Why comparing the right numbers matters so much in real estate
You can make numbers say whatever you want in real estate. Sometimes this happens on purpose, but other times it’s an accident. That’s why it’s so important to know how to make the right comparisons. Below I will show you an example of how you can look at the numbers and end up saying two completely different things about the market. Both might be technically true, yet one of the statements really doesn’t reflect the real trend. In an era of big data in real estate, knowing how to communicate these things to clients is key. Enjoy.
THE WRONG COMPARISON: (Volume is down by 30%)
When we compare January with December, it’s easy to get an inaccurate picture of the market (but it happens all the time in media outlets). In the case above, we see a 30% decline, and this sounds very alarming. Yet volume from December to January almost always decreases by 20-25% easily in any given year in Sacramento, so 30% in not something to freak out about.
Truth: Comparing the previous month to the current month can sometimes give us the wrong picture about the market – especially in the midst of a strong seasonal trend. Volume is ALWAYS lower in January (see this quick graph as proof).
THE RIGHT COMPARISON: (Volume is down by 4.5%)
When we compare January 2015 with January 2014, we see sales volume was down by only 4.5% this year. That’s a far cry from sounding the alarm that “VOLUME IS DOWN BY 30%”. In this case the most accurate thing we can say about the market is that volume was 4.5% lower this January.
Truth: Comparing the current month to the same month last year tends to give us important insight because we are using the same context for comparison. I’m not saying to not compare back-to-back months, but only to get in the habit of looking at the same month last year too. This is especially important when dealing with January and February data since they are typically slower months in terms of closed escrows. Remember too that last month’s sales tell us what the market used to be like when these properties went into contract 30-60+ days ago, but current listings and pendings tell us about the market right now.
Questions: Any thoughts or insight? I’d love to hear your take.
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5 things to remember when using price per sq ft in real estate
Using price per sq ft can be very dangerous. I know that sounds odd because price per sq ft is about as common as anything in real estate. Home owners ask, “How much is the price per sq ft in the neighborhood?”, and real estate agents might say, “I priced this property based on the price per sq ft in the area.” But having a correct understanding about the way price per sq ft works can revolutionize the way we see the market and value properties. Let’s unpack five principles below, and I’d love to hear your take in the comments.
DOWNLOAD a more detailed version of this post to pass along to your office.
5 principles to remember when using price per sq ft in real estate:
1) There is a price per sq ft spectrum in a neighborhood: There is never just one price per sq ft figure that applies to every property in a neighborhood. For instance, a neighborhood might easily see a price per sq ft range from $100 to $250 when looking at all sales.
2) Similar houses tend to have a similar price per sq ft: When homes are similar in size, location, bed/bath count, etc…, they tend to have a similar price per sq ft. That’s obvious, but the contrasting factor is that non-similar homes might have a VERY different price per sq ft that shouldn’t be used to value your home.
3) Property characteristics can quickly change the price per sq ft: When there are differences in condition, location, lot size, quality of upgrades, bed/bath count, size, etc… the price per sq ft can change dramatically. We might see a small remodeled home selling at $250 per sq ft, a model match fixer selling at $175 per sq ft, a short sale model selling at $185 per sq ft, and a home with an adverse location selling at $215 per sq ft. Thus even for one model there could be a price per sq ft range from $175 to $250.
4) Smaller homes tend to have a higher price per sq ft: It costs more to build smaller homes, so smaller homes tend to have a higher price per sq ft than larger homes. This is why it’s dangerous to use a price per sq ft figure from a smaller sale to value a larger home. A smaller home might sell at $250 per sq ft, but a larger home might be closer $150 per sq ft. Here is a quick video below (or here):
5) Price per sq ft provides a valuable context: When you can talk through price per sq ft figures in a neighborhood, and explain the above points, you are an incredible resource. Appraisers, pay close attention to the price per sq ft range in a neighborhood. Some appraisers treat price per sq ft as a meaningless metric, but it’s actually valuable. If your value does not fall within the range (especially the competitive price per sq ft range), it’s important to be able to explain that.
CONCLUSION: Be careful about using price per sq ft to price a property because sometimes it’s like putting the cart before the horse. I recommend starting a valuation with an “apples to apples” approach where you first and foremost try to find other similar sales and listings in the neighborhood, and then subtract and add value based on any differences with your property. After you have a grasp of similar sales, research price per sq ft figures for the entire neighborhood as well as competitive properties. Ask yourself if your value makes sense in light of price per sq ft figures.
Questions: Any thoughts or insight? I’d love to hear your take.
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What do appraisers look for during an FHA inspection? (free download)
What do appraisers look for when doing an FHA appraisal? These days it’s important to be in tune with FHA appraisal standards so your home can be FHA-ready or so you can know what to expect if accepting an FHA offer. Let’s talk through some of the most common FHA issues below. You can also download an FHA checklist to study or share with clients. This checklist has all the information from this post as well as one additional page.
NOTE: This blog post was written in 2015, and there may be some slight variations today (2023). For instance, appliances are basically only required if they contribute to value.
