Sacramento Appraisal Blog

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Fanny packs, pendings, and a slower market

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I guess I never thought I’d talk about fanny packs on my blog, but here goes. This is either a new high or low depending on your perspective, but I want to share an important concept to consider – especially during a slower market. Then for anyone interested I have a big market update for Sacramento. Any thoughts?

Fanny pack analogy: Imagine spotting a guy wearing a fanny pack. You might think, “Sweet, I haven’t seen one since the early 90s.” The truth is if we only saw one dude sporting a pouch, we’d probably just think this person is trapped in the 80s and 90s (like Uncle Rico back in ’82). After all, one guy’s fashion statement doesn’t mean it’s a trend for everyone. But if we started seeing more and more people wearing fanny packs everywhere we went, then it’s probably a fashion trend. The same thing happens with pendings. If we only have one pending at a much higher level than anything else in the market area, it’s probably an outlier more than anything. It might be an isolated incident that’s totally disconnected from the market (like one guy wearing a fanny pack) rather than a real indicator of value (a trend). But if we saw a group of pendings shifting higher or lower, then that’s probably a trend.

The big point: Sometimes we get so distracted by the bling of one high listing or pending that we fail to see the bigger picture of value in a neighborhood. It’s like we develop tunnel vision and get locked into one outlier rather than looking at everything else that is similar AND trending lower. Sellers in particular struggle with this during the fall because they sometimes only see the highest prices from the spring rather than current listings and pendings that might be generating slightly lower prices because the market has softened. Or it’s easy to see that one overpriced listing down the street and expect to fetch a similar lofty price rather than recognizing that zero properties are getting into contract that high. Thus let’s be cautious not to stake all the weight of value on one “lone ranger” pending or listing while ignoring all other data. Otherwise it’s sort of like seeing one guy wearing a fanny pack and calling it a trend…

Disclaimer: This post was in no way meant to offend anyone who used to wear, currently wears, or will wear a fanny pack.  🙂

–——-——- Big monthly market update (it’s long on purpose) ———–——-

The market has continued to soften, though it’s not really all that soft. Inventory is up, price reductions have increased, sales volume has been dropping, it took three days longer to sell last month in the region, and price metrics are down about 1% from the height of summer. Overall the market is clearly slowing down for the season, though it’s not painfully dull like it was in 2013 or 2014 during the fall. This is a key to understand because when saying values are “softening” some interpret that to mean the market is really slow or crashing. But that’s not what I’m saying.

Big Point: We have a housing shortage, but that’s not a trump card to stop a slower seasonal trend.

Let’s get technical. Many price stats last month actually showed an increase in value by about 1%. What the? Does this mean the market increased? I thought you just told me the market is slowing? Let’s remember that sales from October really tell us more about properties that got into contract in August and September before they actually closed escrow in October. Thus that 1% uptick really happened in the market a couple of months ago rather than in October. In other words we’ll see the real trend of the market for October when the pendings from October close in November and December. This is so important because let’s not make a big deal about the market technically showing an increase because the uptick didn’t technically happen last month. Know what I’m saying? If we want to see the current market we have to look at the sales, but we cannot forget to give strong weight to the listings and pendings. Are properties taking longer to sell? Are there more listings hitting the market? Are properties starting to generate less offers or offers at lower prices? What are buyers, sellers, and the real estate community saying about the market?

A huge soft stat: Every year the median price and average sales price in Sacramento County tend to soften by about 5%. This doesn’t necessarily mean values decline by 5% in every neighborhood or price range, but it does mean we can expect price softening in most areas during the fall season.

By the way, here’s an article I wrote for Comstock’s magazine this month about some of the different layers of the Sacramento market right now.

I could go on, but let’s get visual.

DOWNLOAD 62 graphs HERE: Please download all graphs in this post and more here as a zip file (includes a stat sheet too). See my sharing policy for 5 ways to share (please don’t copy verbatim).

