That place where marijuana & real estate meet

Marijuana is on my mind. In recent weeks Californians voted to make recreational marijuana legal, and I can’t help but consider the impact it might have on real estate. Here are a few things I’ve been mulling over. Anything you’d add?

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1) Land Value: All of a sudden land that is ripe for marijuana growing is looking pretty attractive. I’m not talking about tiny postage stamp lots in subdivisions, but rather larger-sized parcels in outlying areas. The truth is many savvy land buyers have already been making their move on large parcels in surrounding areas to Sacramento, but there are going to be more opportunities out there. I saw one listing recently where an agent said, “Good for ‘income-producing crops'” (code for pot). For further reference, here is an article discussing a “green rush” in Yolo County (people setting up marijuana businesses). 

2) Home Experimentation: I expect to see more owners and renters trying to grow their own weed at home. Some will grow a few plants, but others will aim to start a business to make some money in an economy that still isn’t all that vibrant.

3) Commercial Vacancies & Rents: If California ends up being anything like Denver, which has nearly 4 million square feet of commercial space used for cannabis production, I’m guessing we’ll see more interest in industrial properties and higher rents in certain areas. Goodbye commercial vacancies. Here is an image from The Sacramento Bee to show all the locations where pot can be grown in Sacramento. Image created by Nathaniel Levine.

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4) Disclosures: Talking about marijuana in contracts, listings, and appraisals isn’t anything new in real estate, but my sense is if it becomes more common to see pot growing in homes, we’ll need to hone our skills and consider what disclosure needs to look like. By the way, could the smell of a nearby pot farm need to be disclosed? As an appraiser I’m concerned with the condition of the house. There is obviously a huge difference between a massive grow operation with hundreds or thousands of plants and a home owner with a few plants. What I’m going to be looking for is anything that might make an impact on value or a health and safety issue – exposed wiring, over loaded plug-ins, poor ventilation, mold, etc… I’m not there to nark or judge by any stretch, but only figure out the value (and discuss and photograph anything that impacts value).

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5) Advertising: I took my family to Portland last week to enjoy Thanksgiving, and it was amazing to see how much advertising there was for pot (because it’s legal there). Everywhere I turned Downtown there was another weed billboard, A-frame sign, or a green cross (the symbol of a dispensary). Please don’t think I’m dissing Portland because I love the city and can’t wait to go back. I’m just saying we might expect to see the same thing in California when it comes to advertising. Can signs impact the feel of a city or neighborhood? Will there be more signs in certain areas than others? Time will tell.

6) Marijuana Branding: I’m waiting for more in the real estate community to go public with their MJ branding. Last month a Sacramento law firm announced its marijuana practice. Ironically one of the partners has the last name Kronick, which is oh so close to Chronic. Anyway, there is still available shelf space for weed branding such as “Marijuana Realtor”, “Cheebah Appraiser”, and “Mary Jane Lender.” I’m kidding. Sort of.

7) Loans on “Grow” Properties: Some lenders don’t want to lend on properties that are being used for marijuana growth (keep in mind this likely doesn’t mean just a few plants). Here is some direction from a certain bank I sometimes work for when it comes to this issue. This unnamed bank sent out a message to its appraisers regarding grow houses:

####### Bank is currently unable to lend on any property with marijuana grow operations. The marijuana industry is state regulated and ####### Bank is federally regulated. Therefore, we are not in a position to lend to borrowers with income from that source nor can we lend on properties with active marijuana grow rooms or facilities. 

If you encounter a property with an active marijuana grow operation, please take at least one descriptive photo, complete your inspection of the property then cease work on the file and immediately contact your ####### Bank Appraisal Coordinator. Please do not attempt to quote ####### Bank lending policy. We will take care of that and you will, of course, be compensated for the time you’ve already invested in the appraisal.

I hope that was interesting or helpful.

Questions: Anything to add? Did I miss something? What impact do you think the legalization of marijuana might have on real estate? If you are located in a state where marijuana has been legal, what advice do you have for Sacramento? I’d love to hear your take.

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How to figure out what an accessory dwelling is worth

How much is that accessory dwelling worth? How do we really put a value on it? It’s not always easy to figure that out in real estate, so I wanted to share some of the issues I tend to think through as an appraiser when there is an accessory unit on a property. Anything you’d add? I’d love to hear your take.

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Things to consider when valuing a property with an accessory dwelling:

1) Comps: How much are other homes with accessory units selling for? This is a fundamental question to ask. Since data is often limited we might have to look through years of neighborhood sales (or competitive neighborhoods) to try to find something that has sold with an accessory dwelling unit (ADU). Even if the sales are older or a bit different in size we can at the least come up with a percentage or price adjustment to try to get a sense of what the market has been willing to pay. Ideally we’d find three model match sales in the past 90 days, but that’s probably not going to happen. Remember, we might not use the really old sales as comps, but we can still use some of the older data to get a sense for how the market has behaved regarding accessory units.

