When the market feels aggressive…

The market feels aggressive out there. I don’t know about you, but I’m having so many conversations about rising prices at the lower end, a shortage of inventory, and even low appraisals. So I wanted to share some of the talking points floating around out there and give some commentary too. Here’s a list of things coming up in discussion lately (it’s longer on purpose). Anything to add?

sacramento appraisal blog - housing market

One buyer vs market value: Value is what a buyer is willing to pay. I hear that statement quite a bit, but what one buyer is willing to pay could represent an individual’s value rather than market value – which is what appraisers are gauging.

Front-loaded market: Most of the value increases are usually found in the beginning of the year. Thus if values went up 5% last year, that means we probably saw about a 1% increase per month during the first two quarters of the year. But if the bottom of the market increased by say 12%, then we saw a 2% monthly increase. Of course some months might see greater appreciation rates than others.

sacramento appraisal blog

The need to respect pendings: Sales tell us about where the market used to be when they got into contract 60-90 days ago, but pendings tell us about the temperature of the current market. This is why we have to respect pendings. For instance, during a recent appraisal of a fairly original home in South Sacramento I saw some properties close around $230,000 less than six months ago, and now similar ones are getting offers galore at $245,000+. The tricky part is I don’t know the exact price and terms of a pending unless I call the agent (and he/she tells me). 

One sale or pending doesn’t make the market: Let’s remember value in a market is not based on one high sale. In today’s market if a buyer paid $25,000 above appraised value, for instance, an appraiser has to consider if that property at $25,000 above everything really represents the market or just one buyer willing to pay more. This is a reminder that appraisers and agents have to “appraise the comps” so to speak. We can’t just blindly accept the final sales price of a comp without understanding the back story of why it closed that high. The same holds true with pendings as we can’t base an entire valuation on one “lone ranger” that is higher than anything else.

South Sacramento

Upward adjustments by appraisers: Value adjustments can be given by appraisers to account for an increasing market. These adjustments can be figured out with graphs, analyzing sales and pendings, talking to real estate agents, etc… This is what I did with the South Sacramento property above as my comps were 2-6 months old, but the market was 4-6% higher easily because the pendings were all trending higher. The truth is if I didn’t give upward adjustments my value would have reflected the past instead of today’s market. Some appraisers might not give a specific upward adjustment, and I won’t split hairs over that so long as an increase in value is accounted for somehow in the appraisal.  

Appraisers aren’t hired to “hit the number”: A lender hires an appraiser to assess whether a loan should be made or not. Thus if a buyer offers an unrealistic price, the buyer might be willing to pay that amount, but if the house cannot sell for that price to the rest of the market, it doesn’t make sense for the lender to make the loan at that level. In this regard it’s reasonable to see appraisals come in lower than some of the high offers we’re seeing.

Multiple offers don’t always mean aggressive increases: Just because there are many offers doesn’t mean values are increasing rapidly. In some price ranges we are seeing clear increases in value and other prices ranges feel a bit flat. Realistically though there are likely to be multiple offers in about every price range (more at the lower end). This is a good reminder that at times there is a difference between how the market feels and what it is doing (actual data).

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Different trends different neighborhoods: It’s easy to project what is happening in one neighborhood onto another or use one sweeping cliché to describe all locations and price ranges, but we have to look at actual numbers in each neighborhood to understand what the market is doing there.

Informed buyers: Having low inventory is creating some aggressive offers out there, and while buyers are willing to overpay to a certain extent for the right property, they won’t literally pay any price just because “nothing is on the market.”

Not easy to interpret: If we’re honest it’s not always easy to interpret what the market is doing – especially when things seem crazy with multiple offers and bidding wars. This is a good reminder to be humble because the market isn’t always wrapped up in a neat little perfectly decipherable package. There are things we can expect of course and seasons of the year, but the market is still distinct and sometimes even surprising. Let’s be real about that.

A perfect season for communication: This is a perfect market to foster excellent communication between real estate agents and appraisers. Agents, sticks to the facts and tell the story of the marketing of the property when talking to appraisers. Feel free to use my Appraiser Info Sheet (local agents, I love when you use this). In any price range where values are changing quickly, insight from agents can really help appraisers. On that note, Appraisers, glean insight from agents by finding time to make phone calls and asking the right questions about comps and the subject.

Reconsideration of value: I did a presentation recently on tips when asking an appraiser to reconsider the value. If anyone wants a copy of it, just send me an email (lundquistcompany @ gmail  dot com). You can also read this post.

Hindsight makes everyone sound smart: When in the thick of a “hot” market it’s not always clear what the exact trend is, but after a few months when more stats are published everyone and their Mom sounds like a real estate expert. #truth

Questions: Anything else to add? What else are you seeing out there in the market right now? I’d love to hear your take.

