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Adding too many ADUs gets awkward

April 4, 2024 By Ryan Lundquist 24 Comments

It’s nice to see so many accessory dwelling units lately, but is there such a thing as too many? Well, maybe according to Fannie Mae. Let’s talk about this.

UPCOMING SPEAKING GIGS:
4/11/24 Lindsay Carlisle Event (private)
4/25/24 HomeSmart iCare Realty (details TBA)
4/26/24 Prime Real Estate (private)
5/9/24 Empire Home Loans (details TBA)
5/15/24 Investor Meetup (details TBA)
6/6/24 Golden 1 Credit Union (details TBA)
6/11/24 Elk Grove Regional MLS Meeting 8:30am
6/13/24 Sacramento Realtist Association (details TBA)

FANNIE MAE GUIDELINES:

Fannie Mae allows only one ADU on a parcel for a one-unit dwelling, but there are zero ADUs allowed on a parcel of a 2-4 unit dwelling. In other words, if you have a duplex, triplex, or fourplex, Fannie Mae is not cool with an extra ADU. Of course, this guideline could change, but here’s some language straight from Fannie Mae as of April 2024:

FREDDIE MAC DIFFERS THOUGH:

It looks like Freddie Mac will purchase mortgages for a 1, 2, or 3-unit property with an ADU. It’s interesting to see that they won’t do this for a 4-unit property. Remember, a residential property is up to 4 units, so it gets a bit interesting when there are 4 units and an accessory unit. But Freddie Mac is also clear that it’s NOT okay to have two ADUs on site, and the ADU needs to comply with zoning and land use regulations too.

Straight from Freddie Mac’s website as of April 2024:

GIVING GOOD ADVICE:

Why does this matter? It’s important to know the rules so we can make informed decisions and give advice. So, if an investor asks, “Should I add two extra accessory dwellings on my duplex parcel?,” let’s talk about potential pluses and minuses. I think a knee-jerk respond here would be, “Bro, extra units are awesome. Do it.” But there’s more to consider in light of future financing. My advice? Know enough about loans to have conversations like this, but defer to a loan officer to speak definitively about loans.

AN INVESTOR IS HESITANT TO BUILD:

An investor recently asked me about Fannie Mae guidelines for ADUs, and while he is legally allowed to build two ADUs at his local duplex, he is hesitant to do so since it could damage future financing options due to Fannie Mae not allowing this. The reality is so many investors pull money out of their properties to continue to invest, but in this case adding two extra income-producing units could ironically tie up his money. Even Freddie Mac does not allow two ADUs (though Freddie Mac does allow one ADU for a duplex or triplex).

POLICY MATTERS:

People often say real estate is all about supply and demand. Okay, that’s true, but the older I get, the more I realize how much policy shapes the housing market more than anything. Things like zoning, interest rates, and available financing make all the difference in the marketplace. In the case of ADUs, Fannie Mae policy in early 2024 could stifle some accessory dwellings from being built at 2-4 unit properties. Is that good or bad? You decide.

COMPS GET TRICKY:

Imagine a duplex with two accessory dwelling units that were legally built with permits. What would you do for comps? Do you think you could find another duplex with two ADUs as a comp? It’s easy to use a fourplex, but is that the same thing in the eyes of the market, city, and lenders?

EXTRA UNITS AREN’T WORTH NOTHING:

It doesn’t mean there is no value just because Fannie Mae does not allow an ADU on a 2-4 unit parcel. The truth is an investor is going to pay for something that was legally built, conforms to zoning, and produces income. Yet, I could see some investors being hesitant to buy a property that might not qualify for financing in the future. So, do these units take a hit to value because of this? I guess that’s where we have to look to the market to really know. That is, if we’re lucky enough to find comps.

TATTOOS & CHANGE:

Lenders are starting to allow some income from ADUs as qualifying income, and I have to think guidelines will emerge to address ADUs at 2-4 units also since we’re going to be seeing more of these situations. In short, rules often change when they no longer work. I think about how workplaces not that long ago used to disallow tattoos from being visible, but now they are everywhere. Yeah, I know that’s something different, but we’re seeing an explosion of accessory dwellings being built, and that’s going to affect future guidelines.

