Appraisal Stuff

Tax Records is not the definitive source for square footage

January 22, 2020 By Ryan Lundquist 22 Comments

Why is the appraiser saying it’s only 1,400 sq ft? Tax Records shows the home is 600 sq ft larger. This issue comes up ALL the time, so let’s talk about it.

MY BIG POINT: I can’t speak for every market across the country, but I’ll say there can be a difference between what the building department has on file for a house and what is listed in the Assessor’s Records. In my market Realist is what we call Tax Records and that data comes from the Assessor. In my experience it is usually pretty good, but sometimes it’s completely off because it doesn’t actually reflect what is permitted. This means we need to look to a source that does (or should) keep reliable records on building permits. And that source would be the building department instead of the Assessor.

The truth: The Assessor’s records are generally reliable, but I’m just saying sometimes they’re not. Why is this? At times it’s as simple as the original builder not turning in accurate information when a house was built. Or maybe an owner took out permits but official records were never updated. Of course we’ve all seen instances where the tax roll shows two units on one lot, but there’s really just one house nowadays. Let’s not forget sometimes owners do an addition without permits, so the Assessor might actually be correct even though the house is technically larger or has even sold on MLS as a larger home. For reference, here are ten reasons why an appraiser’s sketch might be different.

TWO SITUATIONS ON MY DESK:

1) Garage included in the square footage: I recently measured a house for a Realtor that was about 1,100 sq ft despite Tax Records stating it was nearly 1,600 sq ft. Based on my sketch it looks like the Assessor had the garage included in the square footage for whatever reason. I’ve definitely seen basements included in the square footage too.

2) Non-permitted area included: I’m also working on something where the tax roll shows an area at nearly 2,500 sq ft but about half this space isn’t actually permitted. Look, most of the time Tax Records is pretty much right (especially in tract areas), but in this case it’s scarily inaccurate. One of the problems is in Sacramento County home owners can “correct” property characteristics in Tax Records by submitting a sketch from an appraiser. I get the idea here, but what if the area in the sketch was not actually permitted (and the appraiser hopefully disclosed that in the report)? It would seem like verifying square footage as permitted would be a nice touch when adding square footage into the tax roll, but I’m afraid that doesn’t always happen. It certainly didn’t happen in the case on my desk and I’ve seen many other instances where an area that was not permitted ended up being reflected as square footage in the Assessor’s information (and then Realist).

Closing advice: If something doesn’t seem right about the square footage, start digging further. Most of the time you’re likely going to be able to trust records, but sometimes they’re going to be off. So when something doesn’t smell right about the size, quality of work, setbacks, etc… it’s time to call the building department to see what permits are on file. I never rat out an owner either, so I don’t call and say, “Hey, this house measured 2,300 sq ft, but what do your records say?” Nope. I would call and ask, “Can you help a brother out? What do your records show for square footage and anything else that has been permitted?” Also, if you’re in Sacramento, here is a link that shows building permits online (you’re welcome). Lastly, remember that it’s not enough that permits were pulled. Were permits finaled? That’s the real question.

I hope this was helpful. This could honestly be a dissertation and what I’ve written only scrapes the surface. Please add your comments below.

Questions: Any stories to share or advice about relying on Tax Records (or not)? How is your market different than mine? Anything to add?

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That place where shiplap & murder meet

October 29, 2019 By Ryan Lundquist 25 Comments

There’s going to be a new home renovation show that focuses on murder houses. How crazy is that? It’ll be called Murder House Flip and it’s going to air in 2020. I can already imagine adding shiplap to the walls to erase a heinous history… Anyway, here are some things on my mind.

1) Not the home’s fault: Often when talking about notorious homes we hear things like, “It’s not the home’s fault” or “It’s unfair to penalize the house.” I get that, but let’s remember buyers aren’t just purchasing the home. They’re inheriting all the stories and history too. Anyone who has ever owned a home knows this is true because neighbors will definitely tell you about the previous owners and especially anything big that happened at the property. While a home is technically innocent, it doesn’t mean buyers aren’t discerning or making judgement calls about value.

2) Stigma fades: A property with a crime in its past can certainly have a diminished value, but the loss in value may not last forever. What I mean is right after a gnarly situation buyers might react quite negatively, but over time the tendency is to care less, forget, move on, or not even know what happened decades ago. It would be like saying, “A man was murdered here yesterday” compared to “A man was murdered here in 1917.” Would there be a difference in your mind? Maybe so. But for something really notorious the question becomes how long stigma can last. This is why I’m watching the John Wayne Gacy property. The original home was actually demolished, but can stigma remain with the site despite the new home?

3) No one-size-fits-all adjustment: How much does a murder affect value? There’s no one answer to satisfy all situations. It likely depends on when the murder occurred, the nature of what happened, and whether it took place inside or outside. It could also depend on the price range or location as some sub-markets are more sensitive than others. My experience locally is buyers at lower price points tend to be more forgiving about certain issues compared to higher price points (generally speaking).

