Sacramento Appraisal Blog

Market trends and real estate appraisals for divorce, estate settlement, loans, property tax appeal, pre-listing and more. We cover Sacramento, Placer and Yolo County. We're professional, courteous and timely.

Comparing 10 appraisals with Zillow Values

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I had a conversation recently with a home owner about the online valuation site Zillow, and it went like this:

humans vs machinesOwner: Your value was right on.
Me: Wonderful. That’s great to hear.
Owner: It was right in line with Zillow.
Me: Oh, okay.

This conversation made me smile since like many consumers, the property owner thinks of Zillow as the standard for accuracy. After all, Zillow is a very well-known brand that is becoming a household name. Heck, even President Obama used Zillow to moderate a conversation on housing a few months ago. We still need to ask the question though, how reliable is Zillow? Let’s take a look at 10 recent actual appraisals compared with “Zestimates”. I would be curious to hear your take too – especially if you’ve had a recent appraisal. How much of a value difference was there between the “human” (appraiser) and “machine” (Zillow)?

  1. Tahoe Park Area House:  Appraisal: $133,000;  Zillow: $114,173 (-14%)
  2. Del Paso Manor House: Appraisal: $332,000; Zillow: $305,000 (-8.1%)
  3. Midtown Fixer: Appraisal: $130,000; Zillow: $203,000 (+56%)
  4. Citrus Heights House: Appraisal: $278,000; Zillow: $240,000 (-13.7 %)
  5. Citrus Heights House: Appraisal: $138,000; Zillow: $194,000 (+40.6%)
  6. College Greens House: Appraisal: $259,000; Zillow: $282,000 (+8.9%)
  7. Fair Oaks House: Appraisal: $630,000; Zillow: $612,000 (-2.8%)
  8. Galt House: Appraisal: $191,000; Zillow: $188,000 (+1.5%)
  9. Mather House: Appraisal: $255,000; Zillow: $238,000 (-6.7%)
  10. Capital Village House: Appraisal: $233,000; Zillow: $191,000 (-18%)

appraiser vs zillow

Appraisals vs. Zestimates: First off, I am not anti-Zillow since I believe there is a place for Zillow in today’s world. I’m actually a fan of their graphs, rental estimates, neighborhood information and the power of their brand. Ultimately I tend to give little weight to “Zestimates” for the following four reasons:

  1. Condition: Zillow has no idea about condition or upgrades. This often makes an enormous difference in value (obviously).
  2. Knowing the Niche: It is very challenging for Zillow to capture the idiosyncracies of niche areas that fetch higher or lower prices for whatever reason.
  3. Margin of Error: Zillow posts their margin of error, and it shows they are off by quite a bit (click the link). Of course to be fair, appraisers can be off too.
  4. Distressed Sales: I’ve noticed at times Zillow struggles to see beyond distressed sales. For instance, the vast majority of sales in Capital Village (#10) have been short sales recently that sold for too little, and Zillow was unable to interpret true market value around $220,000 to 230,000 compared to all the distressed data points around $190,000.

Question: Any thoughts, insight or stories to share? I’d love to hear your take.

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A snapshot of Sacramento’s real estate market

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I could tell you what’s been happening in Sacramento’s real estate market, but why not show you instead? Of course there are a handful of things to look at, which is why there are two options for reading this post:

  1. Briefly scan the graphs below in probably 30 seconds.
  2. Take a few minutes to digest the graphs and commentary.

Enjoy and let me know what you think.

Monthly Median Sales Price in Sacramento County - by Sacramento Appraisal Blog - 530 pixels

The median sales price is currently at $252,000 in Sacramento County. When we look at the average price per square foot though, the market has been very flat for four months as it has been hovering between 162 to 163. I’ve been seeing lots of current listings priced at levels more consistent with July or so, which causes me to not put too much weight in a slight increase in median price last month.

Sacramento real estate trends 2 - by sacramento appraisal blog

Here is a closer look at median sales price, inventory and interest rates. As you can see, prices have begun to stabilize as inventory and interest rates have increased. But it’s also Fall, so it’s completely normal to see a slowdown since that is usually what happens. Real Estate Broker Joel Wright did a study recently of the past 25+ years and found there is a dip 75% of the time during this season.

sacramento county inventory

This is a graph from Trendgraphix and I like the way it shows the story of inventory. When zooming in on roughly only the past year, it’s easy to see that inventory has more than doubled in recent months (whereas my graph above looks like there has only been a slight uptick lately). What does it mean that there are 2.3 months of housing supply? This means if zero new listings hit the market it would take 2.3 months for all these properties to sell. Remember, inventory is easy to find out. It’s just a matter of dividing the number of current listings by the number of sales over the past month. I actually have a brief YouTube tutorial here (or below) in case it’s of interest. It’s good to know how to make these calculations so you are not waiting around on Trendgraphix or other sources to tell you what you need to know.

absorption rate in Sacramento county

The absorption rate is basically how fast current listings are being absorbed (sold or pended) each month. It’s an inverse of the months of inventory really, so this rate declines as inventory increases. Right now the absorption rate is 44.3%, which means that 44.3% of all listings are being absorbed on a monthly basis. All you need to do to figure out the monthly absorption rate is divide the number of sales over the past month by the number of current listings.