SACRAMENTO COUNTY (more graphs & stats here):

SACRAMENTO COUNTY STATS:

  1. The median price is currently $349,450. It’s up slightly from last month but down 1% from summer.
  2. The median price is 9.2% higher than the same time last year.
  3. Sales volume in October was 5.4% lower this year than 2016. There were 1456 single family detached sales last month.
  4. It took an average of 29 days to sell a home last month (one year ago it was taking 4 days longer).
  5. The median days on market last month was 15 days.
  6. It took 1 more day to sell in October compared to September (median days).
  7. FHA sales were 19.9% of all sales last month in the county.
  8. Only 0.7% of sales last month were bank-owned & 0.7% were short sales.
  9. The avg price per sq ft was about $221, which is about 1% lower than last month (9% higher than last year).
  10. The avg sales price increased about 1% last month and is currently $386,000. This is 9.4% higher than last year.
  11. Cash sales were 12.2% of all sales last month.

SACRAMENTO REGION (more graphs & stats here):

SACRAMENTO REGION STATS:

  1. The median price is $392,000. It increased about 2% last month, but it’s down 1% from summer.  
  2. The median price is 9.8% higher than the same time last year.
  3. Sales volume in October was nearly the same as October 2016. There were 2380 single family detached sales last month.
  4. It took an average of 34 days to sell a home last month (one year ago it was taking 3 days longer).
  5. The median days on market last month was 18 days, which means properties are selling really quickly.
  6. The median days on market increased by 3 days last month, which shows a slowing in the market.  
  7. FHA sales were 16.5% of all sales last month.
  8. Only 0.8% of sales last month were bank-owned & 0.8% were short sales.
  9. The avg price per sq ft was about $227, which is down slightly from last month (9% higher than last year).
  10. The avg sales price increased about 1% last month and down about 1.5% from summer (but up 9.4% higher than last year.
  11. Cash sales were 15% of all sales last month.

PLACER COUNTY (more graphs & stats here):

PLACER COUNTY STATS:

  1. The median price is currently $455,000 and increased about 1% last month.
  2. The median price is 3.8% higher than the same time last year.
  3. Sales volume in October was 10% higher than 2016. There were 533 single family detached sales.
  4. It took an average of 37 days to sell a home last month (one year ago it was taking 4 days longer).
  5. The median days on market last month was 22 days, which means properties are selling really quickly.
  6. The median days on market increased by 4 days last month, which shows a slowing in the market. 
  7. FHA sales were 9.5% of all sales.
  8. There were only 4 bank-owned sales last month and only 4 short sales.
  9. The avg price per sq ft was $232, which is slightly higher than last month (9.2% higher than last year).
  10. The avg sales price is currently $511,121. This is 6.4% higher than last year.
  11. Cash sales were 18% of all sales last month.

DOWNLOAD 62 graphs HERE: Please download all graphs in this post and more here as a zip file (includes a stat sheet too). See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: On a serious note, did you wear a fanny pack back in the day? Anything else you’re seeing in the market? I’d love to hear your take.

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When a home is almost three bedrooms (but technically only two)

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Imagine a house that used to be three bedrooms until the owner converted one room into a den. Is there a big hit to value now? Will the appraiser only give credit for two bedrooms? Let’s consider some thoughts below. Anything to add?

1) Big deal for value: First off, there can be a huge difference in value between a property that has three full bedrooms and one that only has two bedrooms with no other space that could possibly be used as a bedroom (such as a den). A three-bedroom unit simply has more utility and marketability, so when appraising a classic two-bedroom property I definitely want to take an “apples to apples” approach in my comp selection by finding other two-bedroom homes since those ones are most similar in appeal.