2) ADU Minimum: At a minimum an accessory unit needs to have a bathroom, sleeping area, and kitchen. This means an outbuilding without a bathroom really isn’t an accessory unit. And that Man Cave / She Shed isn’t an accessory dwelling because it’s basically a game room meant for hanging out instead of living.

3) 2nd Unit or Not: Are we dealing with a second unit or an accessory unit? It might sound like I’m splitting hairs to ask this question, but there is actually a difference between a full-fledged second unit and something that would be classified as an “accessory” unit (or “Granny flat”, “Mother-in-Law” unit, or “Guest Quarters”). I wrote a post here to describe the difference. In short, whether something is a full second unit or merely an accessory dwelling could potentially change the way we approach valuing the unit and which comps we choose.

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4) Just a House: How much would the property sell for if it just had a house without an accessory unit? This doesn’t help us put a value on the accessory unit, but in a sense it helps us start gauging value for the neighborhood. This at least gives us a place to begin.

5) Combining Square Footage: Often times an accessory unit’s square footage gets lumped into the main square footage of the house. This happens in MLS and sometimes it happens in Tax Records. So we might read a home is 2000 sq ft when in reality the main home is only 1400 sq ft and the accessory unit is 600 sq ft. In this example we don’t really have a 2000 sq ft house but rather a 1400 sq ft house with an accessory unit. The question becomes, could the subject property sell on par with homes that are 2000 sq ft? Maybe. Maybe not. This is where we have to do research. I will say quite a few properties are priced based on a lumped square footage and then they end up sitting instead of selling. This is not always the case, but it reminds us to be careful about assuming a home with an accessory unit is always going to have the same value as a larger home.

6) Permits: Was the accessory unit permitted? If you are hoping to see more significant value recognized for an accessory dwelling, having permits is a key factor. My friend Gary Kristensen in Portland wrote a post on ADUs and he says, “Provide the appraiser and your lender with documentation that your ADU was legally permitted. Also, list information about rental income, expenses, and detail construction costs (if your unit was recently constructed).” Good advice, Gary.

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7) Rent: Can the accessory unit be legally rented? What is the market rent? This is where we might use the Income Approach to come up with a value (another blog post). Imagine an accessory dwelling has a market rent of $1000 per month. Now imagine an appraiser says the extra unit is worth $10,000. Does that seem reasonable? Doesn’t it seem low right away since the unit would be 100% paid for after 10 months? Or imagine a unit rents for $300 but it’s being given $150,000 in value. Doesn’t that seem excessive based on the low rent? Thus sometimes when we know market rent we can begin to sniff out whether a value adjustment is even approaching reasonable.

8) Square Footage Adjustment: If I’m adjusting $50 per sq ft for extra square footage in my report, would it be reasonable to see that same adjustment for the 600 sq ft accessory dwelling? This is only a question I ask myself. There isn’t a constant where the market will pay the same amount for square footage for the main dwelling and something else (converted basement, converted garage, accessory unit). Part of it depends on quality too. If the extra unit has a quality clearly below the main house, it’s probably not reasonable to see buyers pay the same amount for square footage outside the house. Though if the quality is the same, we might be looking at an adjustment that is similar or the same to that which is given to the house. Again, there is no rule here. This is only a question I ask myself in the background when approaching an accessory unit. I would never automatically give an adjustment like this. Remember, square footage adjustments are NOT based on the entire value of the property divided by the square footage.

9) Cost vs. Value: We all know the cost of something doesn’t necessarily translate to the value, but cost can help us gauge quality. There might be a difference in value for an accessory unit that cost $125,000 compared to $15,000, right? This is basic logic, but let’s not overlook the importance of it.

I hope that was helpful.

Questions: Anything you’d add? Did I miss something? If you work in real estate, how do you come up with the value of an accessory unit? I’d love to hear your take.

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Fees, turn-times, & eliminating appraisers

Blah, blah, blah. That’s what people tend to hear when we start talking about issues facing the appraisal industry. But here’s the deal. What happens to appraisers can absolutely impact the public AND the entire real estate industry. Let’s take a minute to consider some current trends. Any thoughts?

