Choosing comps when there is a gated community

I had a real estate agent ask a fantastic question recently about choosing comps when there is a gated neighborhood. Here’s the issue: If the subject property is NOT located in a gated community, can an appraiser use “comps” that are similar and within 0.25 miles but are in a gated community? My answer is YES and NO.

45853684 - iron gate

YES: An appraiser can definitely use sales from a gated community. If there isn’t a price difference inside and outside the gate, an appraiser can use gated sales and make no value adjustment. Or if there is a price difference between the two locations, an appraiser can always choose to use gated “comps”, but also make an up or down adjustment to account for the value difference.

NO: Sound the alarm because it’s a red flag if you are valuing something outside a gate but only using gated “comps”. After all, what is the gate keeping in? And what is it keeping out? Despite being nearby, a gated subdivision could be a much different market that is higher or lower in price. Realistically, if I am only using gated sales for my “comps”, I haven’t really shown what the market is willing to pay outside the gate. There could be a value difference, which is why it’s critical to find non-gated sales to help tell the story of value for the subject property (even if the sales are older). It goes back to an “apples to apples’ comparison where we want to try to use the most similar sales in terms of size, location, condition, quality, bed/bath count, etc… Ultimately as we study the market we can make the distinction between properties that are truly “comps” from ones that are merely sales.

A local example: Here is a graph of all 2500 to 3500 sq ft sales in the Crocker Ranch area of Roseville. The blue dots are the gated sales and the yellow dots are the non-gated sales.

Crocker Ranch Neighborhood - Sacramento Appraisal Blog

The graph helps show larger-sized properties inside the gated areas tend to command higher prices. Obviously there are some higher non-gated sales too, but the highest sales in the area over the past 7 years have come from within the gate. This is why we have to study sales and then choose “comps” accordingly.

choosing comps in appraisal - sacramento real estate appraisal blog

Questions: Do you find values to be higher or lower outside of a gated community? Any other advice or wisdom you’d offer when it comes to choosing comps? Did I miss anything?

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How much value does an extra bedroom add?

How much value does an extra bedroom add? The bad news is there isn’t a one-size fits all answer that makes sense for every neighborhood. But the good news is we can think through some of the key issues to respond intelligently. On that note, let’s kick around some ideas below. I’d love to hear your take in the comments.

value of a bedroom - sacramento appraisal blog

Things to consider about the value of an extra bedroom:

  1. More is often better: Let’s be realistic. More bedrooms is usually a better thing for value because a home with more bedrooms is more marketable to buyers. That’s obvious, though there comes a point when there are too many bedrooms, right? (like Evander Holyfield’s old house with 12 bedrooms and 21 bathrooms).
  2. Diminishing value with each bedroom: Generally speaking the added value of extra bedrooms tends to diminish with each additional bedroom. It’s sort of like how you pay less for each ounce of Starbucks coffee the more you buy. In other words, the value difference between a 1-bedroom home compared to a 2-bedroom home could be far more substantial than the value difference between a 2-bedroom home and a 3-bedroom home (or 3-bedrooms vs. 4-bedrooms).
  3. Canned adjustments: It’s tempting to give a token value adjustment for bedroom count differences. Maybe we heard it somewhere or learned from a “mentor” the value adjustment should be $10,000 for each bedroom. So we give this adjustment any time we see a bedroom difference. But does this amount really make sense if we are talking about 2 vs 3 bedrooms and 5 vs 6 bedrooms? Don’t you think the value variance could be huge for 2 vs 3 bedrooms but maybe minimal at best for 5 vs 6 bedrooms?
  4. Layout:  At times a 3-bedroom home may sell on par with a 4-bedroom home because of a stellar layout. Imagine a 1400 sq ft 3-bedroom house compared to a 1400 sq ft 4-bedroom house. One house obviously has more bedrooms, which on paper makes it sound more valuable, but the 3-bedroom house very likely has a larger Living Room, which could help it compete well with the 4-bedroom home. This is a good reminder to be careful about blindly letting bedroom count have the final say.
  5. It’s easy to adjust twice: If we adjust a comp for both square footage and bedroom count, we might actually double-dip on our adjustments. I’m not saying both adjustments are not needed, but at times it may suffice to adjust one or the other instead of both.
  6. The story of the comps: At the end of the day we need to find similar sales and let those sales tell the story of value. This means if we are valuing a 4-bedroom house, let’s use some 4-bedroom comps. Or if we are valuing a 3-bedroom house, let’s be sure we are using at least some 3-bedroom comps. Of course it’s okay to use sales with a different bedroom count and make value adjustments if needed. As a closing example, it’s easy to claim there is a huge price premium for that 5th bedroom, so it’s tempting to give an automatic canned adjustment. But have other 5-bedroom homes really sold at a premium? Let’s look closely at sales and try to find the answer.

I hope this was helpful.

Questions: What is point #7? Did I leave anything out? I’d love to hear your take.

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Hot Pockets & adjusting for an increasing market

Hot Pockets. Yep, I’m about to use them to explain the housing market. That either makes me deeply creative or really immature. I’ll let you decide. On a serious note though, let’s talk about this analogy and consider the importance of giving value adjustments to comps during an increasing market. As always, I’d love to hear your take in the comments below.

Hot Pockets and real estate - Greater Sacramento Region Appraisal Blog

Hot Pockets analogy: The real estate market is like a Hot Pocket taken out of the microwave a tad too early. Some portions are blazing hot while others are only warm or frozen. Like a Hot Pocket, we can say the real estate market is “hot” overall, but it’s definitely not the same temperature in every neighborhood or price range.

