Sacramento Home Appraiser

Tax Records is not the definitive source for square footage

January 22, 2020 By Ryan Lundquist 41 Comments

Why is the appraiser saying it’s only 1,400 sq ft? Tax Records shows the home is 600 sq ft larger. This issue comes up ALL the time, so let’s talk about it.

MY BIG POINT: I can’t speak for every market across the country, but I’ll say there can be a difference between what the building department has on file for a house and what is listed in the Assessor’s Records. In my market Realist is what we call Tax Records and that data comes from the Assessor. In my experience it is usually pretty good, but sometimes it’s completely off because it doesn’t actually reflect what is permitted. This means we need to look to a source that does (or should) keep reliable records on building permits. And that source would be the building department instead of the Assessor.

The truth: The Assessor’s records are generally reliable, but I’m just saying sometimes they’re not. Why is this? At times it’s as simple as the original builder not turning in accurate information when a house was built. Or maybe an owner took out permits but official records were never updated. Of course we’ve all seen instances where the tax roll shows two units on one lot, but there’s really just one house nowadays. Let’s not forget sometimes owners do an addition without permits, so the Assessor might actually be correct even though the house is technically larger or has even sold on MLS as a larger home. For reference, here are ten reasons why an appraiser’s sketch might be different.

TWO SITUATIONS ON MY DESK:

1) Garage included in the square footage: I recently measured a house for a Realtor that was about 1,100 sq ft despite Tax Records stating it was nearly 1,600 sq ft. Based on my sketch it looks like the Assessor had the garage included in the square footage for whatever reason. I’ve definitely seen basements included in the square footage too.

2) Non-permitted area included: I’m also working on something where the tax roll shows an area at nearly 2,500 sq ft but about half this space isn’t actually permitted. Look, most of the time Tax Records is pretty much right (especially in tract areas), but in this case it’s scarily inaccurate. One of the problems is in Sacramento County home owners can “correct” property characteristics in Tax Records by submitting a sketch from an appraiser. I get the idea here, but what if the area in the sketch was not actually permitted (and the appraiser hopefully disclosed that in the report)? It would seem like verifying square footage as permitted would be a nice touch when adding square footage into the tax roll, but I’m afraid that doesn’t always happen. It certainly didn’t happen in the case on my desk and I’ve seen many other instances where an area that was not permitted ended up being reflected as square footage in the Assessor’s information (and then Realist).

UPDATE: The chief appraiser at the Sacramento County Assessor’s office commented on my post and I wanted to link to it here. I think he provides some helpful context (and he’s a really nice guy).

Closing advice: If something doesn’t seem right about the square footage, start digging further. Most of the time you’re likely going to be able to trust records, but sometimes they’re going to be off. So when something doesn’t smell right about the size, quality of work, setbacks, etc… it’s time to call the building department to see what permits are on file. I never rat out an owner either, so I don’t call and say, “Hey, this house measured 2,300 sq ft, but what do your records say?” Nope. I would call and ask, “Can you help a brother out? What do your records show for square footage and anything else that has been permitted?” Also, if you’re in Sacramento, here is a link that shows building permits online (you’re welcome). Lastly, remember that it’s not enough that permits were pulled. Were permits finaled? That’s the real question.

I hope this was helpful. This could honestly be a dissertation and what I’ve written only scrapes the surface. Please add your comments below.

Questions: Any stories to share or advice about relying on Tax Records (or not)? How is your market different than mine? Anything to add?

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Peaking prices & rosy real estate narratives

September 13, 2019 By Ryan Lundquist 10 Comments

People tend to freak out when prices slow down. What’s going on? Is the market crashing? But every year around this time we start to see the market soften. Let’s talk about this, and then for those interested I have a big market update.

1) Slowing is normal: Prices have likely crested for the season in many areas of the country. What I mean there’s a good chance we’ve more or less seen the highest prices we’re going to see for 2019 as the market is starting to show its descent from the high-altitude spring season. This happens EVERY. SINGLE. YEAR. It doesn’t mean it’s not competitive either. It just means it starts to take longer to sell, the number of sales begins to shrink, and prices tend to taper.

2) The rosy real estate narrative: It can be a struggle for many people when hearing the market is slowing. It’s like we are only allowed to talk about real estate in glowing terms and our talking points must fit into a rosy narrative. So when there’s any hint of news that sounds even slightly negative, it feels like something is wrong. What do you mean prices aren’t going up? Wait, they’re softening? Does that mean the market is about to turn? Remember, just as it’s not always sunny outside, real estate isn’t always burning hot either.

