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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The difference between remodeled and renovated (and why it matters in real estate)

I swear I’m not a grammar Nazi. But today I want to bring clarity to two words we constantly kick around in real estate. What is the difference between “remodeled” and “renovated”, and why does it matter for the appraisal process?

updated kitchen - sacramento appraisal blog

The short answer: Renovated means something has been updated, but NOT completely changed. Maybe cabinets were painted, faucets were replaced, baseboards were added, or the interior was painted. In the example above, the kitchen only has new door handles, so it obviously doesn’t mean it’s renovated, but if it had new paint, hardware, appliances, and fixtures, we’d say it was renovated. In contrast, remodeled means something significant was replaced or walls were moved. If new kitchen cabinets were installed or the kitchen was expanded significantly, we’d say the kitchen was remodeled.

Renovated: The area of the home has been modified to meet current market expectations. These modifications are limited in terms of both scope and cost. An updated area of the home should have an improved look and feel, or functional utility. Changes that constitute updates include refurbishment and/or replacing components to meet existing market expectations. Updates do not include significant alterations to the existing structure.

remod kitchen - sacramento appraisal blog

Remodeled: Significant finish and/or structural changes have been made that increase utility and appeal through complete replacement and/or expansion. A removed area reflects fundamental changes that include multiple alterations. These alterations may include some or all of the following: replacement of a major component (cabinet(s), bathtub, or bathroom tile), relocation of plumbing/gas fixtures/appliances, significant structural alterations (relocating walls, and/or the addition of square footage).

Why does this matter? When something is remodeled (brand new or completely changed), buyers might be willing to pay more for it. Think of a remodeled kitchen and how buyers might spend more money in light of a resulting great room concept or a kitchen that has been expanded beyond other tiny kitchens in the neighborhood. This is where it becomes important to communicate details of the remodel to the appraiser and even what sort of feedback you got from buyers and agents. In other words, how did the market respond to the remodel? Also, if you didn’t know, appraisers actually need to indicate in the appraisal report for the subject property if a kitchen or bathroom is “remodeled” or “updated” (only for lender work). Additionally, when choosing comps it helps tremendously to know more about the details of the home so appraisers make proper comparisons and adjustments. MLS photos can help of course, but then again it’s not always obvious if the kitchen cabinets were actually replaced or if the bathtub is brand new, etc… Value is found in the details, isn’t it?

Application:

  1. Use the words correctly in listings and appraisals.
  2. Use the words correctly in conversation.
  3. Help appraisers understand if something really is remodeled.
  4. Win the real estate category on Jeopardy by using these words correctly.

NOTE: This post is not meant to rag on real estate agents in any way. That’s the furthest thing from my intention and the way I do life and business. This is simply about knowing definitions and communicating more effectively – especially with appraisers.

I hope this was helpful. If you want to go even further, check out 5 real estate words that make you sound smart.

Question: Any thoughts on stories to share? I’d love to hear your take.

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Can appraisers tell real estate agents if value is going to be an “issue”?

“Just give me a call if value looks like it’s going to be an ‘issue’.” I hear this fairly regularly from real estate agents who ask me to let them know if the appraised value is going to be lower than the contract price. The goal is really twofold: 1) If value doesn’t seem reasonable, the agent can offer additional market support for the appraiser to consider; and 2) The agent can help prepare the seller or amend the strategy for negotiations.

Agent: Are we good on value?
Me: I can’t talk about value with you since you’re not my client.
Agent: Don’t tell me the exact number. Just let me know if I’ll be happy or not.

Who is the appraiser’s client anyway? Unless hired directly by a Realtor for a private appraisal, the appraiser should not be giving a “courtesy call” to discuss confidential information (value) with anyone besides the client. Despite the agents, home owner and borrower being tied to the transaction, the only Image purchased by Sacramento Appraisal Blog and used with permission (click image to visit website where purchased)client is the party who ordered the appraisal. This can be frustrating to digest, but think of it this way. If an attorney hired you to do research for a court case, you shouldn’t talk with anyone about your work besides the attorney, right? Keeping confidentiality seems obvious when talking about a court of law, but the same is true with a loan appraisal. While agents, owners and buyers may end up relying on the appraisal as a tool for negotiation and confidence in the transaction, ultimately the appraisal is really for the lender to assess whether they should risk making a loan or not. Since the lender has initiated business with the appraiser, the lender is the appraiser’s client. This means when appraisers share about value with other parties, even when they are connected somehow to the transaction, it’s a violation of client confidentiality (which can also actually damage negotiations).

Suggestions for talking with appraisers: This doesn’t mean agents and home owners cannot talk to appraisers. It’s just important to realize appraisers cannot divulge confidential information to non-clients. Since appraisers won’t be discussing a specific value with agents, I recommend for Realtors to be proactive about talking with the appraiser before the appraisal is complete, and feel free to share recent potential comps if you’d like – whether at the inspection, on the phone or via email. Also, if you are an agent, it may be worth considering saying something like, “Call me if you have any questions or need something from me to support your value” instead of “call me if there are value issues.”

Question: Realtors, do you find appraisers do share value with you when you ask? Or do appraisers say, “sorry, I can’t talk about the value with you”?

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