4) One buyer vs the market: It’s possible a particular buyer might not care about a property’s history, but market value isn’t just about one buyer. What would most buyers pay? Last year I ran a poll about the alleged Golden State Killer’s house and asked people to consider if there would be any price impact if this home came to the market. It was a fascinating conversation with many layers, but one thing that kept coming up was the idea that one buyer might not even care. That’s true. But again, market value isn’t just about what one buyer would do. It’s like this. Imagine lining up 100 qualified and interested buyers. What would be reasonable for them to pay? That’s sort of what market value looks like.

5) Crunching numbers: I appraised a murder house recently and interviewed about ten local real estate agents who sold a murder property in the past. Here’s a blurred view of my data collection. Some agents said there wasn’t any impact to price and others would say stuff like, “It probably sold $25,000 lower.” In short, the answer wasn’t always the same, which meant I had to consider which data points were relevant for my situation. This is huge because it’s easy to find one murder house and call it a day because now we have data. But what happened with one home under $200,000 may not mean anything at the $800,000 price point. Thus some data toward the lower end of the market ended up being less relevant during my appraisal.

An episode of Murder House Flip in Sacramento: There’s going to be an episode set in Sacramento to focus on the Dorothea Puente property. If you didn’t know, she was an older woman who ran a “boarding” house in the early 80s, but instead of giving clients respite she drugged them, buried them in the backyard, and collected their social security checks. This property has sold four times in the past twenty years as seen below.

By the way, there was a documentary made about this house and the owner has even given tours. This goes to show another aspect of a famous home is monetization. In this case though the owner donated tour proceeds toward organizations working with the homeless.

Keep in mind entire books are written about this stuff and I’m only scraping the surface here. I hope it was interesting or helpful though.

Questions: Are you going to watch this new show? What stands out to you above? Any other thoughts?

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Low appraisals, weed, & rent control

September 19, 2019 By Ryan Lundquist 30 Comments

I’ve been getting lots of phone calls and emails about low appraisals over the past couple months. Is something in the water? What’s going on? Let’s talk about this briefly. Then I have some quick thoughts on weed and rent control.

5 things to remember about “low” appraisals:

1) This is common when the market slows.
2) This is even more common in a declining market.
3) It should happen if the contract is too high.
4) It can spur negotiation instead of kill a deal.
5) The value of course is too low sometimes.

The problem: During the housing “bubble” we expected appraisers to always “meet value” so to speak. Yeah, that wasn’t good. But it seems like the residue of that expectation still exists today. So when an appraisal comes in lower than the contract price, it’s often treated like a grave market sin when in fact this should be something that happens from time to time. I know this sounds a bit Pollyanna to say, but I’d like to see the real estate community view appraisals this way instead of thinking appraisers should “hit the number” all the time. Appraisers have an important role to play in the market and if they’re doing their job correctly it won’t always lead to smooth escrows.

Botched appraisals and what to do: Of course we don’t live in a perfect world and appraisers legitimately miss value at times. I’m not glossing over that frustration and I realize there are horror stories out there. When this happens it’s reasonable to go through the lender’s process of asking the appraiser to reconsider the value. I don’t think any appraiser looks forward to this, but it’s part of the business, which is why I advocate for data-informed conversations and ethical protocol. In fact, here’s some tips and a form I suggest using if the lender will allow it (otherwise you’ll need to use the lender’s form).

Note to appraisers: I know this post will not sit well with some colleagues, but this is a part of the business and my goal here is to elevate the conversation (and hopefully only see rebuttals when they need to happen).

Rent control: I have an upcoming interview about rent control with an appraiser colleague in the Bay Area (and I’ll likely do others too). We’ll talk through rent control dynamics and some things to consider for value. In the meantime, here are two quick thoughts. One, rent control is a huge deal, but we’re going to need some time to really understand the fine print as well as its effect on the housing market. The temptation is to look for an immediate impact, but we might need years to fully understand the effects. Secondly, rent control will change the way properties are advertised. Gone are the days of saying things like, “Rents are below market and you can raise them to X amount after buying.” The problem is market rent isn’t so straightforward any longer because not all units can be legally rented at the same level. Remember, rent control does not apply to single family homes. My advice? Be careful with assertions about market rent.

Landlords getting huge weed fines: There was an illuminating piece by Capital Public Radio on Sacramento fining landlords when tenants turn rentals into “grow” houses. We’re talking big money too as the story highlights an example of a $137,000 fine. The author of the piece states the City of Sacramento has issued almost $100M in penalties over the past two years. I’ll let lawyers figure out if this is legal or not, but from a market perspective this is something to watch. What are the positives and negatives of this type of enforcement for the housing market? How will this affect investors?

I hope this was interesting or helpful.

BIG MARKET UPDATE: I’ll be giving a deep market update at SAR on September 24th from 10:30-12:00pm. My goal is for everyone to walk away with an understanding of how the market is moving, ways to describe it, and some ideas for business in 2020. Sign up here.