3) The mistake of misinterpreting slowness: On the other side of the coin we tend to see lots of doom and gloom conversations around this time of year as the market softens. My advice? Know what is normal for the fall season so you can assess whether it’s a normal seasonal slowing or something more. In other words, let the stats speak to you and inform your real estate narrative. Otherwise you may be swayed by sensational headlines or get sucked into a real estate culture that sometimes struggles when things aren’t ultra-positive.

Any thoughts?

—–——– Big local monthly market update (long on purpose) —–——–

Now for those interested, let’s talk about Sacramento trends. If I had to sum up the market I’d say things have felt a little more normal lately. Granted, low mortgage rates are like a steroid helping the market feel normal, but nonetheless stats have been about what we’d expect for this time of year – which is unlike the dark season we experienced last year at the same time.

DOWNLOAD 80+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

THE SHORT VERSION:

Stats feel mostly normal
California will now have rent control
Year-over-year price growth is stronger
Don’t be like Michael Jordan
Volume was down slightly in August
Listings are seriously anemic
Pendings are strong right now
Sales volume is down 9% this year
The market is slowing for the season

THE LONGER VERSION:

Here are some of the bigger topics right now:

Normal and cresting prices: We’re seeing about what we’d expect to see right now with prices starting to soften. I’d say prices have likely crested for the season. It’s possible we could see some price metrics bounce up slightly due to low mortgage rates, but that usually doesn’t happen beyond August much. Besides, any sales from September really reflect older pendings from July and August anyway.

Rent control: Statewide rent control in California was just passed by the legislature. There is going to be a learning curve for the real estate community on how to deal with this from a value perspective too. We may need years to really understand the effect on the housing market. Keep in mind this only applies to 2-unit+ properties built prior to 1995 (it does not apply to single family homes). Also, this doesn’t mean rents won’t increase either because landlords can legally raise rents 5% plus inflation each year.

14th bubble anniversary: The real estate “bubble” popped fourteen years ago in Sacramento in August 2005. In other parts of the country the market started to turn in 2007, but we started to tank in 2005. So happy anniversary, I guess.

Michael Jordan’s house: In 2012 Michael Jordan’s house was put on the market for $29 million and after seven years it still hasn’t sold. It’s now listed for about $15M. This just goes to show buyers aren’t willing to pay any price – even if the owner is famous. This is a great object lesson for sellers today who are prone to think they can command whatever price they want since inventory is low. Nope. Buyers are extremely sensitive to paying the right price and they’re more informed than ever. If you want to sell you need to price it right. Bottom line.

Slowing doesn’t mean it’s cold: The market isn’t slow, but it’s starting to show signs of slowing for the season as it’s taking longer to sell, most price metrics declined from July to August, and sales volume looks to be starting to slough for the year as it normally does. This doesn’t mean the market is cold though. Not at all. It’s just not as hot as it was during the spring. Over the next month I’d expect the market to heat up a bit though since kids are back in school and vacations are done. There is usually a last run on the market before the holidays arrive.

Almost 8 years of price increases: In the current real estate price cycle we’ve had about eight years of price growth so far. When I say eight, some people correct me with seven, but that’s not accurate if you count every year since 2012. I also have a chart like this for Placer, Yolo, & El Dorado County in my monthly download.

Stronger price growth: Prices are up about 4-5% from last year, which is a change from a more subtle 2-3% we’ve been seeing for most of the year. What’s going on? Part of the growth could stem from low mortgage rates fueling buyers to play the game, but let’s remember too last year was a dull time in the market, which means it’s going to be easier on paper this year to see glowing stats (more on that below). Let’s not make too much of one month of data.

Really sparse listings lately: The number of listings has been noticeably down. I mean, we’re seeing multiple hundreds fewer per month these days. Technically housing inventory as a metric is on the lower side of normal these days, but there have been fewer listings hitting the market (remember, inventory as a metric measures the relationship between listings and sales rather than the number of actual listings). I’ve been thinking about what’s going on here for a number of months and I’ll admit I don’t have it all figured out. Part of it of course is pendings have been stronger, which naturally means there’s fewer available listings. And maybe some would-be sellers refinanced into a lower rate rather than selling. I don’t think this is the byproduct of the iBuyer model with so many listings selling privately instead of coming to the market, but some properties certainly sold this way. Mostly I would guess this is related to sellers feeling uncertain about the market. Just as buyers had their moment last year where they backed off the market a bit, maybe sellers are feeling it’s their turn? There could be other reasons. This is something I’ll keep watching to understand over time. I’d love to hear your take here.

