Sacramento Appraisal Blog

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Will appraisers use Zillow purchases as comps?

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Let’s talk about Zillow. I’ve been getting a TON of questions every week about what Zillow is doing and whether appraisers can use their purchases as comps.

YouTube Live TONIGHT (10/19/21): Hey, I’m doing a YouTube Live at 6:30pm PST on Jason Walter’s channel. We’ll talk shop for probably 60-90 minutes.

Big news: First off, yesterday news broke that Zillow would be suspending buying anything else until 2022. Based on articles and a few conversations with locals in the know, it sounds like their rapid pace of buying has become backlogged, so they needed to hit the pause button to catch up. In the Sacramento region they own 372 properties right now and they’ve been on a buying spree over the past few months especially. Look, there could be more to this story, but all we have right now is what Zillow says.

Assumptions: I’ve heard some people think Zillow pulling back must mean the top of the market is here. Or maybe this shows the model isn’t working. Or it’s possible other iBuyers would soon follow in backing off. But here’s the thing. These are assumptions and it sounds like Zillow is going to be buying again in about two months. If this is true, it means these assumptions are misplaced. Of course Zillow is very likely losing money, but that may not be the reason they pulled back.

WILL APPRAISERS USE ZILLOW PURCHASES AS COMPS?

Yes and no. It depends. So many people are talking about what appraisers can and can’t do, but there’s so much misinformation. I hope this helps.

NO:

When Zillow buys properties directly from owners these are very likely NOT going to be used as comps. Frankly, appraisers might not even know about these sales since they don’t show up in the MLS where appraisers typically look for comps. But even if an appraiser knew about a few Zillow purchases, here’s the important part. If an appraiser cannot verify the nature of a sale that Zillow bought directly from an owner, then it’s not good appraisal practice to use the sale as a comp. If an appraiser has no clue about condition, quality of upgrades, or any sales concessions, for instance, using a private “comp” would essentially be a blind comparison. So if someone hands me a private Zillow purchase to consider as a comp, I’m going to say, “Thank you, but I don’t know anything about this transaction. But what I do have is 10-15 MLS sales to consider.”

Technically appraisers CAN use non-MLS sales as “comps” in an appraisal report, but only if the sales can be verified with someone principle to the transaction. In other words, the appraiser needs to be able to understand the nature of the transaction from someone like an agent, attorney, title company, buyer or seller. Yet being that Zillow is seemingly buying in suburban markets where the vast bulk of sales happen on MLS, there isn’t really much of a good reason for appraisers to use these private purchases as comps.

YES:

When Zillow buys on MLS, these sales are something an appraiser can consider just the same as any other comp because the details are transparent and it’s likely easy to talk with someone in the transaction. However, just because a property closes at a certain level doesn’t mean appraisers are going to automatically use the sale without consideration of whether it represents the market or not. In other words, if Zillow paid too much for a property they bought, it doesn’t all of a sudden represent the market or set a new price level for the neighborhood. As an example, a property sold for about $50,000 higher than any other similar sale. This sale was a clear outlier and it closed so high because the buyer likely bid too much out of desperation (Zillow wasn’t the buyer). I still used it as a comp, but I gave it far less weight because it simply sold for too much.

Keep in mind Zillow flips homes and appraisers can use the homes they re-list on MLS also. This is just the same as any other sale and appraisers simply have to weigh each potential comparable.

Is Zillow manipulating the market?

There have been quite a number of accusations about Zillow manipulating the market and I’m not here to defend Zillow, but so far I haven’t seen data to back up the accusations. I’m being careful about flippantly making such a serious accusation, but if anything comes to light I’ll be first to yell from the rooftops.

You may have seen the viral TikTok video below and this guy seems really cool. It’s just having one higher sale doesn’t all of the sudden make the market higher just like one lower sale doesn’t break the market. I get what this guy is saying, but I think we need data to substantiate such a claim.

For what it’s worth, this viral video helped put Zillow under the microscope and that’s a good thing. My observation is tech companies often get a pass from the public, but their activity and motives should absolutely be kept in check.

How many homes do iBuyers own in the region?

In the Sacramento region iBuyers own 747 homes (two weeks ago they owned 690). Zillow owns 372 units, Opendoor owns 350 homes, and Redfin owns 25 units. For reference, two weeks ago Invitation Homes had 77 units (since May) and now they have 91 units.

UPDATE: I should clarify too that my stats for all of these companies are for Sacramento, Placer, Yolo, and El Dorado.

Is Zillow temporarily exiting good news for buyers?

I’ve had a few people ask if Zillow backing off for a couple of months is good for buyers. Well, it’s good in the sense of having one less cash buyer to compete with (for the MLS acquisitions at least). But realistically Zillow’s activity is not a significant chunk of the market, so it’s not like pausing operations is going to change the trajectory of prices or the feel of things in the trenches.

Where does Zillow own homes?

Here is a look at a few neighborhoods. The pins are different colors depending on whether properties are active (green), pending (yellow), purchased and not active yet (red), black (no MLS activity yet), or expired (purple).