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Cash sales in Sacramento County declined by over 12.5% since early 2013, and cash sales under $200,000 are currently at 35.6% of the market (only for the first 40 days of Q4 though) compared to 50% the previous in Q2 2013.

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I’ve mentioned this several times lately. Cash investors have been exiting the market, which has given opportunity for FHA buyers and conventional buyers to gain a greater hold on the market. This is good news for neighborhoods to get more owner occupants (assuming of course the owners take care of their properties).

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It’s easy to vilify cash investors since many first-time buyers were beat out of the market from big investment funds flexing million dollar muscles, but it’s important to remember a few things. First, many investors entered the market when it bottomed out in early 2012. There is nothing wrong with being savvy and coming in at the right time. Don’t you wish you did that if you had the means? Second, a rapid increase of cash purchases was one of the reasons why we saw exponential appreciation in value over the past year. This is good and bad depending on how you look at it, but many home owners who needed to sell or refinance should probably be thanking investors (as well as writing a letter to The Fed for keeping rates artificially low). Lastly, in some sense I think investors have really helped revive the market over the past few years with so many flips. It’s nice to have distressed inventory purchased, rehabbed and then sold because that improves our housing stock. Granted, there are certainly drawbacks to having too many investors in the market, and I don’t think anybody is weeping since Blackstone has been pulling back on their purchasing strategy lately. All I’m saying is there have been some positives too.

foreclosures and short sales in sacramento county - by real estate appraiser blog

We have pretty much bottomed out when it comes to foreclosures. Short sales have seen a rapid decrease also. The market used to be utterly driven by distressed sales, but that’s no longer the case. Yes, distressed sales do tend to sell at lower levels still in many cases, but they are not driving the rest of the market right now. When it comes to foreclosures, there is very little room to go down. In fact, I’ve been seeing slightly more REO listings lately, which probably explains the very slight uptick in bank-owned sales over the past month. But ultimately we’ll see what the stats say after a couple more months (keep in mind banks don’t usually foreclose around Christmas too, which could halt some of the data).

Unemployment in Sacramento County through August 2013

Unemployment in Sacramento County has been trending downward for a few years, but let’s be honest, there are still far too many people looking for jobs. The unemployment rate for September 2013 was not announced on time due to employees at EDD being furloughed in light of the government shutdown (sorry to bring that up). We should see new stats in about two weeks.

Share the Graphs: As always, you can use these images unaltered in your newsletter, on social media sites or blog posts (just link back). See my sharing policy for more details.

Question: Any thoughts, insight or stories to share? I’d love to hear your take.

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Why an “arm’s-length” sale matters in real estate

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I knew a guy who was once given an expensive sports car. I was shocked when he told me someone came up to him and handed him keys to a Porsche. Nice stranger, right? A couple of news outlets even covered the story about this stranger’s generosity. Yet here’s the deal. The sports car owner was on the cusp of divorce and his soon-to-be ex would’ve potentially gotten the car anyway, so this was really more about dumping an asset instead of random kindness.

Image-by-Sacramento-Appraisal-Blog-two-five-dollar-bills-in-hand1

Now with that story fresh in mind, let’s consider the concept of an arm’s-length transaction. There wasn’t a buyer in this situation of course, but still there is something important here to note with the concept of “giving away” a property – or in other words selling at a price that really doesn’t reflect the market.

What is an “arm’s-length” sale? “It is a transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm’s-length transaction is to ensure that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party” (Ivestopedia). The classic example of a non-arm’s-length transaction is a parent selling to a child. Instead of the seller acting in his best interest with the highest price, the parent offers the child a discount, which means it is a non-arm’s-length transaction.

Why does it matter whether it is an arm’s-length sale or not?

Chris Opher Loan OfficerChris Opfer of Mason-McDuffie Mortgage explains. Arm’s-length transactions are sometimes confusing to understand, and in many cases can cause big problems for loan officers. The whole idea is to make sure that none of the parties involved knew each other prior to the purchase contract being ratified. The thinking is that each party will fight for the best deal possible for themselves. If any of the parties did know each other, then that would be considered a non-arm’s length transaction and can cause issues when it comes to securing a loan. Loan fraud is always on the top of our minds, and it’s important to protect the buyer from being taken advantage of and to keep the property values consistent with the market and not too low or too high. This is exactly why we are never permitted to do a loan on a property for a short sale when a relative is buying from another relative. Non-Arms-Length deals are definitely possible though as I have done several recently. For example, a parent or child may have purchased a house for a family member who lost their home to foreclosure. Now that the family member can qualify for a loan again after three or four years, the displaced person can buy the house from the relative that bought it for them in the first place. Each transaction is different and should be looked at individually and given much thought before loan application is submitted.

