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When sellers expect buyers to pay for solar

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Sellers often expect buyers to pay the full cost of a solar system. So they say, “I spent $30,000 on this system, so let’s price it $30,000 higher.” I get the sentiment, but is it reasonable? Let’s talk about it.

This isn’t a “how to value” solar post, but a conversation focused on some logical points that might help sellers see why buyers often don’t pay the full cost of an owned solar system in the resale market.

1) Location: I don’t doubt the value of solar, but I do doubt the market always recognizes the full cost of solar in the resale market. If a solar salesman says the value is always the same as the cost of the system, that sounds like a great sales pitch. Is it real though? Does it work in Alabama, Missouri, and Antarctica? Is it the same for a $75,000 house compared to $850,000? Probably not.

2) Dollar for dollar: It’s always the dream in real estate to get buyers to pay dollar for dollar for any home improvement done by sellers, but that’s not so easy to pull off. Even if you look at Remodeling Magazine’s 2018 Cost vs. Value Report, hardly any items on the list give close to a 100% return compared to the cost. Of course solar is different because it saves money, but there still might be a principle here worth considering.

3) Age of the system: Imagine a solar system that is built to last 20 years, and it’s now 5 years old. An owner says, “I know the system isn’t new, but I paid $40,000 for it, so a buyer should pay $40,000 too.” That’s a nice thought, but the system is 25% used up already, so why would a buyer pay the full cost of a brand new system? It would be like saying, “I realize my car is 5 years old, but I want you to pay the sticker price from the dealer because that’s what I paid.”

4) Rebates: Were there any rebates when the owner purchased the solar system? For instance, if there was a $5,000 rebate for a $25,000 system, that means the real cost of the system was $20,000. This is important because why would a buyer pay $25,000 if the seller technically paid $20,000? Moreover, newer systems are bound to be more efficient and maybe even less expensive, so why pay full cost for an older system?

5) Savings: Imagine an owner saves $150 per month on her energy bill for a solar system that cost $25,000. In this situation at $150 per month it would take 14 years to save the full $25,000. Would buyers pay upfront for 14 years worth of savings to keep $150 per month in their pocket? Are buyers even going to be in the property that long? Let’s remember the benefit of solar is realized over the course of two decades, so paying for all of that benefit in one instance may not reflect what most buyers are willing to do. 

6) HUD solar programs: A home owner told a Realtor friend that HUD allows appraisers to add the cost of a solar system into the value. That sounds like an awesome idea, but it isn’t true. Appraisers don’t have a mandate from HUD or Fannie Mae to handle solar by adding the cost of the system to the value. What is true though is FHA allows owners and buyers to add solar on a purchase or refinance and get a loan (in some cases) for the full cost of the energy improvements. See page 453-454 in the HUD manual.

The puzzle of solar: This isn’t a post to explain how to value solar, but I hope some of the points above might bring perspective. In short, valuing solar is like a puzzle. We have to look to many pieces for the answer, so we’ll check out comps, consider the cost and age of the system, be in tune with how much money is saved each month, etc… If you think it would be useful, I can do a follow-up Q&A post about valuing solar (let me know).

I hope that was helpful.

Class I’m teaching: On September 17 I’m teaching my favorite class called “How to think like an appraiser“. I’d love to see you there.

Questions: What do you think of the points? Anything to add? What advice would you give to sellers expecting buyers to pay the full cost of solar?

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The problem of overpricing in real estate

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Overpricing is a problem. You’d think in such a “hot” market that it wouldn’t be an issue, but it is. I’m not trying to dog sellers, but let’s talk about some of the most common pricing mistakes right now. I hope this helps.

1) Getting married to the list price: Sometimes it’s like sellers get married to a lofty list price and become unwilling to budge – even when buyers are refusing to pay that much. It’s as if sellers get paralyzed and cannot move beyond a clearly unrealistic price. My advice? Listen to the market and budge on price as needed.

2) I need this amount to move: I’ve encountered a few sellers recently who priced based on how much money they needed to move. But the market doesn’t care about personal finances or plans. The market only cares about paying a reasonable price for the property.