Thanks for being here.

Questions: What are you seeing out there with ADUs right now? Anything to add to the conversation? I’d love to hear your take.

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Do appraisers deduct value if there are concessions?

March 27, 2024 By Ryan Lundquist 23 Comments

It’s been a heated week of conversation in light of the NAR lawsuit, and one part that feels misunderstood or even controversial is how appraisers might handle concessions ahead. Let’s talk about it. Any thoughts?

UPDATE:

See new information from Fannie Mae, Freddie Mac and FHA below.

WE’RE IN NEW TERRITORY

Commissions for the buying and selling side have been baked into the market, so it’s not really something appraisers have had to consider because it’s been normative for sellers to cover these fees. Well, with a buyer’s agent commission now potentially being handled as a concession, we may have to think about this differently now. In short, everyone in real estate may need to ask a new question: Is there a price difference between homes with and without the seller paying for the buyer’s agent commission?

A QUICK VIDEO I MADE TO TALK ABOUT THIS

The NAR lawsuit isn’t even ratified yet, but I think it’s important to be proactive about thinking through some of the nuts and bolts of changes.

How do appraisers handle concessions?
Do appraisers deduct value if the seller gives concessions?
How does the NAR lawsuit come into play?
Closing thoughts

BRO, EVERYONE TALKS FOR APPRAISERS

One problem we have today is everyone has an opinion about what appraisers do and don’t do, but very few people in real estate understand what appraisers actually do. That’s been my observation this week in so many threads when people say stuff like, “Dude, appraisers won’t adjust,” or “Appraisers cannot do this or that.” My advice? Get familiar with how concessions are handled in appraisal reports, be open to new ideas, and talk to smart practicing appraisers about how they handle concessions and what they’re thinking about the future. Remember, not all opinions are going to be the same, and I don’t speak for every appraiser either.

DO APPRAISERS DEDUCT VALUE IF THE SELLER GIVES CONCESSIONS?

No. I talked about this in the video above (or here). Any adjustment given for concessions happens to the comps. NOT the subject property. In short, if a seller gives a credit for a commission or whatever, that doesn’t mean the subject property is worth less. We have to look to the comps to understand what a property is worth – not the contract price or terms.

SEE WHAT FANNIE MAE SAYS

Look, I’m not sure what Fannie Mae is going to say about the seller paying for the buyer’s agent commission, so this conversation right now is simply trying to be proactive. I suspect we’ll eventually get some direction from Fannie Mae, Freddie Mac, VA, and FHA.

This is straight from Fannie Mae’s Selling Guide.

“Comparable sales that include sales or financing concessions must be adjusted to reflect the impact, if any, on the sales price of the comparables based on the market at the time of sale. Examples of sales or financing concessions include:

interest rate buydowns or other below-market rate financing;
loan discount points;
loan origination fees;
closing costs customarily paid by the buyer;
payment of condo, co-op, or PUD fees or assessment charges;
refunds of (or credit for) the borrower’s expenses;
absorption of monthly payments;
assignment of rent payments; and
inclusion of non-realty items in the transaction.”

THE BIG QUESTION

Will the buyer’s side commission be added to this list? That’s the question, and we’ll only know as time unfolds. Like I said, this is new territory, and if the commission is no longer baked into the purchase price like it has been, we may have to think differently about this. No matter what Fannie Mae says, we still have a new layer of analysis to consider. Is there a price difference when commissions are paid or not paid by the seller? Keep in mind buyers could think about this differently too. If I was a buyer, do you know what I’d like to know? How was the commission handled in the comps? That could influence my perception of value or what I might want to offer.

UPDATE FROM FHA (added on 03/28/2024):

Real Estate News has reported that FHA said in an email, “If sellers continue to pay buyer-side real estate agent commissions and fees as a manner of state and local law or custom, and if the commissions and fees are reasonable in amount, existing policy would not treat those payments as interested party contributions provided all other requirements are met.”

Did you hear that? It sounds like a commission won’t count within the allotted 6% concessions, and it also sounds like part of this comes down to what is normal in the market. So, this provides clarity, but it also means we need to watch the market to understand how things change.

