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Choosing comps in a lopsided market

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How do we choose comps in such a lopsided market? I had a great question about this recently, so I wanted to share some thoughts. Anything to add? I’d love to hear your take in the comments.

Different colorful shapes wooden blocks on blue background, flat lay. The caption says "choosing comps in a lopsided market."

UPCOMING PUBLIC SPEAKING GIGS:

  • 2/9/2022 Yolo Assn of Realtors market update (details)
  • 2/18/2022 WCR El Dorado market update (details)
  • 2/25/2022 Placer Assn of Realtors market update (details)
  • 3/15/2022 NARPM Luncheon (details)
  • 3/22/2022 SAFE Credit Union market update (details)
  • 4/28/2022 SAR Think Like an Appraiser (details)

QUESTION: With so many listings receiving offers above list, and people having to pay the shortfall between the appraised value and the contract price, how do appraisers look at comps? If a property sold at $580,000, but it actually appraised for $547,000, and the buyer paid the difference, which number do you use? $580,000 or $547,000?

ANSWER: Here are a few things on my mind.

1) Weigh the comps:

In any market (not just today) we have to weigh the comps. Or another way to say it is, we have to appraise the comps so to speak. What I mean is if something clearly sells for too much, it’s reasonable to give that property less weight in our analysis. Likewise, if a property sells for too little, we might also give less weight to that sale. Granted, selling for too little isn’t as common lately, but in past markets we regularly considered whether short sales or bank-owned sales sold below market value.

2) One sale doesn’t make or break the market:

It’s important to note one sale doesn’t make or break the market. This means one lofty “lone ranger” sale doesn’t all of the sudden mean the rest of the market will go to that level. This would be like saying that record-breaking $7M sale in Shingle Springs from August will pull the rest of the market up. Nah, I don’t think so. Or Zillow buying a house for $40,000 more than the comps will cause the rest of the market to rise. Nope. If one sale closes at $580,000, but the rest of the market is below $550,000, we won’t arbitrarily accept $580,000 as the new neighborhood price threshold. The same would hold true if a different house sold at $450,000. This one “low ranger” (sorry) won’t automatically drag the rest of the market down.

A picture of a unicorn with a statement saying, "One lofty unicorn sale doesn't all of the sudden mean the rest of the market is now going to be at that higher level."

3) Using the final sales price:

It’s a really good question whether appraisers will use $547,000 or $580,000. Realistically appraisers might not even know about the lower appraised value because it’s not automatically disclosed in MLS or from agents in the transaction. And there isn’t some sort of appraisal database where appraisers know about the appraised value either. Ultimately, even if I knew what it appraised for, I’m not going to use the appraised value because that wasn’t the official sales price. To be fair, is it possible it appraised too low? Yes. At the same time, if the property really was worth $547,000, maybe the buyer legitimately paid too much at $580,000, right? Again, this is where appraisers need to weigh the comps and ask whether they sold at a reasonable level or not. I realize this sounds subjective, but weighing comps has to do with looking at the entire market and weighing sales against other ones, so there is an objective element here. I’ll be checking out recent and much older sales, competitive sales, listings, pendings, withdrawns, lots of geeky metrics, and even similar neighborhoods. I’ll also be making graphs to help visualize where it looks like value is at right now. If something did sell for too much, it’ll probably stand out because it’s disconnected from the rest of the market – including pending contracts. So maybe I won’t use the higher sale as a comp in my appraisal. Or maybe I can use it but give it less weight. No matter what, I won’t automatically use a sale without thinking through why it sold for more than others. But here’s the thing. If pendings contracts are all around $580,000 too, and other neighborhoods have also risen quickly, maybe it’s the market… In that case I need to recognize prices are rising and then adjust my comps up accordingly.

4) Unfairly judging the original list price:

It’s important for appraisers to be cautious about judging the original list price. What I mean is the original list price is a starting point that could be reasonable, too high, or too low. I’m not saying it’s unimportant. I’m just saying it may or may not say something about value. The truth is value is found in the comps – not the original list price OR the contract price. For instance, a friend told me about a property that got into contract about $200,000 above the original list price recently. I know it’s easy to think it could have a problem appraising that much higher than the contract price, but what if the property was priced $200,000 too low? This is where appraisers (including me) need to be careful to be objective and not give the original list price so much weight to essentially say, “I can’t bring the value in that high.” Nope. Value is found in the comps – not the original list price.