DOWNLOAD an FHA checklist HERE (pdf)
The Main Idea with FHA: FHA is primarily concerned that everything in the house functions properly and that there are no health and safety issues. The basic concept of meeting FHA minimum requirements is that everything must work as it was designed to work. For example, a window that is supposed to open must open, and a built-in appliance should do what that appliance is supposed to do. If you have a sliding glass door with a lock on the handle, the lock should work.
What do FHA appraisers look for?
- Utilities should be turned on so the appraiser can test systems and appliances.
- Appliances must function properly.
There should be proper drainage around the perimeter of the house.- The heating unit must be in working order (and AC if applicable).
- Water pressure must be adequate for the house. Appraisers flush toilets, turn on all faucets and ensure that both hot and cold water are working.
- The water heater must be in working order and strapped according to local code.
- Attics and crawlspaces are to be viewed at minimum from the shoulder up by the appraiser. When viewing the attic, appraisers make sure there are vents, no damage, no exposed or frayed wires, and that sunlight is not beaming through. When inspecting the crawl space, appraisers make sure there are no signs of standing water or any other foundation support issues. Excessive debris in the attic or crawl space should be removed.
- Paint must not be chipping, peeling, or flaking on homes built before 1978 because of the danger of lead-based paint (lead was used in paint prior to 1978). However, there must be no defective paint or bare wood for properties built after 1978 because defective paint impacts the economic longevity of the property. Defective paint should be scraped and re-painted (with no wood chips on the soil).
- Electrical outlets must work (outlets should have a cover plate also).
- Toilets must flush and be mounted.
- Any active termite infestation needs to be cured.
- Minor cosmetic issues such as stained carpet or a need for interior paint are okay. The house does not have to be perfect, but if there are issues that impact health and safety or the long-term economic viability of the property, then those issues must be cured.
- Windows must open and close and they cannot be broken. Minor cracks can be okay so long as there is not an issue with safety, soundness and security.
- No dangling wires from missing fixtures or anywhere else.
- FHA doesn’t require air conditioning, but if present the system should work as intended.
- Smoke detectors & carbon monoxide detectors are required insofar as required by local code
- The firewall from the garage to the house should be intact. Missing sheetrock, a pet door installed in the door, a lack of self-closing hinges, or a hollow door could pose a safety issue.
- A roof should not be leaking and needs to have at least two years of economic life left.
- A house will be rejected if the site is subject to hazards, environmental contaminants, noxious odors, or excessive noises to the point of endangering the physical improvements or affecting the livability of the property (this isn’t an issue for the vast majority of properties).
- A trip hazard is a subjective call to make by the appraiser and not necessarily an automatic repair, but if there is a legitimate safety issue it should be called out by the appraiser.
- There are things any appraiser will call out in an FHA appraisal, but there are times when appraisers have to consider how the spirit of FHA might apply in a situation. FHA is black and white on many issues, but other times appraisers simply need to use good judgment.
Reminder About Difference in Locations: Appraisers in different parts of the country may require some items in their appraisals that might not be required elsewhere. For instance, carbon monoxide detectors are required in most residential homes in California, but this is not the case in many other states. An FHA appraiser in a different state might not even mention a CO detector, but in Sacramento it is commonplace.
DOWNLOAD an FHA checklist HERE (pdf)
I hope this was helpful. If you’re looking for more information on FHA appraisal standards, you can check out other FHA appraisal articles I’ve written.
Questions: Anything else you’d add to the list? Any FHA questions? Appraisers, if you have any stories to share about properties that were rejected, speak on.
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The market ripened early this year. Buyers have simply been ready before sellers. On one hand listings and sales have been at fairly normal levels for the first two months of the year, so we can say the market is normal in that regard. But buyer demand really took off last month as pendings in the regional market were up by almost 30% compared to last February. This is the part that is not normal, and why we can say the Spring market ripened early.
One Paragraph to Explain the Market: Well-priced listings are going quickly and experiencing multiple offers, but otherwise properties are sitting on the market if they are not priced correctly. Buyers have been anxious to get into contract, but at the same time they seem to be showing discretion by not readily pulling the trigger on homes with adverse locations or issues. This has led to a sense of many current listings feeling like leftovers since they’ve been well vetted like thrift store clothing. The good news is we are reaching the time of year where more listings should be hitting the market to help alleviate the pressure of a lack of good inventory. Lastly, it took a few less days to sell last month, inventory decreased, and the sales to original list price ratio increased (all normal in Spring).
NOTE: I am posting once a week now, and this means my big monthly post will have less text, but a few more graphs (Placer, Sacramento County, & Regional Market).
Two ways to read this post:
DOWNLOAD 45+ graphs HERE for free (zip file): Please download these 45+ graphs here as a zip file (or send me an email). Use them for study, for your newsletter, or even some on your blog. See my sharing policy for 5 ways to share.
SACRAMENTO COUNTY:
PLACER COUNTY:
SACRAMENTO REGION (Sac, Placer, Yolo, El Dorado):
Questions: What is driving buyers to get into contract? Is it low rates? Is it a sense of needing to get in a home before values rise too quickly? What do you think?
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