UPDATE FROM FREDDIE MAC (added on 04/15/2024):

Freddie Mac is basically doing the same thing as FHA. See press release.

UPDATED FROM FANNIE MAE (added on 04/15/2024):

The big dog has spoken. Here is their press release.

THE GOOD NEWS

The market will figure this out. Real estate professionals will figure this out. Buyers and sellers will figure this out. We need time to see the trend.

Thanks for being here.

Questions: How do you think concessions are going to be handled ahead? How are you thinking about this? I’d love to hear your take.

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

Some things on my mind about the NAR lawsuit

March 20, 2024 By Ryan Lundquist 47 Comments

Everyone is talking about the National Association of Realtors (NAR) lawsuit settlement, and I have a few thoughts too. It’s important to cultivate objectivity and keep some things in mind about buyers, sellers, and concessions.

UPCOMING SPEAKING GIGS:
3/21/24 2024 Market Update for Brent Gove Team (big event free)
3/26/24 Orangevale MLS meeting 9am
4/11/24 Lindsay Carlisle Event (private)
4/25/24 HomeSmart iCare Realty (details TBA)
4/26/24 Prime Real Estate (private)
5/9/24 Empire Home Loans (details TBA)
5/15/24 Investor Meetup (details TBA)
6/6/24 Golden 1 Credit Union (details TBA)
6/11/24 Elk Grove Regional MLS Meeting 8:30am
6/13/24 Sacramento Realtist Association (details TBA)

WE NEED TIME TO SEE THE TREND

There are so many ideas about how the NAR settlement will affect the housing market, but we need time to understand what this is going to mean for the marketplace. What will it mean for real estate agents, sellers, and buyers? And what will it mean for comp selection? Do we start to think of the buyer’s commission as a concession too? The truth is change is on the horizon, but only time will answer these questions. My advice? Stay focused, stay hopeful, stay grounded, avoid sensationalism, and figure out how you need to adapt if you work in real estate.

THE FUTURE WILL HAPPEN NO MATTER HOW YOU FEEL

If you work in real estate, here’s my advice. Cultivate objectivity, stop doomscrolling, read all you can from trusted sources, avoid sensational voices, and stay away from the comment section. There are some seriously toxic threads right now, and it’s not likely to do anything constructive for business or mental health to drink from the firehouse of 24/7 content. But hey, if that’s your thing, go for it. All I’m saying is it’s easy to get drunk on worry and fear, but I have to think there is a better way. The truth is the future is going to happen no matter what. Either you’ll get there after stressing for months ahead, or you can get there after being intentional about cultivating objectivity, purpose, and a plan.

EVERY ESCROW WON’T BE THE SAME

There are many strong ideas right now, and often the truth is found somewhere in the middle with most things in life. The thing to remember about escrows is it’s not going to be the same thing for every transaction ahead. Some sellers will offer a commission to the buyer’s side, sometimes it will be a hybrid situation where it is less than expected but something, sellers will still offer credits of various kinds to help the buyer, and other times the seller is not going to offer anything. We don’t know right now how much of each category will exist, so only time will tell. I find some people are saying it’s the death of the buyer’s agent, but others are convinced nothing at all will change. Who is right? The market will let us know eventually. Personally, I’m not a fan of either extreme. Ultimately, buyers will figure out how to navigate their end to make things work, and sellers will figure out what it looks like to be able to command top dollar.

WILL BUYERS BECOME MORE SENSITIVE?

One thing on my mind is the psyche of buyers. In recent years, buyers have become really picky about condition, price, and location, and I’m wondering if we’ll see more sensitivity ahead. I think the key is what happens in the marketplace. If we see buyers having to pay more out of pocket, it’s not hard to imagine more sensitivity. Also, will buyers expect to pay a lower price? Will we see more FHA financing since FHA allows up to 6% as a credit? These questions will only be answered as the market unfolds.

WILL SELLERS BOTH FLEX AND LISTEN?

