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.

Are we really back to “bubble” prices?

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We’re back at the peak of the market. Well, that’s what some of the national indexes are saying. So imagine yourself in line at Starbucks and someone remarks, “I heard on CNN we are back to bubble prices.” What would you say? Let’s look at some of the “national” trends below and then kick around a few thoughts. I’d love to hear your take in the comments.

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Case-Shiller National Index: This index shows the “national” market is about where it was during the peak of the index in 2006 (source).

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Freddie Mac National Price Index: This index shows the “national” market is about where it was during the peak of the index in 2007 (source). 

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Freddie Mac California Price Index: The “national” index in gray shows we are back to the peak of the market, but the state index in black shows California is still about 5% below the peak (source).  

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Freddie Mac Sacramento Price Index: The national index in gray shows we are back to the peak, but the local Sacramento index in black shows we are still a ways off (source).

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Some quick thoughts:

1) I want to buy in the national market: There is no such thing as a national market, which makes “national” indexes only so valuable (or sometimes totally useless). As Jonathan Miller says, real estate is local and we have thousands of local markets instead of one national market. Therefore we ought to be naturally cautious about national metrics (see Barry Ritholtz rip NAR’s affordability index). In short, I watch “national” indexes, but I look to the local market for the real trend.

2) Different Peak: The “national” market peaked around 2007 depending on which index you’re looking at, but Sacramento peaked in 2005. Media outlets often talk about the housing “bubble” bursting in 2007 when in fact that wasn’t true for many markets (including Sac).

3) Current Values: Many Sacramento neighborhoods are still a good 10-15%+ below the peak of the market, though some classic areas are getting very close (while other depressed areas have much further to go). I included some neighborhood graphs below for reference.

4) Condos & Land: Let’s remember not all property types trend the same way. For instance, the condo market has struggled since the housing “bubble” burst. Owner occupancy rates being too low have stalled many complexes from obtaining financing, which has stalled value increases too. Vacant land is also far below where it was at the peak because there is less new construction today and we don’t have land speculators like we did 10+ years ago. 

Specific Neighborhoods (Are we there yet?):

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I hope this was helpful.

Questions: Are there any national metrics you pay attention to? Any you’d recommend avoiding? Did I miss something? I’d love to hear your take.

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Excess and surplus land (and why the difference matters)

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Is it excess or surplus land? And why does it even matter? Let’s talk about that today while looking at a real life example of a lot that is currently being divided.

Excess Land: This is when the lot is larger in size and the extra land (or excess) can be sold separately from the existing lot. In other words, a portion of the lot can be broken off from the rest, sold separately, and have a different highest and best use from the rest of the lot.

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Surplus Land: This is when the lot is larger in size and the extra land (or surplus) cannot be sold off separately. This means the “surplus” doesn’t have a separate highest and best use. The larger size is simply extra land that still might have some value, but it can’t be used for a separate purpose from the rest of the lot.

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Why does this matter?

1) Real Estate Jeopardy: Next time you’re on Jeopardy you’re going to sound like an expert when the category is land.

2) Assuming Value: It’s easy to assume a larger lot is always more valuable, but we have to ask if we’re dealing with surplus or excess land because it could make a difference in the value. At times we see a large lot size and get distracted like we’ve seen a bright shiny object. But can the land be divided? What can it be used for? Does the parcel shape help the lot be useful for buyers? And what have comps with larger lot sizes actually sold for too? 

3) The Bottom Line: Here’s the big deal. A larger lot that can be divided might be worth far more than a larger lot that cannot be divided (thanks Captain Obvious). For instance, the lot in the example above is located in the Curtis Park neighborhood and the extra space in the backyard is considered excess land because it CAN be divided and have a separate highest and best use. This backyard is currently being split by Keith Klassen in order to build two new homes. Anyway, this reminds us how important it is to talk with the local planning department to see what possibilities exist for extra space on a lot. We might see something big and assume it can be divided, but can it really? What does zoning allow? Moreover, is it realistic for the property to be divided right now? Remember, just because a lot can be divided doesn’t necessarily mean its going to happen in the current market. For instance, imagine values are tanking and new construction has stopped in the area. In a market like that any excess land might not command much of a value premium. But in a market where values are up and construction is happening, there is a higher probability of the lot being worth far more because it might be split.

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I hope this was helpful. There are many other things we could discuss here, so let’s kick around some ideas in the comments.

Questions: Anything else to add? Any stories to share? Did I miss something? I’d love to hear your take.

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The problem with non-permitted additions in real estate

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Non-permitted additions can cause huge problems. Last week I wrote about how I valued a garage conversion without permits, and I wanted to follow up with some expanded thoughts. As I mentioned, in this situation I gave value to a conversion because I was able to show the market was willing to pay for it. Yet it’s not always that easy, so let’s dig deeper. By the way, props to Cynthia, Gary, and Bryan for stellar blog comments that prodded me to follow-up. Any thoughts?

54025005 - demolishing the old kitchen - exposing the studs, existing plumbing and electrical work

Issues when dealing with a lack of permits:

1) Lenders & Appraisers: Here’s the bottom line. Some lenders don’t want to lend on properties with non-permitted additions. In short, a non-permitted area might have legitimate value in the market, but some lenders will tell appraisers NOT to give the space any value. At the same time other lenders are okay with value being given, but they want appraisers to show a few comps with similar non-permitted areas to prove the market is willing to pay for the space (that’s tricky to find).