2) Buyers see the bigger picture: Sometimes we see homes that technically only have two bedrooms because a buyer selected a builder’s “den option” or maybe a seller removed a closet in the third bedroom. We’d be right to classify these homes as 2-bedroom properties, but at the same time my sense is if there’s an extra den or office that can be easily converted to a bedroom, buyers see the bigger picture of the house without getting too stuck on one less closet. Thus we can probably compare a house like this with other three-bedroom homes more than classic two-bedroom homes. Though we have to consider any impact to value for the lack of a closet.

EXAMPLE 1: A seller closed up a bedroom closet to use the space as an office and is now concerned an appraiser is not going to give him credit for the extra “bedroom.” Since there isn’t a closet, an appraiser will likely label the home as two bedrooms, BUT the appraiser will also recognize the house can very easily have an extra bedroom with the addition of a closet. Since the house is so much closer to being a three-bedroom home, it would be very limiting to only use classic 2-bedroom comps (see #3 below too). In other words, buyers see the big picture of a house and they probably aren’t going to expect a massive price reduction over one simple closet being removed.

EXAMPLE 2: I was asked how to value a 2-bedroom house that was close to 3000 sq ft and there were no other “comps” that size with only two bedrooms. But the thing is this house had extra space that could easily be converted to a third and fourth bedroom with the addition of closets. In situations like this it’s so easy to get locked into a rigid comp search and only look at two-bedroom homes. I’m a big fan of “apples to apples” where possible, but sometimes we have to step back and look at properties like buyers do. In this case there were multiple offers on the home because buyers were seeing the bigger picture of value rather than getting wrapped up in two closets missing. It’s possible this home could still sell at a discount, but let’s not start comparing it with significantly smaller two-bedroom “comps” either because that’s not what buyers are doing.

3) Logic and adjustments: Whenever we see a difference in bedroom count it’s easy to give a canned value adjustment. So without any research we hear, “The value difference between a 2-bedroom and 3-bedroom home is $20,000.” Okay, maybe that number works sometimes, but let’s step back and think like logical buyers. If looking at a home that has a den option that is otherwise similar to a traditional bedroom, it might cost around $2,000 to add a closet. In a situation like this does it really make logical sense to give a $20,000 negative adjustment? In other words, would buyers truly penalize a property at $20,000 because there is technically no closet? I would venture to say most buyers are probably not going to expect a huge price discount for such a minor cost-to-cure.

4) The market might not care: Sometimes the market doesn’t show much of a price impact for only having two bedrooms. We see this in 55+ communities, but we might also see it with architecturally interesting properties where prospective buyers might not need extra bedrooms. This is a good reminder to step back from being trigger-happy about giving the same value adjustment since the market doesn’t always make an adjustment.

5) Pro tip on downsizing: I recommend not turning a 3-bedroom to a 2-bedroom house. I see this happen when an owner wants a larger master bedroom, but it’s a quick way to lose marketability (and maybe value).

I hope this was helpful or interesting.

Think Like an Appraiser Class (I’m teaching): By the way, I’m doing my favorite class on Dec 7 from 9am-12pm called How to Think Like an Appraiser. We’ll talk through comp selection, making adjustments, tips for talking about value, and what to do in various scenarios. Details here.

Questions: What is #6? Do you have any stories or examples to share about the value difference (or lack thereof) between bedrooms? Anything else to add?

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Two questions to ask about permits

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I delivered bad news recently. Well, it was helpful news for the buyer, but maybe bad news for the seller. There was a 700 sq ft home addition that turned out not to be permitted as living area, and I was the guy to let everyone know. Oh dang!! Let’s talk about this and highlight two important things about permits. 

Two things to consider with permits:

1) Signed off: It’s one thing if a permit was pulled, but the most important thing is that it was finaled. If a permit is not finaled, it’s sort of like getting a marriage license from City Hall but not actually getting married. The thing is the marriage license is only the beginning of the process, and it means very little by itself unless it results in a marriage ceremony. The same thing is true with permits in real estate. The beginning part of getting a permit matters, but unless the permit is actually signed off at the end, then the act of pulling a permit means very little. Thus when someone says, “We pulled a permit,” a good follow-up question might be, “When was the permit finaled?”