Questions: What is the sixth thing to remember about low appraisals? Any stories to share? Any thoughts on rent control or the weed dynamic right now?

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How do you know how much the market has gone up?

July 24, 2019 By Ryan Lundquist 19 Comments

I’ve been getting this question quite a bit lately. How much has the market gone up? How do you figure that out exactly? This is something we consider all the time when pulling comps, which is why it’s so important. Let’s talk about it.

NOTE: This post is longer because there’s lots to say. You can still skim the bold headings though if you wish.

Here are a few simple things I do to gauge value changes:

1) Look for comps: The best thing we can do is look to the comps for the answers. More specifically, look for the price difference between sales in the past compared with properties that are currently getting into contract.

To gauge a change in value I recommend comparing similar properties from the past to similar properties now. This is often done with sales from last year vs this year, but here’s an example of several years ago with this year. If you’re in a tract neighborhood you might consider comparing a few different similar-sized models from the past with those same models today. If you’re not in a tract area, just compare competitive sales from the past with competitive sales today.

In this example above I looked up a 2,734 sq ft model in South Sacramento and in 2015 this model was selling for about $330,000 while today the most recent sales have been $400,000 (backs highway) and $412,000. There is a pending at $419,126. Ultimately we could say the market has gone up by $80,000 to $90,000 or about 24% to 27%. It might seem odd that I’m looking up 2015 sales, but in this case the subject property sold in 2015, so I was attempting to figure out how much the market changed since then.

When lining up all data from 2018 through 2019 it’s really clear we’ve seen price increases, right?

2) Sales last year & this year: We can also try to find some sales that sold last year and then re-sold this year. I realize if we’re lucky we might find only one or two examples at best. I’m not talking about flips where remodeling has occurred, but an example like the one below where it sold in the exact same condition.

In this example we see the market has shown about a 2% uptick in value over the past year. Of course we have to understand whether these sales sold at reasonable levels. After all, if either sold too high or too low, then it’s probably meaningless data. Ultimately sales like this can be clues into the market (more on this below too).

3) Stats programs: Some people might use fancy excel spreadsheet programs where competitive neighborhood data can be exported to show price changes over time. I don’t personally use something like this, but it’s not a bad idea if it helps you get a good picture of a neighborhood market. If you use something like this, please comment below.

4) Create visuals: I’m a visual guy and it helps me see the market by creating visuals. I find myself spending a good chunk of time on #1 and #2 above as I’m pulling comps, but I also use this step to compliment those steps. If you want to learn to make graphs, here’s a tutorial. If you’ve been thinking about this, why not go for it? Creating images has been revolutionary for the way I see the market and explain it.

CLOSING TIPS:

1) Be careful about zip code data: If you’re pulling data from a zip code or county, just remember trends shown in a larger area may or may not apply equally to every neighborhood or price range (or property type). This is why I don’t look at my recent big market update, see price metrics are up 3-4% this year in the region, and then use that number for every neighborhood. Nope. I advise knowing the larger trend very well, but don’t impose that trend on a smaller area without doing research.

2) Not just one example: It’s dangerous to base a value conclusion on only one example. This is why I wouldn’t look at my example in number two above and definitely state the market has increased by 2%. One example is best considered a piece of the puzzle, and it’s important to find other pieces before understanding the puzzle.

3) The stock market & competitive data: In the stock market you can have different stocks going up, down, and sideways all at once. The same thing happens in real estate. This is exactly why I strongly recommend you look at competitive data in neighborhoods. For example, if you are valuing a 1,200 sq ft house, make sure you are looking at examples of similar-sized homes to understand that market segment instead of 4,000 sq ft homes in the same neighborhood. Otherwise if I only look at larger homes that might be a little more stagnant, I could miss the fact that the bottom of the market is increasing much more rapidly than the top end.

4) Declining market: It’s been years since we’ve had a declining market, but this same methodology above can help you measure the market when prices are declining too.

5) Seasons: When looking at older sales let’s remember the seasons in which they sold. Thus last year I might give a 2% adjustment in a neighborhood for a property that sold in June, but I could give a 5% adjustment for something that closed in December because it sold when the market was down further during a dull fall season.

6) Being quick & reconciliation: There’s not just one way to do this, and there aren’t quick answers. We have to dig in. Most of all, we might choose a few different ways to study the market and then reconcile our findings. What I mean is I might do all of the steps above, get slightly different answers for each step, and then piece them all together (reconcile them) when I use a comp in a report and make a specific adjustment to that comp. In other words, if I adjust a comp up by 2% or 4% or whatever the number is, I’m coming to the table with some sort of rationale or support for why that adjustment makes sense.

I hope this was helpful.

MARKET UPDATE VIDEO: Here’s a video to walk through the growing and slowing market in Sacramento. Enjoy if you wish.

Questions: What do you think of the steps above? Anything else you’d add? What do you do?

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