5) Instagram and market value:

I’m seeing images floating around Instagram about market value. The images tend to say things like, “The appraised value is one professional’s opinion,” and “Market value is what a buyer will pay a seller.” That sounds maybe sorta kinda hopefully true, but let’s dive deeper. The truth is what one buyer is willing to pay could represent market value (what the bulk of buyers would pay), but sometimes what one buyer pays is more like individual value because it’s totally disconnected from the rest of the pack. So, if a buyer pays above all the comps and pendings, it doesn’t automatically represent market value. It would be like me buying a house for $750,000 in a $350,000 neighborhood. I can pay that, but just because the seller and I agree on the price doesn’t mean it’s market value. Does that make sense? And here’s the kicker. What if a buyer paid 20% lower than the comps? Would we say it’s market value since the buyer and seller agreed on the price? I doubt it.

The bubble question:

I did a YouTube Live last week and here’s what I said when someone asked about a real estate bubble. This was all off the cuff it the answer should start at 58 minutes. Enjoy if you wish.

Thanks for being here.

Questions: What do you think of the points above? What did I miss? Anything to add?

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How bedroom value adjustments DO NOT work

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How much is a bedroom worth? What sort of adjustments do you give when looking at two houses with a difference of one bedroom? It’s always $10,000, right? Or wait, someone else said $20,000. What’s the truth? Let’s talk about this today. I’d love to hear your take in the comments.

SacBee presentation: This week I was honored to give a video interview for 30 minutes or so to The Sacramento Bee. Check it out (subscriber content).

THE BIG POINT: Don’t use one figure every time you see a bedroom count difference. That’s just not going to work. Thanks for coming to my TEDx talk.

FOUR REAL ESTATE TRUTHS:

1) There is no standard adjustment: There isn’t a one-size fits all bedroom adjustment. I know many of us were taught to adjust by $10,000 or $20,000 whenever we see a difference in bedroom count, but that’s just not how the market works. It sure would be easy if there was a quick adjustment to give any time we saw a difference, but the problem is canned adjustments won’t work in every price range, market, or location. I wrote about this more in, “Why a little black book of value doesn’t exist in real estate.”

2) Getting logical: The difference in value between a one-bedroom unit and a two-bedroom unit could be quite substantial, right? In contrast, the difference between a four-bedroom home and a five-bedroom home could be minimal. This goes to show there really isn’t a standard adjustment to apply for every single difference in bedroom count. Frankly when valuing a one-bedroom condo, I’m really looking at one-bedroom units for comps because I know there can be a huge value difference. In other words, it would be a massive mistake if I only used two-bedroom units and didn’t even look at one-bedroom units. In contrast, when pulling comps on a five-bedroom home there could be some four-bedroom units that really sell at the same level. The key is that we compare and contrast the comps to understand if there really is a price difference rather than imposing our preconceived ideas on the property. Sometimes we see a difference and there is obviously an adjustment to give because the market clearly paid more or less because of the difference. Other times we see a difference in bedroom count and we have to be bold enough to recognize that despite the difference there really isn’t any difference in value. So sometimes the best adjustment is giving no adjustment.

3) Exceptions to the rule: Sometimes modern units in Midtown only have two bedrooms despite a larger square footage and these units still command a price premium. The issue is the buyer pool doesn’t often need four bedrooms to fit a family, so it’s not a big deal to have fewer bedrooms compared to the suburbs. Or 55+ communities almost always have only two bedrooms and it may not be a premium at all to have an extra bedroom since usually just one or two adults live in the space. I recently met someone building a modern home in Sacramento and people are telling her to be sure to build at least three bedrooms. I mean, I generally like to see at least three bedrooms, but for this custom modern home the buyer pool will likely be good with only two bedrooms for the size of the home. Ultimately it’s easy to judge a home for not having enough bedrooms based on what we’d see in a typical tract area, but sometimes we have to back up and realize a lower bedroom count doesn’t always lead to a lower value.