Warning about glowing stats ahead: Hey stat nerds, this is important. Over the next few months if we have fairly normal numbers they could end up looking glorious since last year the market was in a slump. If you remember, when mortgage rates shot up in 2018 buyers began to put their foot on the brakes and it felt like there was a dark cloud looming for about six months. Anyway, when you’re pulling stats over these next two quarters, just remember the numbers might technically look glowing this year compared with last year. My advice? Take stats with a grain of salt and compare multiple years of data rather than give laser focus to last year.

I could write more, but let’s get visual instead.

FOUR ISSUES TO WATCH:

1) SLOWER GROWTH: The market continues to show price growth, but the rate of change is slowing. This sounds offensive to some because the narrative in real estate is often that the market is always blazing hot. But let’s remember “slow” is not a dirty word in real estate.

2) A QUICK RECAP: All year prices have shown a modest uptick at about 1-3%, but this past month the stats look a bit sexier. Part of this could be due to lower mortgage rates, but some of it could be due to the market showing weakness last year (which helps pad today’s stats).

3) VOLUME SLUMP: Volume was lower last month compared to August 2018, but not by much. The bigger story though is volume is down in the region by 9% over the past year. Moreover, volume has been down in the region for 14 out of the last 15 months. Overall despite a lower year of volume, it’s still not outside of a normal low range (see 2014 and 2015).

4) PRICES SOFTENED IN AUGUST: The market generally slowed in August in terms of price growth. This is why I’m saying prices feel a bit flat (even though they’re up from last year). This is fairly normal for the time of year, and sometimes we see prices bounce up and down as summer comes to a close. Stay tuned. Let’s keep watching.

NOTE: Take El Dorado County data with a grain of salt. Stats change significantly month by month.

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SACRAMENTO REGION (more graphs here):

SACRAMENTO COUNTY (more graphs here):

PLACER COUNTY (more graphs here):

EL DORADO COUNTY (more graphs here):

DOWNLOAD 80+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: What are you seeing out there? What do you think prices are doing? What are you hearing from buyers and sellers lately?

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How do you know how much the market has gone up?

July 24, 2019 By Ryan Lundquist 19 Comments

I’ve been getting this question quite a bit lately. How much has the market gone up? How do you figure that out exactly? This is something we consider all the time when pulling comps, which is why it’s so important. Let’s talk about it.

NOTE: This post is longer because there’s lots to say. You can still skim the bold headings though if you wish.

Here are a few simple things I do to gauge value changes:

1) Look for comps: The best thing we can do is look to the comps for the answers. More specifically, look for the price difference between sales in the past compared with properties that are currently getting into contract.

To gauge a change in value I recommend comparing similar properties from the past to similar properties now. This is often done with sales from last year vs this year, but here’s an example of several years ago with this year. If you’re in a tract neighborhood you might consider comparing a few different similar-sized models from the past with those same models today. If you’re not in a tract area, just compare competitive sales from the past with competitive sales today.

In this example above I looked up a 2,734 sq ft model in South Sacramento and in 2015 this model was selling for about $330,000 while today the most recent sales have been $400,000 (backs highway) and $412,000. There is a pending at $419,126. Ultimately we could say the market has gone up by $80,000 to $90,000 or about 24% to 27%. It might seem odd that I’m looking up 2015 sales, but in this case the subject property sold in 2015, so I was attempting to figure out how much the market changed since then.

When lining up all data from 2018 through 2019 it’s really clear we’ve seen price increases, right?

2) Sales last year & this year: We can also try to find some sales that sold last year and then re-sold this year. I realize if we’re lucky we might find only one or two examples at best. I’m not talking about flips where remodeling has occurred, but an example like the one below where it sold in the exact same condition.

In this example we see the market has shown about a 2% uptick in value over the past year. Of course we have to understand whether these sales sold at reasonable levels. After all, if either sold too high or too low, then it’s probably meaningless data. Ultimately sales like this can be clues into the market (more on this below too).

3) Stats programs: Some people might use fancy excel spreadsheet programs where competitive neighborhood data can be exported to show price changes over time. I don’t personally use something like this, but it’s not a bad idea if it helps you get a good picture of a neighborhood market. If you use something like this, please comment below.