The temptation for sellers right now is to flex all the money they’re going to save by only covering the commission of the listing agent. Well, here’s my advice. Sellers, don’t forget to listen to buyers while you are flexing. The reality is buyers are struggling to afford the market right now, and many buyers are going to need to find a way to cover the cost of a buyer’s agent commission. This is where sellers come in by offering something to the buyer’s side. Look, we don’t know what the market is going to look like, and every escrow is likely to look a little different. I’m just saying, don’t sleep on the idea of needing to meet buyers where they are at right now.

WILL A COMMISSION BE A CONCESSION?

Commissions for the buying and selling side have basically been baked into the market, so it’s not really something appraisers have had to consider because these fees have been normative. Well, with a buyer’s agent commission now potentially being handled like a concession, this is something new that we need to analyze. The gist is we’re going to have to see if there is any price difference between homes with and without the buyer’s agent commission covered. This isn’t just something appraisers will have to ask either. Real estate agents are going to dig into this, and savvy buyers too. If you were a buyer looking at comps, wouldn’t you ask, “Did the seller pay for the buyer’s commission on this one?” That seems like a relevant question when considering what to offer, right?

APPRAISERS AREN’T TRYING TO BLOW UP DEALS

When looking at these comps, does it seem like concessions inflated the price? Do you see how properties with concessions generally sold for more? In this situation, if an appraiser was using these properties as comps, it would probably be fitting to adjust some of the comps down since concessions look to have boosted the price. Appraisers don’t do this to try to blow up deals or devalue properties. Keep in mind, an inflated contract price might help a deal happen, but that doesn’t mean the property is actually worth that amount. Yet, appraisers don’t always adjust when there are concessions. Imagine a scenario where homes with and without concessions sold at the same price. In a case like that, it’s hard to justify an adjustment if these homes are all at the same level. Maybe the sellers who gave concessions were generous, full of compassion, or maybe they needed to move quickly and appeal to buyers.

I wrote more about concessions here. I’ll keep writing as needed too.

GETTING INTO TROUBLE

I’m not an attorney, and I don’t have legal advice, but I’d recommend for real estate friends to be very careful about commission language in light of antitrust laws. I strongly recommend brokerages to have conversations about this with your agents. What can you discuss? What is off limits? I’m surprised at some of the comments I’m seeing online, and I’m concerned for some friends who are talking in such a way to advocate for a minimum concession amount.

CLOSING THOUGHTS

This is a loaded issue, and it’s a bit of a hot mess right now to say the least. My advice? Don’t let this overwhelm you, but it’s important to talk about potentials. Keep in mind, this isn’t even official yet. A judge still needs to ratify the decision. Ultimately, the market will figure this out, and people who work in real estate will figure this out too.

Thanks for being here.

Questions: What’s on your mind about the lawsuit settlement? Is there anything you anticipate about the future?

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

The housing market is like nachos

March 14, 2024 By Ryan Lundquist 8 Comments

I heard the best description of the market this week. It made me chuckle, and I hope you like it too. I mean, how can you go wrong when relating the housing market to nachos? I also have some emerging trends to talk about below.

UPCOMING SPEAKING GIGS:
3/19/24 WCR Gold Country (details here)
3/21/24 2024 Market Update for Brent Gove Team (big event free)
3/26/24 Orangevale MLS meeting 9am
4/11/24 Lindsay Carlisle Event (private)
4/25/24 HomeSmart iCare Realty (details TBA)
4/26/24 Prime Real Estate (private)
5/9/24 Empire Home Loans (details TBA)
5/15/24 Investor Meetup (details TBA)
6/6/24 Golden 1 Credit Union (details TBA)
6/11/24 Elk Grove Regional MLS Meeting 8:30am
6/13/24 Sacramento Realtist Association (details TBA)

THE PERFECT MARKET DESCRIPTION:

Nadia Melzer said this on my Facebook business page, “The housing market is like sharing a plate of nachos. The good chips are being picked up quickly, while the unappealing ones are being left behind.” This is just SO good because it’s true. Another way to describe today is to say it’s either multiple offers or crickets. I find the good stuff so to speak is going very quickly with strong competition, but anything that’s overpriced is just sitting since buyers are picky about condition, location, and price. Anyway, pick your poison for market descriptions. All I’m saying is this one is a winner.