Thoughts on making adjustments in an increasing market:

  1. Changing Market: If the market has changed since the most recent sales got into contract, a value adjustment may be needed. In other words, if the market is now higher or lower than the sales, we can account for that in an appraisal (or listing) by making an up or down value adjustment to the comps. Of course there needs to be support for making such an adjustment. We can’t just say, “There’s no inventory, so value must be higher”. We need to rather find support in the market (see #2 and #3).
  2. Pendings vs. Sales: There are many signs of an increasing market, but one of the best things to do is compare competitive pendings and sales. Are pendings getting into contract at higher levels? The other day I appraised something where pendings were about 3-4% higher than similar sales from December, so I ended up giving a 3-4% upward adjustment to a couple of sales I used from November and December. I didn’t have many recent sales to work with unfortunately, but comparing a few older sales with a few current pendings helped me see the current market. Remember, the entire county might show certain trends, but we have to look in each neighborhood to find neighborhood trends (which could be different).
  3. Contract Date: When making adjustments we need to look at when the comps got into contract. One comp may have a contract date four months old, while another is from 40 days ago. The change in the market could easily be different for each comp, which means it’s okay to give big adjustments to some comps and smaller ones to others (or no adjustment).
  4. The Real Price: In an increasing market it’s very helpful for appraisers (and agents) to know the exact price of pending “comps” where possible. After all, we might see something listed as “pending” in MLS, but the real contract price could be higher or lower. On one hand appraisers might give less weight to pendings because we don’t know the precise dollar amount in many cases, though when agents divulge the exact contract price and terms, it can help appraisers give even stronger weight to pendings in the neighborhood.
  5. Imperfect Data: It would be nice if all neighborhood data was perfectly aligned, but sometimes it’s conflicting, which means we have to use good judgement. Does that one high sale or pending really reflect the market or not? Is it reasonable? Do those two lower pendings mean the market is starting to soften? Did the hefty credit to the buyer in that one comp inflate the sales price? At the end of the day we have to spend time weighing both sales and listings to see the market, which means sometimes we end up throwing out certain sales because they’re outliers more than anything.

I hope that was helpful.

Questions: When was the last time you ate a Hot Pocket? Anything else you’d add to this post? I’d love to hear your take

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An appraiser’s view of cottage cheese ceiling texture

They say everything comes back in style, but I’m pretty sure cottage cheese ceiling texture isn’t one of those things. Well, I hope not. This style of texture is also known as popcorn, or more formally as acoustic or stucco ceiling. The house I grew up in had this texture, and a couple of rooms in the first house I bought did too. The other day on Twitter someone asked me how ceiling texture impacts value, and since we had a great conversation, I figured we could deepen the topic here. I’d love to hear your insight in the comments below.

cottage cheese ceiling texture - sacramento appraisal blog - image purchased and used with permission from 123rf dot com

3 things to consider about cottage cheese ceilings and value:

  1. The General Truth: Cottage cheese ceilings are from yesteryear, so they tend to make a home feel more outdated. Ultimately when a home has tired elements, it tends to sell for less or need to spend more time on the market to sell to the right buyer. Okay, that makes sense. But how much does this type of texture impact value? Well, that really depends on the following.
  2. The Whole Enchilada: I’ve found when a home has popcorn ceiling texture, it often has other outdated features. We might also see older wallpaper, an original kitchen and bathrooms, wood wall paneling, steel casement crank windows, etc… Thus the popcorn texture is only one symptom of an antiquated home. My sense is buyers tend to see the entire package of a home as outdated, so they become willing to pay a certain price for “the whole enchilada” so to speak. In other words, buyers don’t often segment one feature like popcorn texture to ask how much it might detract from value, but instead see the property as a whole and thus make one big value adjustment downward. Of course if a home is updated throughout besides popcorn ceiling texture, a buyer might realistically ask how much it is going to cost to remove the texture. The cost of the texture might be a reasonable value deduction, but not always as seen below.
  3. Different Expectations in Neighborhoods: I told a home owner the other day NOT to remove his cottage cheese ceilings for a planned renovation. Yes, install straight-edge granite counters in the kitchen and paint the cabinets. Yes, spruce up the bathrooms. Yes, paint the interior. Yes, lay new carpet. But leave the cottage cheese because all the remodeled comps still have texture on the ceilings. Since buyers were paying the highest prices in the neighborhood despite popcorn ceiling texture, it didn’t make financial sense for the owner to fork out a few thousand dollars to scrape his ceilings (this was in the Sunriver neighborhood in Rancho Cordova). This is a good reminder that it’s easy to bring in our own judgements and perceptions when valuing a home, but ultimately we have to look closely at the market to glean insight. We might be prone to think a home would sell for less because of the dated texture, but in this case it was best to look at other competitive sales in the neighborhood and let those sales set the standard for what we think. At the same time, if all the sales in the neighborhood do not have texture, it’s probably time to start scraping because owners need to eliminate obstacles and excuses for buyers making offers. In a neighborhood where ceiling texture is not common, scraping is a good move because it is a fairly minimal cost, and in my experience owners are often likely to recoup scraping expenses in the resale market because of the increased marketability. But remember, if all the comps already have no popcorn texture, scraping texture simply brings the home up to par with others in the neighborhood.

I hope this interesting and helpful. By the way, if you want to pave the way forward to help bring back popcorn texture, here is a DIY tutorial for you.  🙂

Questions: What else would you add? What is point #4?

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