4) Create visuals: I’m a visual guy and it helps me see the market by creating visuals. I find myself spending a good chunk of time on #1 and #2 above as I’m pulling comps, but I also use this step to compliment those steps. If you want to learn to make graphs, here’s a tutorial. If you’ve been thinking about this, why not go for it? Creating images has been revolutionary for the way I see the market and explain it.

CLOSING TIPS:

1) Be careful about zip code data: If you’re pulling data from a zip code or county, just remember trends shown in a larger area may or may not apply equally to every neighborhood or price range (or property type). This is why I don’t look at my recent big market update, see price metrics are up 3-4% this year in the region, and then use that number for every neighborhood. Nope. I advise knowing the larger trend very well, but don’t impose that trend on a smaller area without doing research.

2) Not just one example: It’s dangerous to base a value conclusion on only one example. This is why I wouldn’t look at my example in number two above and definitely state the market has increased by 2%. One example is best considered a piece of the puzzle, and it’s important to find other pieces before understanding the puzzle.

3) The stock market & competitive data: In the stock market you can have different stocks going up, down, and sideways all at once. The same thing happens in real estate. This is exactly why I strongly recommend you look at competitive data in neighborhoods. For example, if you are valuing a 1,200 sq ft house, make sure you are looking at examples of similar-sized homes to understand that market segment instead of 4,000 sq ft homes in the same neighborhood. Otherwise if I only look at larger homes that might be a little more stagnant, I could miss the fact that the bottom of the market is increasing much more rapidly than the top end.

4) Declining market: It’s been years since we’ve had a declining market, but this same methodology above can help you measure the market when prices are declining too.

5) Seasons: When looking at older sales let’s remember the seasons in which they sold. Thus last year I might give a 2% adjustment in a neighborhood for a property that sold in June, but I could give a 5% adjustment for something that closed in December because it sold when the market was down further during a dull fall season.

6) Being quick & reconciliation: There’s not just one way to do this, and there aren’t quick answers. We have to dig in. Most of all, we might choose a few different ways to study the market and then reconcile our findings. What I mean is I might do all of the steps above, get slightly different answers for each step, and then piece them all together (reconcile them) when I use a comp in a report and make a specific adjustment to that comp. In other words, if I adjust a comp up by 2% or 4% or whatever the number is, I’m coming to the table with some sort of rationale or support for why that adjustment makes sense.

I hope this was helpful.

MARKET UPDATE VIDEO: Here’s a video to walk through the growing and slowing market in Sacramento. Enjoy if you wish.

Questions: What do you think of the steps above? Anything else you’d add? What do you do?

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How do we value a house with a HUGE non-permitted addition?

February 5, 2019 By Ryan Lundquist 26 Comments

What do appraisers do when there is an enormous non-permitted addition? Imagine a 1,300 sq ft house with a 1,000 sq ft addition. What the? Let’s talk about this.

Here are some things to consider:

THE SHORT VERSION:

A lack of permits causes uncertainty in real estate
Buyers usually expect a price discount
Appraisers need to think through many issues when there aren’t permits
Many appraisers are likely to use the original footprint when choosing comps (instead of blindly lumping in the extra space)
This is a complicated issue, which is why the post is longer

THE LONGER VERSION:

1) Uncertainty: Whenever a home has a substantial non-permitted addition, it’s like infusing the property with uncertainty. What I mean is every time a person does a refinance or sells, the lack of permits might not be seen the same way by buyers, lenders, real estate agents, and appraisers. So just because it sold without any problems in the past doesn’t mean it will sell without hiccups in the future. In short, people who buy homes like this need to understand they’re signing up for a future of uncertain escrows.

2) Expectation of a discount: My sense is most buyers are going to expect a price discount when there aren’t permits. I know, thanks Captain Obvious. Granted, in some areas a lack of permits might be normal, but in other places or price ranges a lack of permits can be a huge deal. If a house was increased from 1,300 sq ft to 2,300 sq ft though without permits, that’s a 77% change in size. I’d say that’s no small matter for marketability, so buyers aren’t likely to be okay with paying full price. On top of this, some lenders might not want to touch the property either. Anyway, I’d expect to see buyers wanting a discount, but technically I’m open to seeing otherwise because my job is to be objective rather than impose a rule that says, “Buyers will always pay less in this situation.”

3) Nuts and bolts: Appraisers have to ask whether an addition is legal based on zoning. If it’s flat-out illegal, the appraiser isn’t going to be recognizing value (or shouldn’t be). Keep in mind sometimes lenders instruct appraisers not to show value for non-permitted space. At the same time many lenders ask appraisers to simply support the value if the appraiser is assigning value to non-permitted features. In other words, lenders might say, “We’re cool if you give value to this, but support the value with comps or data.” I wrote more about some of the nuts and bolts of the problem of non-permitted additions here.