DEEP HOUSING MARKET THOUGHTS

Scroll quickly by topic or digest slowly.

BRO, IT FEELS LIKE SPRING AROUND HERE

The market is doing spring things in the stats. We can clearly see the temperature heating up when we look at numbers from January to February, but overall, I’m describing February as a bit flat or lackluster. What I mean is the number of pendings felt a little flat in February, which I think was a reflection of rates ticking up in January. The theme for the year is “more in 2024,” and what we want to see are more new listings, more pendings, and more sales. So far, this is exactly what we’ve seen through the first two months, but February wasn’t quite as glowing as January.

NEW HOMES ARE FLEXING BIG IN THE MIRROR

New construction is flexing. It’s been a very strong start to the year in terms of volume. In fact, per North State BIA stats, it was the strongest February since 2005. I have a graph back that far if anyone wants to see (email me).

In contrast, this is what the resale market looks like for existing homes. Big difference, right? Thankfully we’ve seen more sales compared to last year, but it’s still dramatically lower for older units (which is the bulk of the market).

YOU’VE GOT A FASTER CAR IN 2024

It’s taking less time to sell this year compared to last year, and we’re seeing a definitive seasonal heating in the days on market stats. We’re actually still moving faster today (green line) than normal (red line). But it’s nowhere close to the speed of 2021 (orange line). Okay, way too many colors.

PEAK MONTH VIBES IN FEBRUARY

This visual shows the height of spring each year with the percentage of sales with multiple offers. The peak of multiple offers typically happens in April or May. Well, this February, 55% of units had multiple offers, and that’s basically what the height was for a normal pre-2020 spring market. Yet, we saw this in February. This is why I really understand when people are saying things like, “Bro, it feels like 2021.” Well, not so much with the stats, but it’s been way hotter than normal for a February.

NOT 2021 & NOT NORMAL EITHER

This is a chaotic and cool way to look at the percentage of units selling above and below the original price. Check out the green line for 2024 compared to red (normal) and orange (2021). This shows us we are still more competitive than normal, but we’re still not anywhere close to the chaos of 2021.

RECAPPING VOLUME IN 9 COUNTIES:

The market isn’t the same everywhere, and it’s important to keep tabs on different locations and price ranges (while being careful not to form perspective based on only one month). By the way, I corrected this visual. I accidentally included January figures for Placer County yesterday, and that painted a way different trend. Sorry about that. This is correct.

HOT GRAPH SPRING

I’ve made this visual for two months in a row, and I kind of like it. Do you? I think it’s interesting to see how today compares to 2021, 2007, and the pre-2020 normal.

LARGER HOMES ARE SELLING

We’re starting to see larger homes sell in the region this spring. This is a normal trend, and it’s a good reminder that part of prices going up actually comes down to larger units selling. In other words, it’s not just a change in buyer demand driving higher prices.

YES, PRICES ARE TICKING UP

In mid-January, I wrote about the spring market waking up, and a few people said things like, “Dude, it’s January, what are you smoking?” But here we are seeing a change in February closed sales due in large part to the properties that got into contract in January. In other words, the market started to change in January, but it took a month for the trend to show up in the sales.

INFLATION FEELS LIKE THIS

One of the reasons why it’s challenging to predict real estate too far out is we don’t know exactly what is going to happen with mortgage rates and inflation. My advice? Talk about the future, but have enough humility to recognize there are forces at play that can change the housing dynamic. Also, do you like my new GIF? Or is this way too middle school?

RECAPPING NINE COUNTIES

I post these stats every month on the stats tab on the navigation bar.

Don’t be rigid: Median price and average price change doesn’t translate rigidly. In other words, it would be a mistake to think your value is up X% since the median is up that much. Maybe. Maybe not. Look to the comps.

Smaller counties are erratic: I’m not crazy about some of the price stats in the smaller counties since there just aren’t enough sales to be meaningful. I was hesitant about pushing these stats out, but I decided to anyway. Smaller counties are grouped in 60-day chunks since stats are erratic with only 30 days. I might even try 90 days instead.