2) Illegal: Does the addition conform with what zoning allows? This is a key question. For instance, if zoning only allows one unit and the seller has a non-permitted second unit that hands-down would never be allowed, it’s an enormous liability for an appraiser to be giving value to something like that. Likewise, imagine if an addition was built within the setbacks on a site, which would make it illegal and maybe even a safety issue.

3) Building Department Reaction: Is it likely the non-permitted area can become permitted? What is it going to cost? This is where it’s worth giving the building department a call. I don’t recommend mentioning a specific address at first so you don’t raise red flags, but call and maybe ask about a hypothetical situation to see what the cost and feasibility might be for getting permits. Remember, not all markets are the same either. For instance, since 1976 the City of Davis has had a program where building inspectors visit all properties before they close escrow to ensure there are no code violations. In short, you can’t get away with non-permitted additions in Davis if you plan to sell (but you can elsewhere).

4) The Struggle of Different Opinions: A friend gave me a call to talk through a situation with a garage that was converted into a second unit without permits. The appraiser gave little weight to the addition because of zoning issues, but the seller thought it should have carried more weight. There was a solid back-up offer on the table, but regardless of whether this addition was worth more or not, the thing I told my friend was there was no guarantee a future appraiser or lender was going to see the situation any differently. Owners in scenarios like this tend to say, “The lack of permits wasn’t a problem when we first bought the house”, but guidelines and what appraisers report might have changed over time. Moreover, not every appraiser or lender is going to see things the same way.

Advice about non-permitted areas:

1) Minimal value: Expect there is generally going to be less value for something not permitted than something fully permitted (thanks Captain Obvious).

2) Bigger is Bigger: Buyers seem to ignore smaller-ticket items that weren’t permitted, but the bigger something is, the more likely it is going to be a bigger deal that it wasn’t permitted. For example, there is a huge difference between a non-permitted covered patio and a 400 sq ft addition that was not permitted.

3) Glorified Storage: Keep in mind an appraiser might be instructed by a lender to count a non-permitted area as storage instead of living space. So that second story attic conversion might be really sweet, but an appraiser might end up treating it like storage instead of extra square footage.

4) The Easy Answer: Getting permits can help avoid future loan problems. Be sure to keep a copy of the permit too so any appraiser or buyer can see everything has been signed off.

NOTE ON GIVING VALUE TO SOLAR: This is off-topic, but there was a recent class on solar and it was apparently mentioned I do not give value to solar systems. That’s not accurate. However, I have said a LEASED solar system does not get value because it’s personal property. Just wanted to clarify. You can read this post and another for some thoughts on solar.

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Questions: How have you seen a lack of permits impact a transaction or appraisal? Would you buy a home if it had an addition that was not permitted? Did I miss something? I’d love to hear your take.

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How I appraised a property with a non-permitted garage conversion

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How do we value a non-permitted garage conversion? Today I wanted to share a real life example of a property I appraised. I’ll keep things fairly brief because it’s impossible to get to everything in just one post. Though I do have a 10-minute audio clip for more depth on conversions. Any thoughts?

UPDATE: Read part 2 of this post HERE.

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Garage Conversion Formula: It would be nice if there was a one-size-fits-all value adjustment we could apply to any conversion, but that’s not how it works because conversions vary tremendously in size and quality – not to mention some neighborhoods accept them and others really don’t.

Golden Data: In this case the conversion was nicely done and was even on a crawl space like the rest of the house. I searched the neighborhood for garage conversions over the past few years and literally found none. But I did have one very lucky bit of data since the subject sold four years ago on MLS as an arms-length sale. This means I was able to look back in time and find how the subject fit into the context of neighborhood prices.

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What I wrote in my report: Based on the previous sale in 2012, it is clear the market recognized the subject property’s extra size as square footage and paid for it as such in the marketplace. The lack of permits on the garage was definitely disclosed in MLS. At the time of the sale in 2012 the market was willing to pay about $15,000 (6%) less for the subject property compared to otherwise similar homes that had a garage. In today’s market were no recent sales with a garage conversion, so the appraiser used historic data to give a downward $15,000 adjustment to Comps 1-3. The garage adjustment would really be reasonable anywhere between $15,000 to $20,000, but since the subject has been upgraded extensively in recent years it made sense to adjust at the lower end of this range since upgrades lessen the negative for not having a garage.

If I didn’t have a previous sale: Without a previous subject sale, I’d need to find other garage conversions in the neighborhood or search in a competitive area of town to try to find a reasonable adjustment for the lack of a garage (and lack of permits). In some cases I would maybe consider the cost to turn the conversion back into a garage – especially if the conversion was shoddy or minimal to cure. Still other times I might ponder the cost to permit the conversion or the cost to actually build a garage if there is space to do so. Remember, the adjustment at $15,000 made sense here, but it could be FAR DIFFERENT in other situations.

Garage Conversion Video: This audio clip is ten minutes or so and could be good as background noise while working. Watch below (or here).

Note on permits: As an appraiser it’s a liability to assume everything in a non-permitted conversion was done to code. What if I recognized value for a conversion but then in the future an owner had to rip out the non-permitted area? Can you see why some appraisers (and lenders) won’t give value to something unless it was permitted? Yet we still have to ask, “Is the market willing to pay something for this non-permitted area?” This is not an easy question to answer, but it is vital nonetheless. Hopefully we can find some comps, but more than that we need to disclose everything clearly, use logic and professional judgement, and maybe reach out for opinions of other trusted professionals too.

Questions: How do you deal with garage conversions? Any other insight? Did I miss something? I’d love to hear your take.

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