That place where the internet and real estate values meet

My Grandma never considered the internet when buying her first house, but these days it’s on all of our minds. Think about it this way. Would you buy a house if internet access was going to be impossible for some reason? Assuming we’re not talking about a secluded cabin somewhere, it’s safe to say most buyers would have a huge problem with that (not just Millennials either). Yes, there would probably be a value impact to not have internet, but the really intriguing part begins when we consider that what happens online or digitally at or around an address can also potentially impact value. This wasn’t even a part of the conversation just a handful of years ago, yet here we are.

Guy on computer - Image purchased by 123rf dot com and used with permission by Sacramento Appraisal Blog

Digital World Meets Real Estate: A few months back I heard of a house in Kansas that had 600 million IP addresses pointed toward it. If you don’t know, every computer has what is called an IP address, which is basically a string of numbers to identify that individual computer. Well, in this case due to a company’s digital mapping error it looked like 600 million computers were being used from this one location in Kansas, which led to a whole host of problems for the occupants. As the article states, the owners and tenants have “been accused of being identity thieves, spammers, scammers and fraudsters. They’ve gotten visited by FBI agents, federal marshals, IRS collectors, ambulances searching for suicidal veterans, and police officers searching for runaway children. They’ve found people scrounging around in their barn. The renters have been doxxed, their names and addresses posted on the internet by vigilantes. Once, someone left a broken toilet in the driveway as a strange, indefinite threat.”

Yikes. Assuming buyers knew about the IP address problem and unwanted visitors and threats, couldn’t a mistake in the digital world cause buyers to pay less? Or maybe renters would pay less? Appraisers, would this be considered external obsolescence?

BIG POINT: What happens online or digitally around an address just might impact value. Think of the advent of Pokemon Go and how a digital game has the power to bring customers to commercial properties or maybe even help increase use of neighborhood parks. Remember, if you’re tired of hearing about Pokemon Go, don’t worry because there will be many more games just like it in the near future. Again, the digital world and real estate are colliding, and we can expect more of that in coming years.

Pokemon Go Real Estate

Questions: Would you buy a house without internet capabilities? What other types of activity online might impact a home’s value?

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How do you know when a real estate market is increasing?

If a client asked you how to know when a real estate market is increasing in value, what would you say? Prices going up is the first and obvious answer, but what else? There are a number of different metrics to watch, and the image below helps hit on some of the main issues. Anything else you’d add?

Signs of an increasing market - 530

Markets tend to change over time rather than in an instant, so it’s important to know which metrics to watch. It’s also helpful to listen to what buyers are saying. After all, there is something about consumer confidence and the mood among buyers that cannot always be captured in one neat little metric. The other big question we must ask is: Why are values increasing? Remember that an increase in housing supply or interest rates can change the direction of the market in a heartbeat too (especially after the Spring seasonal market fades). This is why it’s also important to know the signs of a softening market.

think like an appraiserHow to Think Like an Appraiser: I’m excited to be teaching a class in a couple days at the Sacramento Association of Realtors. The class is called “How to think like an appraiser”, and we’ll hit on how to choose comps, how to make adjustments, and tips for working with appraisers. This will be very practical, and we’ll have many case studies to talk through in the class. See the image and register online here.

Question: What other signs do you watch to know if the market is increasing?

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Why a little black book of value doesn’t exist in real estate

little black book of real estate values 2 - photo purchased and used with permission by sacramento appraisal blogReal estate would be so much easier if we had a little black book to tell us how much each feature of a home was worth. Imagine a list of values for things like bathrooms, bedroom count, garage spaces, square footage, extensive landscaping, built-in pools, etc…. The truth is I get asked all the time how much a particular something is worth, and my answer is very often “it depends”, which I know can seem frustrating. But this is the best answer because what something is worth is based on the location.

Location Matters: It’s Real Estate 101 to know location plays an enormous role in shaping value. For instance, if you took the same house from Sacramento and put it in San Francisco or Hollywood, it would be worth substantially more in those cities. We all know this, but one thing we sometimes don’t consider is how the value of certain upgrades or features is also strongly influenced by location. Let’s consider the following examples.

A) Kitchen Remodel: Imagine a $50,000 kitchen remodel. You could literally put the same kitchen in a $150,000 neighborhood and a $500,0000 neighborhood, and the contributory value would be less in the lower-priced neighborhood and more in the higher-priced area. Why? Because buyers in the $150,000 neighborhood do not expect a kitchen that costs 1/3 of the entire home’s value, and affordability may also be a factor. In contrast, the remodeled kitchen would be much more acceptable in the $500,000 neighborhood, which means it would command a higher premium. This is why when someone asks, “how much is a kitchen remodel worth?”, the answer is, “it depends”, because the value of the kitchen is tied to the location.