2) Getting specific: In the situation above there was one big problem. The large addition was basically an attic conversion on the third floor, and it was only permitted as storage in the eyes of the county – not as living area. This reminds us that sometimes after being told an area is permitted, we might consider asking a clarifying question, “What was it permitted as?” After all, it can be technically correct to say an area was permitted, but was it permitted for the actual use it’s being said to have been permitted for? That’s the real issue. 

Appraisers and non-permitted areas: There are times when appraisers might include non-permitted areas in the value, but there is no one rule for appraisers to apply in all cases because each situation is different. Though my sense is when an area is very large most appraisers probably won’t include it in the square footage because it hasn’t gone through the most basic process of becoming legitimate in the eyes of the building department. In other words, it’s one thing to include a non-permitted covered patio in the value because that’s pretty minor and so common in many markets, but it’s another thing to include an addition that represents 20% of the total square footage of a house. You can read more about the problem of non-permitted additions here.

I hope this was helpful or interesting.

Questions: What is a third thing to consider when it comes to permits? Any stories or wisdom to share? Anything else to add?

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Does the buyer own the appraisal?

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If a buyer pays for the appraisal during a loan, does the buyer own the appraisal? That’s a good question, and the quick and often frustrating answer is NO. The buyer does not own the appraisal because the buyer isn’t actually the appraiser’s client. I know that’s not always easy to digest, but let’s look at an appraisal report and consider some thoughts. Anything to add?

Three things to remember about the client in an appraisal:

1) The appraisal clearly defines the client: When we look at an appraisal report, the lender is always listed as the client during a typical loan. As you can see below, the buyer is not identified as the client. The buyer may have paid for the appraisal, but that does not change who the client is. Of course the buyer is intended as a user of the report, and is even legally entitled to a copy of the appraisal from the lender, but there is a difference between a user of the report and the actual client who engaged the appraiser to do a job. Keep in mind during a private appraisal a buyer could actually be the client, but that’s not the case with a typical loan. 

2) The purpose of the appraisal: When looking at a different portion of the Fannie Mae appraisal form, the client is again identified as the lender. But we also see the purpose of the report is for the lender to evaluate the property and make a decision about the loan. Granted, the buyer might rely on the report when making a personal financial decision, but the end-goal of the appraisal isn’t really about the buyer. It’s about the lender (the client) figuring out if a loan is doable or not. So despite the buyer paying for the appraisal, we have to remember the appraisal is really a tool for the lender more than anything. 

3) Buyer cannot take it to another lender: If you don’t believe the lender is the client, try getting an appraisal done and then switching lenders. See if the new lender will accept the appraisal from the original lender. It is very unlikely to see that happen, which reminds us that even lenders recognize the appraisal belongs to the other lender. This is why lenders typically will order a new appraisal or in some cases ask the original appraiser to do a new report in the name of the new lender. Keep in mind during a FHA transaction the appraisal sticks with the property instead of the lender, so that is an exception to this rule.

Why this matters: It’s common to hear things like, “I paid for the appraisal, so it’s mine,” or “The buyer paid for the appraisal, so I think it belongs to the buyer.” Let’s step back though and remember the appraiser is actually hired by the lender and is working for the lender – not the buyer. It’s easy to think appraisers exist to help buyers or even enable deals, but that’s not the role the appraiser was hired to perform. Also, appraisers aren’t trying to be rude by refusing to talk about value during a transaction. It’s just the appraiser’s client is the lender – not the agent, loan officer, home owner, or buyer. It wouldn’t be prudent for an appraiser to talk about value with someone who is not the client, so appraisers often tend to say, “I can talk with you more, but you’ll need to direct your communication to the lender / AMC, and I’ll respond through them.”

I hope this was helpful or interesting.

Questions: Does it make sense that the buyer is not the client during a loan? Is there a good metaphor for explaining this better? Anything else to add?

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