Sacramento Appraisal Blog

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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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Unrealistic sellers & my favorite housing analogy

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I have three things on my mind today. I’d love to share a helpful analogy for today’s housing market, let’s talk about unrealistic seller expectations, and then unpack some fresh stats.

Real Estate Week: Next week I’ll be taking part in a free video interview with The Sacramento Bee to talk about the insanity of today’s market. I’ll be talking shop on the first day on August 23 at 12pm. Sign up here.

THREE THINGS:

1) Speeding and slowing car analogy: The housing market is like a car speeding on the freeway that recently let up on the gas. It’s moving really fast, but it’s also slowing. Both things are true at the same time. I find some people fixate only on slowing or only on moving fast. My advice? Pay attention to both.

I like this word picture because it recognizes the speed of the market and recent seasonal cooling. In my mind fixating on only one of these things is a mistake that can cause misinterpretation of trends. Of course a narrow focus for some might also be due to an agenda.

2) Unrealistic seller expectations: Sellers are by far still in the driver’s seat in today’s market, but it’s a good time to weigh expectations as the temperature of the market has been changing. I’ve been hearing a few disappointed sellers say stuff like this: “We only got two offers and only went $12,000 over asking.” I get it because the expectation was to have thirteen offers and go 15% over the list price. But that’s just not always going to happen. My advice? Price reasonably according to similar listings that are getting into contract and adjust your expectations as the market temperature changes.  

3) Fresh neighborhood stats: This image shows how much buyers paid above the list price in various areas for sales between July and mid-August. In short, as I keep saying, the market is slowing, but that does NOT mean it’s slow. Those are two different things. Keep in mind these are averages, so they don’t perfectly represent each individual escrow. In other words, some properties sold for way more and some for way less.

NOTE: One thing to remember is these stats are based on sales, which tell us more about the past when these properties got into contract in June most likely. The current market is best seen in the listings and pendings.

Thanks for being here.

SHARING POLICY: I welcome you to share some of the images I post 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 do you think of the analogy? What are you hearing from sellers and buyers? I’d love to hear your take.

If you liked this post, subscribe by email (or RSS). Thanks for being here.

10 ways the housing market is slowing

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The housing market has turned the corner and we are seeing definitive slowing. Here are ten ways I’m seeing slowing in the market. If you’re not local, what are you seeing in your area?

NOT DULL: The market is slowing, but it’s not dull. It is still really competitive.

DOOM AND GLOOM: The doom and gloom crowd loves to say the market is starting to crash because of the slowness we’re seeing, but stats right now don’t support a crash and burn narrative. In my mind it’s premature to say the market has shifted directions. Of course if the stats go that way I’ll change my narrative. For now it’s most reasonable to say we are seeing what looks to be a normal seasonal slowing. Stay tuned.

Glowing & slowing market update:

I’m doing a big market update for SAFE Credit Union next week. There is no cost. It’s totally free, but you have to register. It’ll be at 9am on Zoom on Wednesday August 18, 2021. It’ll be about an hour and packed with lots of stats and perspective. REGISTER HERE.

10 WAYS THE MARKET IS SLOWING

1) Prices are starting to dip: Last month we finally saw most price metrics take a dip from the previous month. The median price usually peaks around July, so this is what we would expect to see in a normal year.

2) We’re seeing fewer sales happen: Around this time of year we start to see sales volume slump. Here is one of my favorite images to help explain what I mean. The green line represents average monthly sales volume and we typically see the number of sales increase from January to June before dipping for the rest of the year. This is normal. The black line represents 2020 and it was such a freakishly abnormal year. Check out the red line though (2021). Volume peaked in June and it started to soften in July, which puts us right on track with normal historical averages. By the way, we had a thirteen month streak where monthly volume was up over the previous year, but that streak has been snapped. Last year we saw highly abnormal demand in July onward, which is  why this year volume is actually down (even though it was a normal month in terms of numbers).

3) It’s taking longer to sell: Last month it took an extra day to sell in Sacramento County and two extra days in the region. Since August pendings in the region have taken sixteen days to get into contract, which is up two days from July sales. This is still lightning fast, but it’s clearly slower than it was a few months ago.

4) More homes are selling below the list price: There are slightly more homes selling at or below the list price right now. For two months in a row we’ve seen this metric increase and it’s a sign of a market that is slowing. Keep in mind in a normal market we should be seeing closer to half of all homes sell at or below the list price, so this market is still on steroids.

5) There are fewer offers above the list price: Here’s a visual to show what buyers are paying compared to the asking price. Most categories slowed slightly last month, but not every category. The most aggressive range in the market is 1-5%. Last month properties on average sold 3.7% above the original list price, which is still one of the highest percentages ever for the region, but it’s down 4.1% from the previous month. Keep in mind stats show we do not have an overpriced market, but sellers would be wise to note the clear change in temperature lately and price according to similar properties that are getting into contract instead of sensational headlines from a few months ago.

6) Housing supply has increased slightly: We are seeing an uptick in monthly housing supply. We are still at an absurdly low level with basically less than a one-month supply of homes for sale in most surrounding counties. In the region we have 0.92 months of supply, which means we basically have a month worth of listings before they run out. This number should be easily twice this amount.

7) More listings are hitting the market: We are definitely seeing more listings hit the market, but we are nowhere close to normal levels yet. About six months ago we had 1,200 or so listings on any given day and now we have over 2,000 listings. Granted, we should have about twice as many listings, but this is a step in the right direction. We typically start to see fewer new listings hit the market around this time of year, but one thing to watch is whether sellers pull back from listing their homes in light of the Delta variant. To be determined.

8) Smaller-sized homes are selling: If you didn’t know, when the spring market fades we typically start to see smaller homes sell, and that is exactly what has been happening for two months. The dark blue line represents the average home size in Sacramento and it goes up and down like clockwork each year. Do you see how size typically hits a seasonal peak during May or June (besides last year)? Anyway, the average size slumped in July quite a bit. This is actually something to watch because it can affect price stats. What I mean is whenever we interpret price stats we have to be in tune with what is actually selling. 

9) Fewer multiple offers: For three months in a row we’ve seen fewer multiple offers in the Sacramento region. Keep in mind the percentage of offers is still about as high as it’s ever been.

10) Word on the street: I’m hearing from lots of real estate agents, loan officers, and appraisers that they’ve seen a slightly slower vibe. I haven’t heard many people call this market dull, but there is lots of chatter about slowing. At the same time I’m hearing things like, “My listing had 11 offers” or “We got outbid again,” which speaks to how competitive it is right now. Buyers, be hopeful that we’re seeing some seasonal slowing, but be careful not to think you’re poised for a big price discount. We’re just not in that sort of market.

Now more stats if that’s your thing.

——————– BIG MARKET UPDATE ——————–

JUNE TO JULY:

This is a helpful view to understand the market has been slowing. Take a look at how most metrics softened from June to July.

LAST YEAR VS THIS YEAR:

Last year the market was dull at the beginning of the pandemic, so this year versus last year gets a little weird for a comparison. My advice? Take these percentages with a grain of salt because they’re inflated due to sagging numbers last year. And remember these percentages DO NOT actually mean every house is worth that much more either.

MORE PRICE VISUALS:

A few more visuals to show the insanity of price growth and softening lately. Look how far disconnected 2021 prices are from previous years.

Anyway, this is starting to get way too long.

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? What are you hearing buyers and sellers say? I’d love to hear your take.

If you liked this post, subscribe by email (or RSS). Thanks for being here.

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, 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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