Anyway, I hope this was helpful or interesting.

Thanks for being here.

Questions: Anything to add regarding comp selection? What do you think of Zillow exciting the market? Is the iBuyer model a good thing for the public?

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How close is the housing market to normal?

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The housing market is trying to get back to normal, but how close are we? On one hand we’re feeling some seasonal slowing, but it also still feels really competitive. Today let’s talk about what normal looks like. If you’re not local I’d love to hear what you’re seeing in your market. Any thoughts?

Background noise: Last night I did a YouTube Live Q&A to talk about appraisal stuff. If you need some background noise, here’s two hours. Watch below (or here). I love doing stuff like this, so don’t forget to hit me up.

What does normal look like?

Comparing to 2019: The last normal-ish fall season we had was in 2019, so it’s a good frame of reference to consider what fall should maybe look like. Technically I should take the average of five years of fall data to establish normal, but I’m honestly just slammed this week and I can’t pull that off until someone hires me full-time to crunch numbers all day.

How does 2021 compare? In short, the market right now is showing some seasonal slowing, but it’s still far more competitive than it should be for the time of year. Check out some of these stats.

Brand new visual (do you like this one?):

Breaking it down: Today we have more multiple offers, properties are selling in half as much time, and we even have fewer price reductions. Most notably buyers last month paid above the list price whereas two years ago on average they paid about three percent below the list price. This is striking because in 2019 in a normal-ish September buyers on average paid $13,808 below the original list price, but this past month buyers still paid almost $6,000 over asking price. Another way to say this is buyers today paid about $20,000 more than a normal year in 2019 (13,808 + 5,951 = 19,759).

30% more aggressive? If I had to put a number on it I’d say the market is conservatively 30% more aggressive than it was in 2019 (maybe even more as some stats are still about twice as aggressive as they should be). For reference, stats for price reductions especially show this as there are 31% fewer reductions right now compared to two years ago. Check out Altos Research for price reductions.

Anyway, I hope that was helpful.

—–——– BIG MARKET UPDATE FOR THOSE INTERESTED ———––

Skim or digest slowly.

QUICK SUMMARY:

The market is experiencing seasonal slowing and it’s clearly not what it was at the height of spring season. This is important for sellers to understand to price according to today’s trend instead of headlines from the past. With that said, things are still really competitive and mostly all stats are not normal yet (still more aggressive than usual). On one hand buyers have gained power, but it’s still fierce out there. Here’s a good way to put it: “The market is not slow, but it’s slower than it was.”

Some visuals eh…

NOT AS MANY MULTIPLE OFFERS:

For five months in a row in the region we’ve seen multiple offers subside. Last month 56% of sales had more than one offer and that’s one of the most competitive months ever, but there is no mistaking a cooling seasonal trend.

AUGUST TO SEPTEMBER SEES SOFTENING:

For months I’ve been talking about the market starting to slow and we are finally starting to see it in the stats. Not every single stat is dull, so my advice is to look at the bigger picture of all stats together rather than hone in one stat. In short, it’s starting to take longer to sell, we have slightly more inventory in the region, and even prices have softened (part of that has to do with smaller homes selling).

LAST YEAR VS THIS YEAR:

Year over year comparisons get a little weird these days because the market was so atypical last year, but in my opinion this is still worth digesting since we want to be good students of the market. I suggest taking these percentages with a grain of salt and recognize these percentages DO NOT actually mean every house is worth that much more either. Also, remember that we are now comparing a market that is trying to be normal today with a super aggressive fall last year.

IT’S LESS COMPETITIVE:

The market is still ultra-competitive, but this image is crystal clear that the temperature of the market has changed in recent months. This is exactly what we should be seeing at this time of year. Keep in mind we should have closer to half of sales selling at or below the list price, so this market is NOT normal yet.

OTHER VISUALS:

MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.

Thanks for being here.

SHARING POLICY: I welcome you to share some of these images on your social channels or in a newsletter. In case it helps, here are 6 ways to share my content (not copy verbatim). Thanks.

Questions: What are you seeing out there in the market?

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Tech companies & Wall Street targeting residential real estate

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Tech companies and investment funds have their eye on residential housing. I wrote about this a few months ago and wanted to do a follow-up piece. Here are some things on my mind as well as fresh visuals. Any thoughts?

TWO THINGS:

1) iBuyers are on a rampage:

The iBuyer model has been on a buying spree in many parts of the country. They are purchasing to flip and here is a breakdown of their activity in the Sacramento region based on Tax Records (Realist).

  • Opendoor, Zillow, and Redfin own 690 units in the region.
  • Opendoor and Zillow each own about 330 properties.
  • The average price of acquisition was $555,000.
  • The median price of acquisition was $545,000.
  • Besides a few outliers they are NOT targeting the luxury price point.
  • iBuyers represent 6.4% of all listings and pendings right now.
  • The iBuyer model does not represent 93.6% of the active market.
  • Acquisitions are spread throughout with half of purchases below the regional median price and half above.