4) Looking to the market: So what is the proper adjustment? Well, we have to look to the market to understand if there is a price difference. Ideally if I’m appraising a 4-bedroom home it’s best to use other 4-bedroom comps so I don’t even have to consider any difference. The problem is if I only use 3-bedroom sales as comps I haven’t really shown what a 4-bedroom home is worth. If I have some sales with varying bedroom counts though then I can start comparing and contrasting these properties to try to discern if there was a price difference because of having a different bedroom count. Of course the price difference might really be about the square footage, so I have to be careful not to double-dip on adjustments by automatically adjusting for square footage as well as bedroom count.

Okay, this isn’t a post on how to give adjustments because that could be a long topic, but here’s a piece I wrote called “4 questions to ask when giving real estate value adjustments” that might give some more insight.

Questions: How much were you taught to give for a difference in bedrooms? Anything else you’d like to add? What did I miss? I’d love to hear your take.

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Just say NO to subjective language in real estate

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Is it a poor neighborhood? Is it rich? Is the neighborhood desirable or undesirable? Is it family-friendly? Is it crime-ridden? These are words some might use to describe certain neighborhoods, but they’re 100% off limits for appraisers (and probably other real estate professionals). Let’s talk about this.
 

A refresher & false narratives: I hope this will be a good refresher and encouragement to consider the power of language. But I also wanted to bring this up since media sources are starting to talk about Fannie Mae clamping down on appraisers by issuing a list of words not to use. Look, this list from Fannie Mae has been around for as long as I can remember. I even have a blog post from 2011 about these words. In short, this isn’t something new to bust appraisers. Yet there is no mistaking this list is timely for the real estate community today.
 
Fannie Mae says appraisers cannot use these phrases:
 
– “pride of ownership”
– “no pride of ownership”
– “lack of pride of ownership”
– “poor neighborhood”
– “good neighborhood”
– “crime-ridden area”
– “desirable neighborhood or location”
– “undesirable neighborhood or location”
    (B4-1, Page 536-537 in Seller’s Guide):

Why is this list important? Fannie Mae wants appraisers to stay objective about the criteria they use to describe and value properties. Appraisers need to not let their personal opinions, beliefs or subjective judgements about certain neighborhoods influence the content or outcome of an appraisal. Fannie Mae basically reiterates the Fair Housing Act in saying it is a prohibited practice to base the “opinion of market value (either partially or completely) on the race, color, religion, sex, handicap, familial status, or national origin, of either the prospective owners or occupants of the property being appraised or the present owners or occupants of the properties in the vicinity of that property” (B4-1 Pg 536 in Seller’s Guide).

Not about being politically correct: Sometimes when this conversation comes we might hear, “Dude, stop being politically correct,” or “Don’t get all woke on me,” or “It’s not your place to tell me what to say.” But this has nothing to do with being PC and everything to do with being professional, showing respect, and recognizing that words have meaning. The truth is there are always new things to learn and sometimes old dogs need to learn new tricks (myself included).

SUBJECTIVE LANGUAGE ISN’T USEFUL:

Pride of ownership: What does “pride of ownership” mean? Couldn’t pride mean something different depending on who you are talking to? Saying a neighborhood has pride or not doesn’t help anyone understand an area. So if someone says, “The neighborhood lacks pride and it’s a bad area,” that’s probably more of a declaration of personal bias rather than useful language to objectively describe an area.

Luxurious community: On the other hand when we say a location is luxurious, what does that mean? The word is so subjective because one person’s luxury is another person’s dump. That’s why I might suggest saying something like, “The neighborhood fetches some of the highest-prices in the zip code with homes typically above 5,000 sq ft., etc…” A focus on the facts is much more useful than a subjective word, right?

Family-friendly: It almost sounds okay to say, “This is a family-friendly neighborhood” because our society is so used to language like that. But what about saying, “This is NOT a family-friendly neighborhood”? I think sometimes when we insert a negative it’s a clue there is room for better language that doesn’t leave certain groups out. Let’s be real. Families live in all sorts of neighborhoods, so being a so-called good or bad area for families is highly subjective. Ultimately if you say an area isn’t fit for families, you’re probably talking about your own family or belief system more than anything.