3) Headlines: At times sellers hear sensational headlines like, “Values are increasing more rapidly than ever,” so they price according to a headline rather than similar sales in the neighborhood market.

4) Out of touch with picky buyers: Buyers these days tend to be more picky than ever about what they purchase, but I’m not sure sellers are really in tune with how finicky buyers are about price, location, and condition. You’d think buyers would be so desperate to get into contract and pay anything because of a housing shortage, but they’re actually quite patient in many cases because they want to wait for the right property and feel like they’re paying a fair price. My advice? Price for real buyers in the neighborhood market rather than that one mythical “unicorn” buyer who is going to pay more for some reason.

5) Sales instead of comps: The most common pricing mistake I see is pricing according to a sale down the street that really isn’t comparable. So a seller says, “I know that house is totally remodeled with a pool, but someone’s going to pay the same amount for my house.” My advice? Price according to similar homes that are actually getting into contract rather than dissimilar properties. Be careful about hijacking price per sq ft figures too.

6) The fallacy of summer: We hear that summer is the hottest real estate season, but the spring season is actually the hottest in many markets throughout the country. By the time summer rolls around the market is actually beginning to cool because it’s been hot for almost two quarters already. During summer listing volume is just about to peak for the year, and that means it starts to take longer to sell, prices often begin to soften for the season, and buyers gain more power to negotiate. My advice? Be realistic about prices today.

7) Zillow: I can’t tell you how often I’ve heard, “But Zillow says my house is worth X amount.” I know, Zillow says stuff like, “We’re only a starting point and a ballpark figure.” Yet in my experience sellers rely heavily on the Zestimate and very often treat it like a definitive ending point rather than a ballpark. Remember, Zillow doesn’t know anything about condition, upgrades, smell, etc… Sometimes Zillow nails the value, but other times it’s off by a substantial amount – even in a tract neighborhood. My advice? Take “The Big Z” with a grain of salt.

8) Other: What else are you seeing out there?

I hope this was interesting or helpful. In light of the market beginning to cool for the season, I thought scratching out these thoughts might be helpful and even save sellers some money (and heartache).

Questions: Which mistake do you see most often? Any stories or insight to share? I’d love to hear your take.

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Peak prices & “bubble” conversations

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We’re about to have more real estate “bubble” conversations. Why? Because prices are very close to where they were at the previous peak of the market. Here’s a few things that come to mind when these conversations come up. Then for those interested I have a big monthly market update. Anything to add?

Higher prices fuel conversation: As prices rise, it inflames conversation about a real estate “bubble”. Media outlets cover this topic of course, but it’s also on the mind of the public.

Stats are VERY close to the peak: Markets throughout the country are different, but in Sacramento most price metrics are getting very close to the peak from 2005. In fact, the average sales price in the Sacramento region is now the SAME as it was back then.

No formula: As a friendly reminder, there is no “bubble” formula that says the market will plummet if we get back to prices from 10+ years ago.

Hello inventory: As news of high prices gets out there, some sellers will put their homes on the market thinking we are at the top. So let’s watch inventory very closely in coming time.

Normal seasonal slowing: Right now the market is slowing, and some are saying, “It’s starting to turn. Pop. The Bubble is happening!!!” Here’s the thing though. Markets tend to have a seasonal cycle where things are hot and then they cool off. When the market begins to soften each year we tend to hear a little more doom & gloom because sometimes we confuse a seasonal slowing with the market tanking. At the moment the stats in Sacramento look normal for the season and don’t indicate the market has made a big turn down, so I’ll keep saying that unless I have a reason not to. Make sense?

Less room: There is less room for prices to increase unless the job market and wage growth really start to move. So it seems logical for the market to slow down. Yet there are many dynamics that make prices move, and nobody has a crystal ball to say exactly what prices will do in the future.

