appraisal blog in sacramento

How do we choose comps in such a lopsided market? I had a great question about this recently, so I wanted to share some thoughts. Anything to add? I’d love to hear your take in the comments.

UPCOMING PUBLIC SPEAKING GIGS:

• 2/9/2022 Yolo Assn of Realtors market update (details)
• 2/18/2022 WCR El Dorado market update (details)
• 2/25/2022 Placer Assn of Realtors market update (details)
• 3/15/2022 NARPM Luncheon (details)
• 3/22/2022 SAFE Credit Union market update (details)
• 4/28/2022 SAR Think Like an Appraiser (details)

QUESTION: With so many listings receiving offers above list, and people having to pay the shortfall between the appraised value and the contract price, how do appraisers look at comps? If a property sold at $580,000, but it actually appraised for $547,000, and the buyer paid the difference, which number do you use? $580,000 or $547,000?

ANSWER: Here are a few things on my mind.

1) Weigh the comps:

In any market (not just today) we have to weigh the comps. Or another way to say it is, we have to appraise the comps so to speak. What I mean is if something clearly sells for too much, it’s reasonable to give that property less weight in our analysis. Likewise, if a property sells for too little, we might also give less weight to that sale. Granted, selling for too little isn’t as common lately, but in past markets we regularly considered whether short sales or bank-owned sales sold below market value.

2) One sale doesn’t make or break the market:

It’s important to note one sale doesn’t make or break the market. This means one lofty “lone ranger” sale doesn’t all of the sudden mean the rest of the market will go to that level. This would be like saying that record-breaking $7M sale in Shingle Springs from August will pull the rest of the market up. Nah, I don’t think so. Or Zillow buying a house for $40,000 more than the comps will cause the rest of the market to rise. Nope. If one sale closes at $580,000, but the rest of the market is below $550,000, we won’t arbitrarily accept $580,000 as the new neighborhood price threshold. The same would hold true if a different house sold at $450,000. This one “low ranger” (sorry) won’t automatically drag the rest of the market down.

3) Using the final sales price:

It’s a really good question whether appraisers will use $547,000 or $580,000. Realistically appraisers might not even know about the lower appraised value because it’s not automatically disclosed in MLS or from agents in the transaction. And there isn’t some sort of appraisal database where appraisers know about the appraised value either. Ultimately, even if I knew what it appraised for, I’m not going to use the appraised value because that wasn’t the official sales price. To be fair, is it possible it appraised too low? Yes. At the same time, if the property really was worth $547,000, maybe the buyer legitimately paid too much at $580,000, right? Again, this is where appraisers need to weigh the comps and ask whether they sold at a reasonable level or not. I realize this sounds subjective, but weighing comps has to do with looking at the entire market and weighing sales against other ones, so there is an objective element here. I’ll be checking out recent and much older sales, competitive sales, listings, pendings, withdrawns, lots of geeky metrics, and even similar neighborhoods. I’ll also be making graphs to help visualize where it looks like value is at right now. If something did sell for too much, it’ll probably stand out because it’s disconnected from the rest of the market – including pending contracts. So maybe I won’t use the higher sale as a comp in my appraisal. Or maybe I can use it but give it less weight. No matter what, I won’t automatically use a sale without thinking through why it sold for more than others. But here’s the thing. If pendings contracts are all around $580,000 too, and other neighborhoods have also risen quickly, maybe it’s the market… In that case I need to recognize prices are rising and then adjust my comps up accordingly.

4) Unfairly judging the original list price:

It’s important for appraisers to be cautious about judging the original list price. What I mean is the original list price is a starting point that could be reasonable, too high, or too low. I’m not saying it’s unimportant. I’m just saying it may or may not say something about value. The truth is value is found in the comps – not the original list price OR the contract price. For instance, a friend told me about a property that got into contract about $200,000 above the original list price recently. I know it’s easy to think it could have a problem appraising that much higher than the contract price, but what if the property was priced $200,000 too low? This is where appraisers (including me) need to be careful to be objective and not give the original list price so much weight to essentially say, “I can’t bring the value in that high.” Nope. Value is found in the comps – not the original list price.

5) Instagram and market value:

I’m seeing images floating around Instagram about market value. The images tend to say things like, “The appraised value is one professional’s opinion,” and “Market value is what a buyer will pay a seller.” That sounds maybe sorta kinda hopefully true, but let’s dive deeper. The truth is what one buyer is willing to pay could represent market value (what the bulk of buyers would pay), but sometimes what one buyer pays is more like individual value because it’s totally disconnected from the rest of the pack. So, if a buyer pays above all the comps and pendings, it doesn’t automatically represent market value. It would be like me buying a house for $750,000 in a $350,000 neighborhood. I can pay that, but just because the seller and I agree on the price doesn’t mean it’s market value. Does that make sense? And here’s the kicker. What if a buyer paid 20% lower than the comps? Would we say it’s market value since the buyer and seller agreed on the price? I doubt it.

The bubble question:

I did a YouTube Live last week and here’s what I said when someone asked about a real estate bubble. This was all off the cuff it the answer should start at 58 minutes. Enjoy if you wish.

Thanks for being here.

Questions: What do you think of the points above? What did I miss? Anything to add?

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