What to do instead: It’s important to take inventory of the words we use and how our lingo might be perceived. I suggest weeding out subjective language that might in any way show bias or discriminate. So take a list like the one above and monitor your language. Being familiar with the Fair Housing Act and figuring out fact-based ways to talk about value and neighborhoods is the goal as it focuses on respect and not being swayed by personal opinions or beliefs. When describing neighborhoods I would suggest sticking to facts such as architectural styles, types of units, proximity to conveniences, school ratings, economic factors, condition of homes, and anything that would help sum up an area without imposing subjective words that show personal bias. Keep in mind I’m saying this as a non-lawyer, so this isn’t legal advice. Also, I’m not saying solely using the right words is the end-all solution for eliminating bias either.

I talked with a reporter last week about these words and he asked if I use these off-limits words in my appraisal reports. Heck no. I don’t know if he believed me or not, but words matter and I take that very seriously as an appraiser.

Anyway, that’s what’s on my mind. I hope it was helpful.

Questions: What do you think of the list above? Anything to add? Are there other phrases you’ve heard by the real estate community that you’d recommend weeding out? I’d love to hear your take.

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Lumber prices, bias, & slowing in the housing market

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I’ve got a few things on my mind today. Some light stuff and some deep stuff. Let’s talk about lumber, food in listings, that leaning building in San Francisco, bias in valuations, and a slowing vibe in the housing market.

Skim topics or digest slowly.

5 THINGS ON MY MIND

1) Lumber is lower (sort of):

The good news is the price of lumber as a commodity is coming down. The bad news is that doesn’t necessarily mean savings are being felt by the consumer immediately. For instance, here’s a snapshot of the price of a 2×4 at my local Lowe’s yesterday. In short, the local price here is still at an all-time high despite lumber overall dropping about 45% lately. If you didn’t know, a 2×4 was under $3 just over a year ago.

2) Real estate listings mentioning food:

How often is food mentioned in real estate listings? These are words associated with food and retail in the public description of home sales and listings in the Sacramento region so far in 2021. These words were chosen at random and they’re honestly pretty rare, but I’m still tickled (and hungry).

3) That one leaning building in San Francisco:

We’ve all been glued to news about the heartbreaking tragedy unfolding in Florida right now with the condo building collapse. Not to bring up real estate, but this is going to spur on many conversations about structural integrity, the role of HOAs, and liability. Speaking of structural issues, here is a visual of sales in Millennium Tower in San Francisco, which has been documented as a building experiencing tilting and sinking. By the way, residents were informed in 2016 that the building had issues. Can you see the difference of that news?

4) Conversation about bias:

Last week I was on Agent Kee’s podcast along with Dr. Jesus Hernandez. We talked about lots of stuff, but at the 55-minute mark we had a ten-minute discussion about valuations and racial bias. I find it’s not easy to talk about this today, but this is what should be happening. Ultimately as an appraiser I am doing lots of listening and self-reflection. I’m also clear we need to be careful about quickly saying it’s racism every time an appraisal comes in lower than expected. This conversation is only the tip of the iceberg, but I’m hopeful we can have more discussions like this. Please note I won’t approve any toxic comments because that’s not the culture of this blog.

5) Steroids & slowing (two realities of today):

The market is moving about as fast as it ever has, so it feels like it’s on steroids, but we’re also seeing what looks like seasoning slowing. For those interested I’ll be talking on Thursday at the Yolo Association of Realtors about this dynamic (I think you have to be a member).

FEWER MULTIPLE OFFERS:

Having fewer multiple offers is a symptom of slowing. Even though we’re basically seeing some of the highest levels of multiple offers ever, the numbers have been slightly lower for two months in a row. So clearly competition has begun to pull back slightly (which is what we’d expect to see at this time of year).

INSANE PRICE GROWTH:

With that said, prices are still rising. It really isn’t a slow market, but we are noting some slowing (two different things).

Anyway, that’s what’s on my mind today.

Thanks for being here.

SHARING POLICY: If you share any of my stats or visuals, please attribute the source. Here are 6 ways to share my content (not copy verbatim).

Questions: What topic stands out to you most above? What’s on your mind these days? I’d love to hear your take.

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