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What’s your housing shtick?

It’s easy to fall into the trap of saying one thing about the housing market. Just as a comedian has a shtick, or regular performance, we can get into the routine of talking about real estate based on one big idea about what the market is doing or will do. Let’s consider some examples. Which one(s) are you? Any thoughts?

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Doom & Gloom:  The market is going to crash like it did 10 years ago.

Corrector:  Values will correct but not implode.  

One-Metric Wonder: The market will turn as soon as this one thing happens.

Normal: The market is normal and not in a “bubble”.

Mr. Buzzword: The market is headed toward a “shift” in the future.

Polly Pollyanna: It’s always a good time to buy and sell. Everything is always good.

Specific Year Guy: This year is going to be the one where values turn.

Mrs. Cyclepants: The market has a 7 year cycle and it’s about up.

Foreclosure Prophet: Another foreclosure wave is coming. Just wait.

Headline Regurgitator: This person says whatever the latest headlines say.

Spinster: Any negative aspect of housing is spun into something positive.

The Feeler: I feel like the market is strong and will be in the future.

Crystal Ball: This is exactly what the market is going to do.

Broken Crystal Ball: Nobody knows the future including me.

If we’re honest we might identify with several shticks above. That’s okay. I’m not saying there’s something wrong with that, but let’s be challenged to consider what we say and not get locked into conveying only one thing about the complex housing market. Moreover, let’s be cautious about imposing clichés and ideas on the market because it’s easy to miss trends that way. At the same time let’s not be naive by refusing to consider the future. My advice? Pay attention to the numbers and know them well enough to quote, know what is normal and not for the time of year, remember that values might be moving differently in various price ranges and neighborhoods, and find ways to talk about current values in specific terms while keeping an eye on the future (instead of focusing entirely on the future).

My knee & market update post: Some of you may know I hurt my knee in a snow tubing accident 10 days ago. I have an MRI next week, but for now the doctor thinks I may have torn my meniscus. Anyway, I normally do my big market update between the 10th and 15th of the month, but I can’t swing it this week since I took last week off and I’m basically playing catch-up with all my reports this week. I’m just grateful to be at my desk again. Anyway, I will be 100% up and running (not literally) next week, and I’ll get to my big update then. Thanks for your understanding.

Questions: Which shtick stands out to you most? Any others to add? Did I miss something? I’d love to hear your take.

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Is it okay to share a previous appraisal with the appraiser?

I was asked a great question recently. Is it okay to share a previous appraisal with the appraiser? I would say YES and NO. Here are a few thoughts. Anything to add?

Sacramento Appraisal Blog- sharing a previous appraisal

1) Data: It can be valuable at times for an appraiser to see what a previous appraiser did, especially if the property is complex. After looking at a colleague’s work, an appraiser might pick up on some insight or glean ideas for how to approach valuing the property. This happened to me a few years ago as I found out about an important easement and an illegal structure after an attorney gave me a copy of a previous appraisal. I still had to make sure the appraiser was correct, but it was nice to get a heads-up by someone who did a great job a couple of years prior.

2) The only appraisal that matters: We have to realize the only appraisal that really matters is the one the current client is going to rely on. A previous appraisal might not cut the mustard so to speak, so sharing something that isn’t any good doesn’t mean much for the current appraiser. For example, I was asked to appraise something for a private loan and the owner shared a previous appraisal with me at $1.2M. Yet this appraisal done during a conventional refinance was definitely inflated by a good 20% unfortunately. Keep in mind a previous appraiser might have included a detached structure’s square footage within the square footage of the main house, but just because it played out that way before does not mean it should happen now (I have a blog post on that here). Also, just because it appraised at a certain level before does not mean a new appraiser is going to think that is anywhere near acceptable. 

3) Sharing a specific number: I was recently hired to appraise a property for a cash buyer and there was an appraisal done already from a prior buyer’s loan. The Listing Agent told me, “We had an appraisal done at $425,000 two weeks ago”, though I was not provided the appraisal. This to me seemed like more than anything the agent was trying to influence my value. I’m not saying the agent was slimy or unethical at all. I’m just saying had the agent said, “We had a previous appraisal done. You are welcome to see it if you want,” it would have felt much more like the agent was making data available rather than subtly suggesting the contract price was a reachable target for value. This might sound like I’m playing semantics or being anal about words, but the words we choose matter, and how we say things can be interpreted as influencing an appraiser or not.