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Some important appraisal issues going on right now:

  1. Turn-times & 30-day escrows: Many Appraisal Management Companies (AMCs) order an appraisal and expect the appraiser to turn around the finished product in seven days or less. It seems like the better AMCs give appraisers more time whereas the worst ones expect reports in only 3 or 4 days. Here’s the thing though. Appraisers in Sacramento and many parts of the country have been turning down an avalanche of work every single day because AMCs are asking for unrealistic turn times for today’s market. Just the other day a colleague told me he literally turned down 19 appraisal orders in one day alone because he couldn’t meet the deadlines. It seems like seven days has been the benchmark of a reasonable turn-time, but that’s not doable right now for many appraisers. Remember, turn-times are not written in stone and they should change according to the market. Moreover, if nobody accepts the appraisal report because the due date is too fast, it will eventually get to someone who may not be an ideal candidate to appraise the property. Thus a quick turn-time rule ends up catering to whoever is going to get it done faster (and maybe cheaper). On a related note, appraisers being so busy can cause escrows to slow down, which means it can be far more difficult to close in only 30 days. Keep in mind though appraisals are often one of the very last things ordered during the loan process, and that’s surely part of the problem in closing escrows more quickly.
  2. True Cost of Low Fees by Ryan Lundquist - Working RE MagazineIncreasing fees: For years many appraisers have dealt with below-market rate fees from lenders because of Appraisal Management Companies skimming off the top. Well, lately fees have been increasing, and you’ve probably noticed that if you work in real estate. The increase is a byproduct of appraisers being very busy, the fee market changing after years of being stale, a shortage of appraisers willing to work for low-paying AMCs, and many appraisers having left the business over the past 10 years. A few years ago AMCs were in control and appraisers were desperate to get approved to be on their panels, but these days AMCs are desperate to get appraisers to work for them. For more thoughts on fees, check out Jonathan Miller’s Housing Notes from a few weeks ago (scroll to the bottom of the post for some really sharp commentary that influenced some of my thoughts above). Also, I wrote an article for Working RE magazine recently called The True Cost of Low Fees, and it helps show just how much of a financial impact there is when fees are below market rate.
  3. Letting trainees inspect: If you didn’t know, before becoming a full-fledged appraiser you have to train under a supervisory appraiser. In California, a trainee actually has to do 2000 hours of work under a supervisor (and have a 4-year degree if the trainee wants to eventually get a certified appraiser’s license). Anyway, many lenders have actually not allowed trainees to sign appraisal reports or inspect properties alone without a supervisor. On top of already lower fees from AMCs, this has created a real lack of incentive for existing appraisers to train the future generation of appraisers. It’s understandable that lenders require a certified appraiser to do the bulk of the report and inspect the property, but if trainees are not allowed into the mix under the supervision of a trainer, there is going to eventually be a big shortage of appraisers. This will only cause longer turn-times and higher fees. Seriously, this is a huge deal and it would be wise for real estate organizations to get behind this point to advocate for appraisers and pressure lenders to relax their short-sighted regulations.
  4. Replacing appraisers: There have been a number of recent articles about lenders eliminating appraisals or even potentially allowing real estate agents to do BPOs in lieu of appraisals. For those who don’t like appraisers, this may sound like welcome news, though the truth is any new valuation system would inherit all the problems we have in today’s system. It’s easy to think the grass would be greener and consumers would save money on expensive appraisals, but we’ll still have issues with turn-times, fees, valuation disputes, pressure to “hit the number”, skill level, interpreting the market, choosing comps, making adjustments, etc…. To me this issue reminds me of people who say we need to just get rid of all politicians. As much as that sounds appealing (particularly for some candidates right now), it wouldn’t solve the problem because we’d still need new leaders to take their place. Maybe that’s not the perfect comparison, but do you catch my drift?

I hope this was interesting or even helpful.

Questions: Which points stand out to you the most? Agents, are you seeing any of these trends in your escrows? Loan officers, what are you experiencing? Appraisers, anything you’d add?

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How to challenge a low appraisal (and tips for agents and appraisers)

The appraisal came in low. Those are five very stressful words during a real estate transaction, right? We hear these words every now and then, but when a market begins to change in the spring especially, it seems like we hear them more. So what can be done when this happens? What is the best way to communicate with the appraiser? What are some things to do and not do? Let’s talk about what it can look like to work through this issue. I’ve included a template you can download to your desktop, but I’ve also included some communication tips. The goal here is not only to give a useful rebuttal format, but to spark conversation between agents and appraisers (see tips below).

I’d love to hear your take and insight in the comments.

Image purchased by 123rf dot com and used with permission by sacramento appraisal blog - target value

DOWNLOAD this format HERE as a Word document. I created this format to help foster better communication with appraisers and focus on the right issues when challenging an appraisal. You might notice the diplomatic tone and logical flow too. Use this format as a template to fill in the blanks for a specific property.

appraisal rebuttal format to use - sacramento appraisal blog

Example of the template filled out:

appraisal rebuttal example - by sacramento appraisal blog

DOWNLOAD this format HERE as a Word document. Use it as a template to fill in the blanks for a specific property.

