Sacramento Appraisal Blog

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Market Value

Can appraisers tell real estate agents if value is going to be an “issue”?

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“Just give me a call if value looks like it’s going to be an ‘issue’.” I hear this fairly regularly from real estate agents who ask me to let them know if the appraised value is going to be lower than the contract price. The goal is really twofold: 1) If value doesn’t seem reasonable, the agent can offer additional market support for the appraiser to consider; and 2) The agent can help prepare the seller or amend the strategy for negotiations.

Agent: Are we good on value?
Me: I can’t talk about value with you since you’re not my client.
Agent: Don’t tell me the exact number. Just let me know if I’ll be happy or not.

Who is the appraiser’s client anyway? Unless hired directly by a Realtor for a private appraisal, the appraiser should not be giving a “courtesy call” to discuss confidential information (value) with anyone besides the client. Despite the agents, home owner and borrower being tied to the transaction, the only Image purchased by Sacramento Appraisal Blog and used with permission (click image to visit website where purchased)client is the party who ordered the appraisal. This can be frustrating to digest, but think of it this way. If an attorney hired you to do research for a court case, you shouldn’t talk with anyone about your work besides the attorney, right? Keeping confidentiality seems obvious when talking about a court of law, but the same is true with a loan appraisal. While agents, owners and buyers may end up relying on the appraisal as a tool for negotiation and confidence in the transaction, ultimately the appraisal is really for the lender to assess whether they should risk making a loan or not. Since the lender has initiated business with the appraiser, the lender is the appraiser’s client. This means when appraisers share about value with other parties, even when they are connected somehow to the transaction, it’s a violation of client confidentiality (which can also actually damage negotiations).

Suggestions for talking with appraisers: This doesn’t mean agents and home owners cannot talk to appraisers. It’s just important to realize appraisers cannot divulge confidential information to non-clients. Since appraisers won’t be discussing a specific value with agents, I recommend for Realtors to be proactive about talking with the appraiser before the appraisal is complete, and feel free to share recent potential comps if you’d like – whether at the inspection, on the phone or via email. Also, if you are an agent, it may be worth considering saying something like, “Call me if you have any questions or need something from me to support your value” instead of “call me if there are value issues.”

Question: Realtors, do you find appraisers do share value with you when you ask? Or do appraisers say, “sorry, I can’t talk about the value with you”?

If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook

Should congress outlaw appraisers from using distressed sales as comps?

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Would you support a bill in congress that outlawed appraisers from using distressed sales as comps? On paper this might sound appealing because there is often a difference between market value and distressed sales, and if the wrong comps are used there could be a negative impact to value. But in reality, sometimes there are nothing but distressed sales for the appraiser to use.

There have been quite a few bills over the past few years proposing appraisers not be allowed to use distressed sales in their apprisal reports. As an example, H.R. 1755 was introduced in the House of Representatives on May 5, 2011 and says:

Library of CongressARMS LENGTH TRANSACTIONS: The appropriate Federal banking agency shall require that entities used by financial institutions to assess or review underwriting standards and collateral values for real estate loans made by such institutions after the date of the enactment of this Act use comparable sales involving arms length transactions to make such an assessment or review.

(A) IN GENERAL- The term `arms length transaction’ means a negotiated real estate transaction between a buyer and seller in which such buyer and seller act independently of each other.

(B) TRANSACTIONS EXCLUDED- Such term shall not include any transaction involving a short sale or foreclosed property or any other distressed real property.

Can Congress Provide me Comps? I’m finishing up an appraisal on my desk right now in the Wild Wings neighborhood in Woodland. This neighborhood is unique and there are literally no other subdivisions in Woodland that compare to this secluded golf course community. Therefore the most adequate and competitive sales come from within the neighborhood (that makes sense, right?). The only problem is that 75% of all sales over the past 12 months were distressed (only 32 sales by the way). Moreover, I’m doing an appraisal of a 2,500 square foot house and 8 of 8 sales between 2300-2800 squafe feet over the past year were either REOs or Short Sales.

If a law was passed that stated appraisers could not use distressed sales, I would have a big problem in this neighborhood and many others like it. Thankfully I know how to do my job though and I can use sales like this and sift through which ones may or may not represent market value (and make adjustments if appropriate).

Would you support this bill? Why or why not? What is the motivating factor behind a bill like this?

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Facebook, Twitter or subscribe to posts by email.

Why do appraisers give such little value for square footage?

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Why do appraisers sometimes give such little value to something as important as square footage? It’s crazy that an appraiser gave $10,000 in value for 300 square feet, right? Maybe you’ve felt this way about an appraisal on your home or for one of your listings. Give me a minute to help clear up some of the confusion by explaining how appraisers are supposed to come up with value adjustments for house size.

Example 1: A Typical Size Scenario

Real estate appraisers should be giving value to square footage according to how the market sees the square footage. What does that mean? While it may cost $40,000 for a 400 square foot addition, based on an analysis of comps in a neighborhood, the appraiser might determine properties with an extra 400 square feet sell for $20,000 more than houses without that space. This means the market in this particular neighborhood really only rewards $20,000 in value for the size difference. This example of course assumes there are no other factors to consider such as lot size, location, upgrades, room count, financing etc….

Example 2:  The McMansion Mega House

Imagine your house is 6,000 square feet in a neighborhood where the largest model is 4,000 square feet. Do you think the market is willing to pay 50% more for you house because it is 50% larger than the 4,000 square foot model? Probably not. There are situations where the market is actually willing to pay very little or nothing for the extra square footage because it’s considered an overimprovement (or “superadequacy” for the fancy term). This can be very upsetting for home owners and agents, but the appraiser is not being mean or ruthless, but only interpreting the market properly (hopefully).

