Let’s talk about choosing comps. I want to share an example of what I did not long ago when there were no recent sales for a unique model in a tract subdivision. Anything to add? I’d love to hear your take.
The situation: The subject property is a larger single story home with a casita. In this case the builder built only a handful of homes with a casita, so comps would be limited. If you aren’t familiar with a casita, it’s a term used to refer to an extra housing unit or detached area. I find it’s often interchanged with “in-law unit” or “accessory dwelling”, but we have to remember an accessory dwelling unit (ADU) actually needs a sleeping area, bathroom, and kitchen to be an ADU. In this case the “casita” only has a bedroom and bathroom, so while it’s tempting to call it an accessory dwelling, it’s really not because there isn’t a kitchen.
The problem: There are zero recent casita sales, so it’s not easy to readily understand what the market is willing to pay for one of these units. What do we compare the casita unit with in today’s market? How do we adjust for it?
What I did: In an ideal world I would’ve had a nearby neighborhood with casita sales, but I didn’t find anything, so I chose to study the neighborhood market by researching three casita sales in the neighborhood over the past ten years. As long as the data was good, I would use research from sales in the past to help me value a property today.
Immediately I noticed the casita sales were clearly commanding a price premium. I thought that this might be the case, but it was still good to confirm instead of assume. Keep in mind if you don’t know how to graph, that’s okay. You can see the same thing when pulling a CMA or printing out sales. Here is a tutorial though in case you want to learn to make a graph like this.
The next thing I did was to research how the casita units compared with other specific models at the time of their sale. Being that most casita homes were somewhere around 2500 sq ft (without the casita), I wanted to see how these units competed with other homes that were around that size. The beauty of having three older sales was I could find what the price adjustment was in each of those situations compared to other specific models. This would prove valuable since I had three recent 2500 sq ft sales without a casita, and I would need to make a value adjustment for the casita in today’s market.
I won’t say exactly what my adjustment was, though maybe I will in the comments.
The big point: Sometimes we have to look back in time to understand how value works. Don’t be afraid to pour through many years of sales to help establish context. Spend time answering the question, “How does a property like this fit into the market?” We can do this by scouring years of sales in the immediate neighborhood, but we might also look to the surrounding market too for competitive locations. Of course just because we research sales that are many years old does not mean we will use them in a current valuation (or a listing presentation for agents). I really don’t have a problem with using older sales when appropriate because we can always make an adjustment depending on how the market has changed over time. But let’s remember FHA wants appraisers to use comps within 12 months, so I probably couldn’t get away with using a sale from three years ago in a lender appraisal. However, I could pull in research from the past to help support the value for what the casita is worth.
I hope this was helpful or interesting.
Questions: Anything else to add? Did I miss something? When have you used older sales to help see the context of value? I’d love to hear your take.
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Nice article Ryan. I disagree with one point. Lenders in my experience will accept sales more than 12 months old for good reason if well documented in the report. A purchase I’m working on today will have as Comp#5 a sale from two years ago.
Thanks Joe. I agree with that, though I brought up the point to mention lenders tend to want the focus to be on current sales. I think it’s good to use older sales at times. This report was actually for a private situation and I used two new sales and one from 2014. I’m not sure if I would’ve gotten away with that in a lender report, though I think it would have been an excellent methodology. At times lenders want valuations to fit into a neat little box, but that can be wishful thinking.
Wow, Ryan, you have really made a sometimes confusing concept a little more understandable by using graphing and the study of the past to help predict the current value of a unique property. Even agents, who are not versed in appraisal methodology, can wrap their brain around this and understand it to help them when pricing properties. I’ll be sure to share this with agents in my area.
Thanks Tom. I appreciate it. This post reminds me of cheesy things my History teachers would say about the past mattering for the future…. Well, I shouldn’t say cheesy, but when in school it sounded really corny about the past meaning something for the present or future. 🙂
In my area kitchens are not permitted in ADU unless is designated as income property. I thought that casitas were typically termed for temperate climate areas like Phoenix? Either way you have done a good job on approach, I have found addressing MIL’s, guest units, ADU’s, etc to be one of the more difficult to access for valuation purposes.
Thanks Mark. I appreciate hearing how your market is different. It’s intriguing to see what things are called in different areas too. I just had an agent call me this morning after reading my post and together we thought her upcoming listing would be best labeled as “guest quarters”. There is no kitchen like the one I mentioned, and functionally the area would really be used for guests more than anything (I could have just as easily labeled this area as guest quarters instead of a casita). Yet we might also dub these areas as a “man cave” or “she cave”. Or we could go with “person cave” to be neutral (kidding). Ha.
I’m not sure about the history of caistas, though if anyone has knowledge to drop, I’m open ears. I just know in the Sacramento area we do see the term thrown around.
Thanks again.
I have this exact situation right now in the Phoenix area and wasn’t sure what to add for casita as there is only one sale in the past 14 years and tax records don’t include casita. Can you say what you valued it at in the end? Always enjoy your articles.
Thanks Jill. It’s tricky when that happens. The difficultly in this neighborhood actually is that the casita square footage is lumped in with the square footage of the main house. It makes it really challenging when appraising.
In this case after observing the three sales, I ended up adjusting up by $35,000. In my mind this made reasonable sense on a few levels. One, that looked like a reasonable market reaction based on matched paired sales through the years (three examples). In other words, when looking at the graphs, this figure seems like it’s supported. But also it made sense in light of the extra square footage of the casita. In this neighborhood it seemed the market was willing to pay about $50-75 or so for additional square footage. That’s really about what I would have adjusted for if I had a few sales on the grid. When considering the size of the casita, this adjustment at $35,000 lined up perfectly with an actual square footage adjustment. I don’t think it always works like this of course, and I did not include the casita in the total square footage either. But buyers being willing to pay about the same for this area makes good reasonable sense because of the quality.
Great share! Sometimes when determining a property’s value you really have to dig in and do some detective work to be able to justify the value you place on it.
Us Realtors have it easy… we just have to get in the ballpark and pick a price and see how the market reacts. Your job requires a lot more accuracy!
One thing I’d love to get your take on (if you don’t have an article about it already hahah) is how to value newer construction that’s surrounded by old construction. Every now and then I come across something that’s brand new and they’re asking a lot more than the median for the area and I’m unsure how to best advise my clients… what would you say to a scenario like this? Especially when the home is much nicer than the neighborhood as a whole!
Thanks Wes. Yeah, it can be tricky sometimes.
That’s a great question Wes. I have literally been asked that three times this week now, so I think it’s time for a post. I actually almost wrote about that this week. This post may have some relation, though I don’t think it addresses your question head on. I’ll get to this. It’s a great topic. http://sacramentoappraisalblog.com/2015/03/17/6-things-to-remember-when-valuing-a-newer-home-in-an-older-neighborhood/
Thank you.
Great Stuff! When you have to sell your house, you have to dig a search for the real value of your property.
Thanks again, Ryan, for another one of your well-written articles. Your thorough, articulate explanations make complex scenarios easy to understand and explain to our clients. You make us all better appraisers.
Thanks Teresa. I really appreciate your kind words.
So what was the adjustment amount??? 🙂
It was between $1,000 and $100,000. 🙂 I’m kidding. In this case it looked like the market was willing to pay between $30-40K. I think I adjusted at 35K.