key is to use an “apples to apples” approach, meaning you are trying to find the most similar properties to the subject property. If the subject property was not available, what properties would a buyer realistically consider purchasing? (that’s what a good comp is). If your house has three bathrooms, try to pull some sales with three bathrooms and a similar square footage. If you have a pool or converted garage, find other homes with the same feature. When the comps are very similar to your property, you don’t have to guess at how the market responds to upgrades or certain amenities because the proof is already there in the sales. Of course sometimes there aren’t any recent truly similar sales, so it’s important to go back in time to find something similar, or even search a different size of property in the neighborhood to understand how the market has responded to a certain feature. Once you find other sales of any size in the neighborhood with a pool, converted garage, or whatever you are looking for, you can then compare these sales to other similar-sized sales at the time. How much more or less did the house with the pool or converted garage sell for? This can help you glean some context for how much a particular feature might be worth.
  4. Search Older Similar Sales: Be sure to look back over the past year or so in the neighborhood so you can see what similar-sized sales have sold for. This will only take a minute in MLS, and it will help create a deeper context for you to understand the market. It can sometimes reinforce the strength of your list price or value to be sure your current price/value makes sense in light of historic trends in the neighborhood. If you are dealing with a custom home or unique location, you might need to consider sales over multiple years.
  5. tight and expanded search in tahoe park - sacramento appraisal blogSearch the Expanded Neighborhood: If you started with very tight boundaries in your initial search, you can expand it a bit more. I’m not saying to go outside of what buyers would consider the neighborhood market, but only to maybe include more area if you didn’t already. If a buyer would typically search throughout the entire larger neighborhood, then look for comps in this larger area now. The benefit of starting out small is that you are sure to research value very close to the subject property, which helps you not pull in data from further away that might not reflect the immediate neighborhood.
  6. Pull from Outside the Neighborhood (if needed): If sales are really sparse in the immediate neighborhood, you may need to find comps in competitive areas. Don’t do this step first though because it’s important to understand values in the immediate neighborhood first (even by using older sales, current listings, and expired listings). Of course the problem is it can be easy to “cherry pick” higher sales from other subdivisions. This can happen on purpose or by accident. A different tract might sell for more or less than the subject tract, so exercise caution to study whether the other tract really does have similar prices or not. Would a buyer shopping on the subject street also be shopping in the other tract? Better yet, would a buyer pay the same price in both areas?
  7. Avoid Using the Wrong Price per Sq Ft: There is always a price per sq ft range in a neighborhood, so it’s important to not simply choose one random price per sq ft figure and use it to come up with a value or list price. For instance, imagine a 2500 sq ft house that sold at $500,000, which would make the price per sq ft $200 (500,000 / 2500 = 200). At times it’s easy to see the metric of $200 and begin applying it to other homes right away. Yet what if the other homes aren’t similar in size, upgrades, appeal, condition, or location? The reality is if I was pulling comps for a 2000 sq ft home, I might find out that similar-sized sales really have a price per sq ft range of $210-225K instead of the $200 figure that was only good for the 2500 sq ft home. This is an easy mistake to make, and it underscores how important it is to be aware of price per sq ft ranges in a neighborhood. Rather than impose a price per sq ft on a property, search similar sales to discover what the price per sq ft range is for that size of property.

NOTE: Obviously some appraisers might not pull comps exactly like this. After all, there isn’t a standard set of steps appraisers must follow. Do what works best for you, and if something here resonates with you, that’s great.

Question: Any other tips, insight, or stories to share? I’d love to hear what you do, whether you are an appraiser or real estate agent.

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