2) Invitation Homes is back:

I reported a few months ago that Invitation Homes is back and since May they’ve purchased 77 units in the Sacramento region. In 2012 and 2013 they bought tens of thousands of units across the country in many markets. At the time they were backed by Blackstone, but these days they are not affiliated with Blackstone.

What is Invitation Homes buying?

  • They purchased 77 units since May 2021.
  • They’ve targeted homes typically between $450-550K.
  • 74% of their acquisitions have been under $500K.
  • They bought 0.5% of all MLS sales since May (half of one percent).
  • 88% of their purchases had an MLS number, which means the bulk of these sales were publicly listed for sale.
  • Invitation Homes is definitely competing with first-time buyers even though overall the fund doesn’t have a massive footprint in the market.

TAKEAWAYS:

1) Huge rent growth is propelling big funds: Having lofty rent gains in recent years has caught the attention of big investors and is essentially allowing them to play the market these days. It’s wild to think investors can presumably make the numbers work after ten years of price growth.

2) Hype vs Reality: Often the narrative is that investors are dominating the market and buying everything. For instance, there were sensational tales a few months back about Blackrock purchasing way above market value, but I have yet to see any data to back up those claims (I’m open ears if someone has something). Anyway, there is no mistaking growing interest from tech companies and Wall Street within residential real estate and we need to watch what they do. But we also need to keep sensational narratives in check.

3) Profit and Convenience: The iBuyer model is nowhere near a dominant force in the marketplace, but we’ve seen exponential growth over these past three quarters. A dissertation can be written on what these companies are doing, but I want to make a simple point. I often hear about how this model is designed to help make things more efficient for consumers, but let’s not forget these companies are here to infiltrate the existing real estate model to make profit. So in the midst of all the slick advertisements let’s be real about the big focus, which is to make money off consumers.

Thanks for being here.

SHARING POLICY: You can share my stats and visuals above, but please attribute the source. Here are 6 ways to share my content (not copy verbatim).

Questions: Do we want Wall Street and tech companies to own more of the real estate process? Is this a good thing for the public?

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Goodbye single family zoning

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Goodbye single family zoning. If you didn’t know, two weeks ago SB9 was signed into law in California, which now allows property owners to build a duplex on any residential lot or subdivide to build up to four units. This is massive news, so let’s talk about it. I’d love to hear your take in the comments.

Some perspective (not arguing for or against):

We need time: This is a huge change, but will it alter what neighborhoods look like? In short, there are some sensational ideas floating around, but we need time to tell. With that said, it seems so far news sources are talking about only modest change. For instance, First Tuesday quotes a study stating at the very most we could see an impact to 410,000 parcels (roughly 5.4% of parcels).

By the way, here is a CalMatters piece that goes into more depth on some of the details of this bill (or read the bill here).

Minneapolis as a case study: In 2019 Minneapolis legalized triplexes to be built on single family lots and Axios points out there was little change. In fact, there were only 70 units added in 2020 (20 brand new units and 50 single family units converted to multi-units). Oregon has also banned single family zoning in most cities, so let’s keep an eye on Oregon too.

Scared of renters: I’ve heard some fear about more renters moving into neighborhoods, but did you know roughly 45% of residents in California are renters? Let’s be cautious about vilifying half the population.

Expensive to pull off: Just because zoning has been modified doesn’t mean we will see a big change in the market. It is still going to be really expensive to build, there is a labor shortage, and land in California is pricey.

Three units were already allowed: Under existing California law home owners have already been allowed to build two other units on site. If you didn’t know, you can build an ADU (accessory dwelling unit) and JADU (junior accessory dwelling unit). This is good to keep in mind as we talk about the end of single family zoning and the idea that new units are now possible because of SB9. All I’m saying is technically more units have already been possible.

Highest and best use: As far as highest and best use in appraisal reports, that’s something appraisers will need to think about as they craft highest and best use statements. Let’s remember highest and best use isn’t just about what is legally possible, but also what is financially feasible and even physically possible. In short, it’s not going to be financially realistic to see multi-units built on every single family lot, so the highest and best use will continue to be the existence of single family homes. Of course we’re going to have to see if SB9 affects some neighborhoods or price ranges more than others. Moreover, it could be difficult to fit a multi-unit property on a postage stamp lot, so it really might not even be physically possible in some cases.

We need more inventory (but not like this): For years we’ve been saying we need more housing inventory, but when SB9 became law so many have said, “It is true we need inventory, but not inventory like this.” I completely get it and I’m not here to argue. Ultimately this new law is likely to expose NIMBYism (not in my backyard) and YIMBYism (yes in my backyard).

Other: What else? What’s on your mind? What did I miss? What are you concerned or excited about?

In closing, this change in zoning is certainly unconventional and even scary to many, but the impact is still to be determined. My advice? Let’s be objective about the issues, listen, embrace facts, and avoid sensationalism.

I hope this was helpful. Thanks for being here.

Questions: What do you think about the end of single family zoning? Is this good or bad? What opportunities and threats will exist as a result of this?

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