How I appraised a property with a non-permitted garage conversion

How do we value a non-permitted garage conversion? Today I wanted to share a real life example of a property I appraised. I’ll keep things fairly brief because it’s impossible to get to everything in just one post. Though I do have a 10-minute audio clip for more depth on conversions. Any thoughts?

UPDATE: Read part 2 of this post HERE.

garage-conversion-sacramento-appraisal-blog

Garage Conversion Formula: It would be nice if there was a one-size-fits-all value adjustment we could apply to any conversion, but that’s not how it works because conversions vary tremendously in size and quality – not to mention some neighborhoods accept them and others really don’t.

Golden Data: In this case the conversion was nicely done and was even on a crawl space like the rest of the house. I searched the neighborhood for garage conversions over the past few years and literally found none. But I did have one very lucky bit of data since the subject sold four years ago on MLS as an arms-length sale. This means I was able to look back in time and find how the subject fit into the context of neighborhood prices.

garage-conversion

What I wrote in my report: Based on the previous sale in 2012, it is clear the market recognized the subject property’s extra size as square footage and paid for it as such in the marketplace. The lack of permits on the garage was definitely disclosed in MLS. At the time of the sale in 2012 the market was willing to pay about $15,000 (6%) less for the subject property compared to otherwise similar homes that had a garage. In today’s market were no recent sales with a garage conversion, so the appraiser used historic data to give a downward $15,000 adjustment to Comps 1-3. The garage adjustment would really be reasonable anywhere between $15,000 to $20,000, but since the subject has been upgraded extensively in recent years it made sense to adjust at the lower end of this range since upgrades lessen the negative for not having a garage.

If I didn’t have a previous sale: Without a previous subject sale, I’d need to find other garage conversions in the neighborhood or search in a competitive area of town to try to find a reasonable adjustment for the lack of a garage (and lack of permits). In some cases I would maybe consider the cost to turn the conversion back into a garage – especially if the conversion was shoddy or minimal to cure. Still other times I might ponder the cost to permit the conversion or the cost to actually build a garage if there is space to do so. Remember, the adjustment at $15,000 made sense here, but it could be FAR DIFFERENT in other situations.

Garage Conversion Video: This audio clip is ten minutes or so and could be good as background noise while working. Watch below (or here).

Note on permits: As an appraiser it’s a liability to assume everything in a non-permitted conversion was done to code. What if I recognized value for a conversion but then in the future an owner had to rip out the non-permitted area? Can you see why some appraisers (and lenders) won’t give value to something unless it was permitted? Yet we still have to ask, “Is the market willing to pay something for this non-permitted area?” This is not an easy question to answer, but it is vital nonetheless. Hopefully we can find some comps, but more than that we need to disclose everything clearly, use logic and professional judgement, and maybe reach out for opinions of other trusted professionals too.

Questions: How do you deal with garage conversions? Any other insight? Did I miss something? I’d love to hear your take.

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5 Reasons why graphing is a vital skill for real estate professionals

Can you teach an old dog new tricks? That’s questionable. It’s certainly not easy for us humans to learn new things either. But let’s talk about one skill in real estate that is HIGHLY attainable, yet something that most will ignore (which can be good for you). Knowing how to graph neighborhood sales sounds really dull, but it’s truly something that can be an amazing tool to help you stand out from the crowd and look like a rock star to your clients.

Real estate geeks - Image purchased and used with permission by Sacramento Appraisal Blog

5 Reasons why graphing is a vital skill for real estate professionals

  1. We live in a visual world, so graphs help clients see the market.
  2. Neighborhood data can be far more powerful than zip code data.
  3. Why let Zillow or Trulia make all the graphs? Show your skills.
  4. Graphing helps you understand trends first before talking with clients.
  5. Graphs are perfect for sharing on your blog or social media.

A tutorial on how to make trend graphs: I made a tutorial below for you to check out. I recommend watching it and then pulling up your MLS so you can create a graph by following the steps I took. This is good for Sacramento MLS, but it’s also good for any MLS so long as you can export data (which is probably only a matter of clicking one button). Ask your MLS how you can export data to a spreadsheet if you cannot figure it out. I use Gnumeric in the video (a free version of Excel), and you can download that here for free. Or just use Excel, which is similar and what I use all the time for my fancier graphs.

You can watch the video above or directly here on YouTube. If it’s too small here, watch on YouTube for a larger version. Does this image help illustrate the market? What story does it tell? Should this seller in Rancho Cordova list at $230,000?

Rancho Cordova Example - trend graph of sales - by Sacramento Appraisal Blog

Some Quick Advice: The only way to add skills in business is to take a stab at learning something new, but one big reason why that doesn’t happen is because it can feel intimidating to take that first step. When it comes to graphing it’s easy to think it is only for techies, but trust me, you can do it. The more you practice, the better you’ll get. Remember, you are going to impress your clients by showing them the market visually. Don’t just tell them. Show them. I recommend trying out a graph every time you need to comp a neighborhood or maybe whenever you get a new listing. There are so many different types of graphs too. You can look at my market trends category for some examples. Whatever you do, get into a rhythm so you are practicing regularly. If you have some questions too, don’t hesitate to ask.

Questions: Was the tutorial helpful? Anything you need clarity on?

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