Case-in-Point: FHA allows a family member to purchase another family member’s home as a principal residence if the property is the seller’s investment property. The max LTV is 85% unless the family member has been a tenant in the property for at least 6 months, and then it would be the normal 3.5%. Don’t forget that you have to prove that you were really paying the rent. This is just one example. There is not enough time to go through all of the possible scenarios.

arms-length-sale definition by sacramento real estate appraiser blog

One last “short” example: Lastly, we all know short sales tend to sell at a discount. However, there are some out there that are definitely not arm’s-length sales because they are seemingly being priced strategically low for the sake of a future flip. The game plan goes like this: Agent 1 “lists” the property at a ridiculously low price. The listing is likely only a technicality to show the bank the property was actually on MLS. Then Agent 2 shows up as the Buyer’s Agent on the deal. The property goes pending after zero days of market exposure on MLS. After escrow closes, the property is spruced up moderately, and either Agent 1 or Agent 2 lists the property again. Now I’m not saying this is fraud because it’s not my place to make that call. All I’m saying is this is not an arm’s-length transaction since the buyer and seller are not trying to get the best deal possible for their side, but are instead focused on the future flip transaction.

Question: Any thoughts, insight or stories to share? I’d love to hear your take.

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There is more than one way to skin an appraisal

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There is more than one way to skin a cat, right? I’m not sure who came up with that saying, and I know it’s graphic, but the point is there are often many paths to finding a solution to a problem. The same is true with appraisals. If you give me a minute, I’d like to share a few of the different ways to appraise a property. This might help you with a situation you’re dealing with too. By the way, I do have an orange tabby cat, and his name is Rambo.

new construction appraisal - using hypothetical condition - by sacramento appraisal blog

Here are a few options appraisers have available. Some of these will relate well to loan appraisals and others might be more geared toward private appraisals.

AS-IS: This is probably the most common way to appraise a property – just as it is. The appraiser will consider whatever is there and the value will reflect the property in “as is” condition. There will be no repairs made at all.

SUBJECT TO REPAIRS: A property can also be appraised as if repairs were already done. Take the photo below as an example. During the inspection I noted obvious roof damage (there was a leak) and the AC unit was missing. Upon calling my lender client after the inspection, they instructed me to appraise the property “subject to repairs” being made. This means I gave a value to the property as if the roof damage and AC unit were already fixed – even though they were not. Then when the repairs were actually made, my client had me go back out to verify they were completed. In cases like this a lender is probably going to want to see the repairs made before the loan can close.

Before-and-After-Repairs-for-Appraisal

EXTRAORDINARY ASSUMPTION:  This is when an appraiser assumes something to be true about the property for the sake of analysis even though the appraiser does not know for sure that it is true. For instance, if an appraiser is not allowed to inspect a couple bedrooms in a house, the appraiser can make what’s called an extraordinary assumption. This means the appraiser can assume the rooms are in average condition despite not seeing the rooms (sometimes “locked” rooms are being used to grow pot). The appraiser has to believe the rooms are actually in okay shape, and the client should be on the same page for the appraiser to use such an assumption too. An appraiser really does the same thing with a “drive-by” appraisal because the appraiser has not seen the inside of the house, but is assuming it is in decent shape based on partial information from Tax Records, old MLS listings, an inspection from the street or other sources. Keep in mind many times a lender will not be okay with an appraiser using an extraordinary assumption, which means they want the appraiser to see every room. But in the case of private appraisals for Date of Death, divorce or bankruptcy, an extraordinary assumption is more commonplace.

Junologo

RETROSPECTIVE VALUE: This type of value analyzes a date in the past despite inspecting the property today. This is common for IRS appraisals where the appraiser gives a value based on the date when the property owner passed away. It’s also common with divorce appraisals if the appraiser is rendering a value based on the date when papers were filed. For example, I was hired this year to give an owner a value for a date in 1996 for tax purposes. Instead of using time travel to get back to ’96 (when I used to use Juno for email), I simply inspected the property after I was hired, and then used very old data to come up with a value based on what the market was doing in 1996.

roof-with-blue-tarp-photo-by-sacramento-appraiser

HYPOTHETICAL CONDITION:  This is when an appraiser considers something as fact for the sake of analysis even though it is not true. An appraiser does this regularly for a new construction appraisal like in the first photo above. Despite the house not being there yet, the appraiser can observe a builder’s plans and appraise a 3000 sq ft house even though it does not exist. Another example would be a client asking an appraiser to appraise a house without a roof as if it had a roof. Maybe there is some sort of insurance claim, lawsuit or repair loan going on. In a case like this the appraiser would simply use a hypothetical condition, meaning the appraiser would appraise the house as if it already had a roof even though it does not. Whenever appraisers use a hypothetical condition, it should be okay with the client in the first place and then made VERY clear in the report so the client and any readers knows what the appraiser has done.

Question: Any questions, stories or scenarios to share? Which methodologies have you encountered? Comment below.

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