Don’t forget Inflation: This might sound anal, but let’s get technical about comparing older prices with today’s prices. We’ve had thirteen years of inflation since 2005, and that means it’s gotten more expensive to buy the same goods today than it was in the past. For instance, the peak of the market in Sacramento saw a median price at $395,000 in 2005, but when adjusting that figure for inflation with an inflation calculator, a price at $395,000 in 2005 would technically have the same purchasing power of $511,000 today. So as today’s median price approaches $395,000, we have to realize it’s really not the same $395,000 as it was in 2005 because of how the value of the dollar has changed over time.

But the market doesn’t care about inflation: Okay, let me now throw a curveball. It’s important to understand how inflation works for the sake of comparing older stats, but I don’t think most buyers and sellers actually care about inflation. They don’t say, “Sweet, prices today look like they’re the same as 2005, but technically they’re lower because of inflation.” No, people tend to see prices and say, “Holy heck, we’re back to the peak.” I’m not dismissing the need to understand how inflation works, but only being real about how the bulk of buyers and sellers tend to think. Besides, it doesn’t matter how close we are to the previous peak anyway because there is no formula that says the market will “pop” at that level.

Preaching doom: Some preach doom & gloom, and that’s fine. My advice though? Be realistic about your ability to predict the future. Some have been making annual real estate predictions about how the market is about to collapse, and I’m hearing many say the big change is now coming later this year or in 2019. The problem is when these predictions don’t come true the “prophecies” simply get pushed back another year. The irony is if a person keeps making the same prediction every year, at some point that person could be right.

Seeing only red flags: It’s getting less affordable. The economy isn’t that great. Interest rates are rising. Home prices have outpaced wage growth. Lenders are getting more creative with financing. These are red flags for sure. But let’s remember just because unhealthy elements exist in a market does not mean it’s starting to crash. My advice? Be honest about the red flags, but let actual stats inform what you say and think about the market. Keep in mind many articles in coming time are going to preach doom, but take a step back from the articles and look to the stats. What do the stats say? And what is the mood among buyers and sellers in the market? That’s the only thing that matters. 

Open letter to worried buyers: Last year I wrote an open letter to buyers worried about another housing bubble. I have some practical advice and tips in there in case it’s relevant.

I hope that was interesting or helpful. Anything to add?

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

We saw what we would expect to see last month. It felt like a normal May. Well, actually it was the strongest May of sales volume since 2013. Prices ticked up again, it took three less days to sell, and inventory remained sparse. Overall the stats are glowing, but it’s important to recognize the market is starting to slow for the season. We are seeing way more listings hitting the market, and this is transferring some power from sellers to buyers. We are also seeing more price reductions. In a few months we will likely see this slowness in the stats, but for now check out some glowing numbers below.

The previous “bubble” vs now:

1) Housing inventory: Since late last year housing inventory has begun to increase subtly. Right now we have 1.5 months of housing supply whereas one year ago we had 1.26 months of supply. Some might interpret this to mean the market has begun to collapse and really change directions, but this is still a very anemic level of housing supply, and the market has been able to handle this change easily because of strong demand. For reference, when the market collapsed in 2005 inventory literally doubled in 90 days from the summer to the fall. That’s a far different story than what we’ve seen so far this year with a minor uptick in inventory over the past two quarters. 

2) Sales volume: If we did have a “bubble” and it burst, I would expect to see more listings hit the market and most likely a drop in sales volume. In 2005 the market changed and properties simply stopped selling as you can see below. In one year sales volume literally dropped by 43%. Yikes!! In contrast, right now sales volume has been very steady. Let’s keep an eye on sales volume and inventory though because both metrics might help us gauge if the market really is changing. Remember though, before we see a change in sales, we’ll hear of a change in the mood of buyers and sellers. Thus the trend always happens in the listings first before we start to see it in the sales. That’s why the word on the street is so important in real estate (agents, please keep emailing me to let me know what you are seeing out there).

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

DOWNLOAD 61 graphs HERE: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

SACRAMENTO COUNTY (more graphs here):

SACRAMENTO REGION (more graphs here):

PLACER COUNTY (more graphs here):

DOWNLOAD 61 graphs HERE: 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 hearing buyers and sellers saying about the market? Do you think the market has turned or are we seeing a seasonal slowness? I’d love to hear your take.

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