TIPS FOR AGENTS:

  1. Be Reasonable: Be realistic about what a property is worth. Try to help the owner base the list price on actual similar sales and whatever the current market is doing in the neighborhood for similar properties.
  2. Communicate First: Sometimes real estate agents have a very hands-off approach about communicating with appraisers (until an appraisal comes in too low of course). When that happens, agents will often start communicating all sorts of things about the property and how the market responded to it. But why was this information not shared in the first place? If you aren’t using my “Appraiser Info Sheet“, please consider doing so because it helps you be intentional about answering questions appraisers tend to ask (before they ask). Remember, it’s easier to be proactive before the appraisal is finished rather than reactive afterward.
  3. Ask the Lender: Before launching into a rebuttal, first make sure to ask the lender what their process is for challenging an appraisal so you know you are spending your time wisely. They might have their own form. Remember, a reconsideration of value has to come to the appraiser from the lender.
  4. Wear your Data Hat: It can be emotional when a property appraises too low, so it’s important to remain objective and stick to the facts of the market when talking with appraisers. Focus on critiquing the meat of the appraisal, which is comp selection and adjustments given (or not given). Forget about minor issues or clerical errors that don’t really sway value.
  5. Price Per Sq Ft: I recommend giving most of your attention to similar sales rather than bringing up price per sq ft. At the end of the day price per sq ft can be a valuable metric, but during an appraisal rebuttal it’s important to focus on sales that are similar since that is probably what is going to be most useful for the appraiser.
  6. Be Humble: It’s easy to blast the appraiser because you think you’re right, but the appraiser might have nailed the value. Remember, some appraisals come in low because the appraiser did a bad job, but many times properties come in lower than the contract price because that’s really where value is.
  7. Novel: There is a better chance of being heard if you keep it short. Don’t write a novel (and it helps if you’re diplomatic and nice). This is why the format above is useful because it helps organize thoughts into a logical manner.
  8. No pressure: Remember to not pressure for a higher value (Dodd-Frank). Stick with the facts and try to help the market speak for itself. That’s the value of the sheet above because it helps focus the conversation on comps and adjustments. You are asking the appraiser to reconsider the value, not meet your contract price. In fact, don’t even suggest a target value for the appraiser to meet. With some focused communication, you can provide support for a higher value without saying, “it’s worth at least X amount”.

TIPS FOR APPRAISERS:

  1. Seasonal Market: When the market changes, the most recent sales may not yet reflect the change. This means if we use older sales, we might essentially undervalue or overvalue a property unless we give an adjustment for the way the market has changed. The most recent sales probably got into contract 30 to 60 days ago, which means they reflect the market at the time. This means we need to weigh carefully if we ought to be giving a “Date of Sale” adjustment to help sales conform to current trends.
  2. Correct Mistakes: I know some appraisers never budge on changing the value. I get that. Nobody wants to have different versions of a report out there. I’m not an E&O company, but if the value is wrong due to our mistakes, isn’t our professional duty to get it right? It’s okay to change the value in the report, and if you need to do that, I would recommend writing in the addendum what changes were made and why they were made. This happens to the best of us. Nobody nails value perfectly all the time.
  3. Professionalism: The market is complex and there is something humbling about putting a value on something. This ought to bring a sense of awe and evoke a deep respect for the way value works in a neighborhood. In other words, since it’s not always easy to interpret value, we ought to be careful to not be arrogant. Let’s rather find ways to reek of humility and professionalism.
  4. Use the Info Sheet: If you think it would be useful, feel free to use my Appraiser Info Sheet document to help train local agents in your area to give you the type of information that is valuable to you during a transaction (this makes for a great office presentation too). Many times agents are doing their best to give appraisers what they think is useful, but it’s actually not helpful at all. This is why appraisers can help educate agents on what type of information they are really looking for. I have a set of questions I always ask a listing agent, so this is exactly why I created the info sheet. Feel free to download the sheet and use it in your market. In fact, make it better. If you end up posting the document on your blog or online, please give me a link back to honor the original source (I’ll do the same for stuff you create).
  5. Be Neutral: There is often pressure to “hit the number” or make the deal work, but appraisers aren’t escrow helpers or deal-enablers. This point really could have been placed above for agents, but it’s always a good reminder for us appraisers too. If value isn’t there, it’s not there, and everyone else needs to be okay with that. Recently a file on my desk ended up appraising 4% below the contract price. In this case the seller was asking way too much in hopes of netting more money to buy a larger house. My job wasn’t to meet the contract price, but to be a neutral party to the transaction.

I hope this was helpful.

SacBee Article: By the way, I have some cool news to share. I’ll be writing a bi-monthly column in the weekend real estate section of The Sacramento Bee. My first article was published last weekend. I’m honored and excited for the opportunity. Now I just need to find more time to write.  🙂

ryan lundquist SacBee real estate article

Questions: Anything else to add? Did I miss something? I’d love to hear your take.

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