4) Assuming it’s no big deal: An appraiser could assume the market would pay the same amount for a 2,300 sq ft house compared to a 1,300 sq ft house with a 1,000 sq ft addition, but that’s a gigantic assumption. In my mind it would be a huge liability for an appraiser to blindly assume the market would have no problem and just appraise it like this was no big deal. There is simply too much uncertainty, so appraisers aren’t likely to walk out on a limb of liability like this without compelling data. In many cases buyers will ignore smaller-ticket items that aren’t permitted, but a 1,000 sq ft addition is a massive issue that cannot be ignored.

5) A starting place: In an ideal world it would be best to find comps that also have large non-permitted additions. That would be incredible, but there’s a fat chance of that happening. So an appraiser has to decide which course to take. Should the appraiser choose 1,300 sq ft comps or 2,300 sq ft comps? There isn’t just one answer here, so I’ll let my colleagues speak to what they would do, but I would personally be extremely hesitant to use 2,300 sq ft homes unless there was a really good reason to do so. When an addition is so large like this, there are too many unknown factors about the quality of work and whether things were done right, so I’d more likely use 1,300 sq ft comps and then treat the non-permitted area separately. In other words, I’d get a really clear sense of what the house would be worth at 1,300 sq ft and then figure out the value of the addition and adjust for that in my report if needed. Yet I would be asking what 2,300 sq ft homes are selling for too, and I would probably view that price level as the very top of what a property like this could be worth.

6) Previous sales: One thing I would look for is if this property sold on the open market in the past. If it sold more recently a few times at 2,300 sq ft and the market seemed to recognize this space as square footage (despite a lack of permits), that might be data for me to consider. In that case I might be more tempted to choose 2,300 sq ft comps while making some very heavy disclaimers about there being no permits. But if I only have one previous sale from 2005 when lending standards were loose and lots of properties sold at inflated levels, I’d probably give very little or no weight to that prior sale. The truth is we might look up previous sales and see the opposite too. Maybe a property is huge on paper, but that doesn’t mean buyers paid a huge price. Thus we might see proof in previous sales that buyers didn’t consider this house on the same level as other 2,300 sq ft homes. Here’s the thing though. No matter how the market responded in the past, it doesn’t mean the market would look at the property the same today. Moreover, what if fraud or incompetence was involved in the prior sales? Thus prior sales can be valuable, but at the end of the day I have to still make a judgment call about today.

7) Multiple offers: If this property was listed on the open market and there were ten offers when buyers were informed about a lack of permits, that might mean something. Offers aren’t sales, but it’s still data to consider. Yet if a property has been really attractive to buyers but it keeps falling out of escrow because of a substantial non-permitted addition, that’s also telling. So just because something is appealing and getting offers doesn’t necessarily mean value is there. If buyers are struggling to close, that’s probably more telling than initial offers, right?

8) It’s a puzzle: Properties like this are like a puzzle. I have to look at many factors and assemble the pieces together. So I’ll give strong weight to 1,300 sq ft comps, I’ll maybe use some 2,300 sq ft comps and adjust down if necessary, and I’ll do my best to find some other comps with permit issues. Additionally, if I get a sense of what it would cost to permit the area, that’s at least worth considering and it might help me come up with some sort of adjustment down. My knee-jerk reaction is to think buyers at the least would deduct the cost to get it permitted (and realistically probably more). Lastly, I’d interview lots of agents and talk with appraiser colleagues too. This would help me sharpen my focus, give ideas for how to approach the property, or maybe even shed light on comps.

It’s not the appraiser’s fault: I know it’s frustrating to not give a quick solution for valuing a property like this, but there isn’t one. Let’s remember the uncertainty in valuing only exists because someone didn’t get permits.

I hope this was interesting or helpful.

BLOG BASH: My blog turns ten this month and I thought it would be fun to get some people together. I reserved a private room at Yolo Brewing Company from 3-7pm on March 2nd, and I’d be honored if you would show up. My wife and I will buy the first 100 beers and I’ll be doing some woodworking giveaways too. This is a laid-back event. No pressure at all. It’s okay if we’ve never met before too. You can RSVP on Facebook or just let me know by email.

Questions: What would you do in this situation? 1,300 sq ft comps or 2,300 sq ft comps? Anything to add?

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Sacramento Home Appraiser

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