4) Difference among appraisers: Some appraisers will not accept a previous appraisal because they feel like it might impact their objectivity, but others will. I don’t think there is a right or wrong answer here as everyone needs to walk out their own sense of morality. Personally I tend to accept previous appraisals in most cases because I like to see how a colleague handled a valuation and I like to double-check my sketch measurements. Moreover, sometimes it helps me prepare my report because the client might be expecting a wildly different value than what is able to be supported. Yet if an appraisal was presented to me in such a way as to influence my value or pressure me to “hit the number”, I would definitely decline and simply say “No thanks. I don’t want to see it.”

Recommendation: In short, in my opinion it’s okay to share a previous appraisal with an appraiser, but it really matters how it is done. If you have a previous appraisal, I might suggest you use my Appraiser Info Sheet to share information appraisers tend to ask about, and then say nothing more than, “I have a previous appraisal if you want to see it.” If the appraiser doesn’t want it, that’s fine. If the appraiser does, that’s fine too.

Questions: What is #5? Which point stands out to you most? Did I miss anything? I’d love to hear your take.

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5 things to remember about the value of landscaping

How much value does landscaping really add? Nothing. A minor amount. A huge total. I’ve heard it all when it comes to what people think landscaping is worth. Today let’s kick around some ideas from an appraisal standpoint. Anything to add?

landscaping in appraisals - sacramento appraisal blog

5 things to remember about the value of landscaping

1) The myth of no value: I’ve heard the sentiment from some real estate professionals that landscaping does not count toward the value. My take? Landscaping is often very important to buyers – especially when it is extensive or highly expected in certain neighborhoods.

2) Front vs back: My sense is front yard landscaping does not sway buyers like the backyard does. I’m not saying it’s not important or curb appeal doesn’t matter (it does). I’m only saying the rear yard tends to make a much more significant impact on value since people spend more time there.

3) One size doesn’t fit all: The value of landscaping will vary significantly depending on the price range and neighborhood. For instance, a few years back during the height of home flipping activity, it was common to see flippers at the lower end of the market do very basic cosmetic landscaping in the front yard while doing almost nothing with the backyard (seriously, rear yards were at times just dirt or bordering on unkempt). In contrast, higher priced homes were getting full-service attention in both the front and backyard. Why? Because the market had different expectations by price range and the investors’ sense was spending the money was worth it in some neighborhoods and not others.

4) On par after huge money spent: Sometimes owners will spend good money to redo an unkempt yard only to expect a huge price premium. The problem is post-landscaping the owner is now basically on par with other homes in the neighborhood rather than in a position to command a premium. This is not easy to swallow, but it’s important to recognize in order to avoid overpricing. 

5) Dollar for dollar: While we like to get a “dollar for dollar” return on our improvement projects (at the least), that’s not always possible in real estate. So when an owner says, “I spent $125,000 in my backyard” and otherwise similar homes are selling for $700,000, can we really expect this property to be worth $825,000? That’s probably not realistic, right? Most of all though, let’s find comps with incredible landscaping and let those properties tell the story of value. That way we are letting actual market data speak to us to set the tone for what buyers have been willing to pay for similar landscaping. Isn’t that better than shooting from the hip about what landscaping may or may not be worth?

Case-in-point for an incredible backyard: While appraising in the Natomas area of Sacramento I came across a house with an incredible backyard. I ended up NOT using it as a “comp” because this property sold about 10% higher than others because of the built-in pool, custom covered patio, built-in BBQ, outdoor fireplace, and everything else in the yard. I’m not calling all of these things landscaping of course, but at the same time let’s be realistic to think buyers may lump some of these items in the same category. Anyway, at times it’s tempting to give a token $10,000 upward value adjustment when we see a nice rear yard because that’s what a mentor taught us to do, but sometimes the market is willing to pay more like 10%. In this case otherwise similar homes seemed to come in around $450,000 and the subject sold for $495,000 (there were 7 offers). There was one other sale at $485,000 and it also had a sweet backyard. As you can see on the graph, the incredible backyard seemed to really matter.

incredible landscaping - sacramento appraisal blog

Here is what the rear yard looked like. I could live with that. You?

house with amazing rear yard - sacramento appraiser

Remember, let’s find a few examples of extensive rear landscaping (or an amazing backyard) if possible so we don’t base our perception of value on only one sale. After all, what is that one sale sold too high or too low?

The Washington Post: Two weeks ago I wrote a post about the ugly side of appraisal fees, and as a result Ken Harney of The Washington Post interviewed a handful of appraisers (including me) for a piece that went live today. Ken is a nationally syndicated columnist, so the conversation that took place here is going to be moving to a much bigger level. Thank you everyone. Here is Ken’s article.

Questions: What stands out to you most about what I mentioned above? What is #6? Did I miss something?

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