B) Extra Bathroom: During a recent appraisal in a classic area of Sacramento the subject property had three bedrooms and one bathroom, whereas many of my comps had three bedrooms and two full bathrooms. How much is that extra bathroom worth? At the end of the day I ended up subtracting $25,000 from the comps with two bathrooms because that’s what it seemed the market was willing to pay. But this adjustment wouldn’t apply to every neighborhood because it would be WAY TOO HIGH in many other areas where the adjustment could easily be $10,000 or less. The value for a bathroom might also vary depending on whether we are talking about the difference between 1 and 2 bathrooms, 2 and 3 bathrooms, or 3 and 4 bathrooms.

C) Square Footage: How much is extra square footage worth? This is one of the most striking examples of how important location is for determining value. In some neighborhoods buyers could easily be willing to pay more than $100 per sq ft for additional square footage, but other neighborhoods might show a modest $30 per sq ft. This effectively means buyers could shell out $20,000 for an extra 200 sq ft in one neighborhood, but in a different community buyers might only pay $6,000 for the same 200 sq ft. Remember, we are not talking about the cost to build the extra 200 sq ft, but the amount buyers are willing to actually pay for the additional space in the resale market. As you can see, there is no standard square footage adjustment because the value of extra space is tied to the location. Read How appraisers come up with square footage adjustments for further insight.

different price in a different neighborhood brick house

The Big Reason why a Black Book Doesn’t Exist: It would be nice if a little black book of value did exist, but in real estate specific values are tied to specific neighborhoods and price ranges. This means it’s impossible to generalize about the value something might add because the same thing can be more or less valuable depending on where it is located. The danger of course is when an appraiser or real estate agent gives the same value adjustment for features regardless of the neighborhood.

Questions: What other examples have you seen where value is substantially different depending on location? Any further insight, questions, or stories to share?

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Appraisers, The Force, and Up & Down Real Estate Values

What makes real estate values move? I often ask this question when speaking at real estate functions, and it’s interesting to hear the responses. I usually start by showing a photo of Luke Skywalker with the caption, “Luke, use The Force to make value move.” Then I ask, “Is that sort of like what appraisers do? Can they make a market move depending on how they appraise properties?” We all know changes with interest rates, housing inventory, the economy, or cash investors can definitely influence property values. That’s obvious. Yet when asking the question, “Do appraisers make values go up or down?”, there is often a bit of hesitation. What do you think? How would you answer this question if a client asked you?

star wars real estate photo - by sacramento appraisal blog - 530 use

Do appraisers make the market move or not? There are so many “forces” that impact real estate values. In fact, if you’ve been around this blog long enough, you’ve heard my schtick about how real estate is like a multi-layered cake since there are many “layers” in a market that impact or create value. Check out the cake below to get more fully what I mean (this is an updated image). Yet it’s still easy to think appraisers are the ones making a market move since they are the ones appraising properties at higher levels. Unless there is fraud going on though, the higher appraisals are really a result of the layers of the market having changed. It’s not appraisers pushing the market up, but rather the market moving and appraisers simply interpreting that change. Think about 2012 when the market hit bottom and values began to increase quite rapidly – especially in early 2013. If anything, during this most recent boom, appraisers were accused of appraising properties too low rather than inflating values.

multi-layered cake analogy - cake by Joy Yip - text by Sacramento Appraisal Blog - yellow text

An Example of 1% interest rates: Imagine if interest rates hit 1% tomorrow. What would that do to home prices? First off, the market would be instantly flooded with buyers because of how much more affordable it just became to borrow money. This would create intense competition resulting in a dramatic lowering of inventory, which would inevitably increase prices because of the scarcity of property. In the midst of shifting “layers” of real estate, appraisers would rightly be appraising properties at higher levels since the market is now hands-down willing to pay those prices. But appraisers didn’t actually move values higher, did they? They simply interpreted the market that changed.

Key Takeaways: 

  1. There are many forces that impact value in a real estate market.
  2. Memorize the cake analogy so you can use it with your clients and speak definitively about what is making value move in your market.
  3. Appraisers interpret the market rather than move it. Appraisers are more like a measuring tape than a gas or brake pedal.
  4. A market does not need appraisal fraud to see values increase. This idea tends to float around the real estate community, but it’s a misunderstanding of what really drives real estate.

By the way, I’ll post more specifically on Sacramento market trends next week. Be on the lookout for some stellar graphs to use for your newsletters and emails to clients.

NOTE: Appraisal fraud and low appraisals could certainly be a layer in the cake above, but fundamentally appraisers are not drivers, but interpreters. That’s my main point. We could easily talk about fraud or even whether appraisers are doing a good job interpreting the market or not, but that’s another post.

Questions: What else makes real estate values move? Any appraisal stories or insight to share?

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