This is important to understand for the following reasons:

  1. Cost vs. Value:  Appraisers do not give value to square footage based on construction costs, but rather the reaction in the marketplace to extra size. Think of it in terms of a kitchen remodel or pool. Just because a kitchen costs $75,000 to remodel does not automatically mean you’ll see $75,000 in value in the resale market. Or while a pool may cost $35,000, resale value will very unlikely include the total cost of the pool. Cost does not always equal value.
  2. Additions & Conversions:  An addition or garage conversion may not always put your house on par with other larger houses. There are many factors to consider when it comes to valuing an addition. It’s important also to know the neighborhood before planning a huge addition because you don’t want to overbuild for the neighborhood.
  3. The Largest House:  Larger houses tend to have an overall lower price per square foot than medium-sized houses, so applying a straight cost-per-sqare-foot for the neighborhood may not yield credible results for the largest house.
  4. Big New Construction Premiums:  If you buy a newly constructed mega-house like in Example 2, you will likely pay a big premium for the extra square footage during the sale, but you may not see this premium again when reselling.
  5. Real Estate Agents:  Agents who know the local market and how appraisers should look at square footage will be able to coach and resource home owners about the process and what to generally expect.
  6. Unique Neighborhoods:  Each market is different. There is no standard price adjustment for appraisers to make because buyers in one area may be willing to pay more or less for size compared to another neighborhood.

All things considered, it’s not always easy to swallow that a big difference in square footage does not always translate into big value. Let me make it clear too that just because I explained how an appraiser is supposed to give value for square footage does not mean that the appraiser actually did that.

Any insight, questions or commentary? In appraisal reports you’ve read, how much value do you see appraisers give for square footage? I’d love to hear your comments.

If you have any questions, or real estate appraisal or property tax appeal needs in the Greater Sacramento Region, contact Lundquist Appraisal by phone 916-595-3735, email, Facebook or subscribe to posts by email.

Grasping REO, Short & Regular Sales

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Is there a price difference between bank-owned sales, short sales and regular sales in the Sacramento area? Usually there is, but the level of difference really depends on the neighborhood. The following two graphs are taken from pages 10-11 of The Wright Report and they show average sales price by type of sale.

Based on these graphs for the Sacramento area, there is an obvious difference between conventional sales and REO & short sales, don’t you think? Of course we need to consider that there could be condition issues that warrant a price variance too since many bank-owned sales are not in pristine “move-in” shape. But overall the difference is fairly obvious.

Neighborhood Mini-Case Study: Let’s look at a particular neighborhood to get a closer view of distressed vs traditional sales. The data below represents the “Bridgegate” model in Sun City Lincoln Hills. Less than 30% of all sales in Sun City Lincoln Hills last year were distressed, which is a low percentage for the Sacramento area. However, even with a lower distressed percentage, if appraisers and agents do not consider all the data points, it can be easy to get the value or marketing price wrong.

  • REO sale on 02/28/2011 – $212,000 (cash)
  • Traditional sale on 05/13/2011 – $248,000 (conv/20% down)
  • Traditional sale on 06/17/2011 – $230,000 (FHA/ 2 days on market)
  • Active traditional sale: $239,000
  • Pending traditional sale: $359,900 (outlier: massive upgrades w/ a view)

It looks like the bank-owned sale sold at the lowest end of the market because it is not consistent with the rest of the sales or listings. At the same time, the latest traditional sale sold in only two days and that also might not represent the market, right? There was no short sale, but it would not be surprising to have seen a short sale sell anywhere from $220,000-$230,000. There are a whole host of value issues to consider for the properties above, and one of them looks to be the nature of the sale – whether distressed or typical (and even how long the property was marketed). A market may be driven by foreclosures, but if we assume that across the board, we could really get an off-base picture of the market.

It can be very challenging to see any differences between distressed and regular sales in a neighborhood where the market is far more saturated with REOs and short sales (say 95% of all sales were distressed), but ultimately appraisers and agents still need to do their homework and use the right data in a neighborhood to correctly interpret the market because there is usually a difference. Typically in the Sacramento area we see traditional sales on top, then bank-owned sales and then short sales. Agree? Disagree?

Implications for the Difference between REO and Traditional Sales:

  1. Avoid REOs in appraisal reports: REO sales should be avoided in appraisal reports where possible. However, many areas in Sacramento have a percentage of distressed sales (bank-owned + short sales) near 70%, so it’s not always possible to use only traditional sales. I just appraised a condo recently and 35 of 36 sales over the past year were distressed.
  2. Note the difference: If REO sales are used in an appraisal report and there is a difference noted in the market between distressed and traditional sales, an upward adjustment should be made (or at least less weight given to the distressed sale). The same principle applies to selling a property. A property is not worth less because it is a short sale. It is worth what it is worth, but it may need to be marketed more aggressively to offset any stigma in the market and avoid foreclosure. If the short sale was not a short sale, would it sell for more? That is the critical question to ask and leads us to a better picture of what market value is.
  3. Marketing Strategy: Sometimes a property does not generate interest as a short sale, but that does not mean it is not worth the listing price or more. Short sales tend to have a stigma among buyers, so they often need to be priced more aggressively to generate interest. Moreover, it is very common to see short sales generate very little interest at a certain price, but the same property will sell quickly as an REO at that same price. The listing agent and/or home owner need to understand the market in order to set the right price for the property, whether a short sale, REO or traditional sale.
  4. Quick Value vs. Market Value (tax appeals / FSBO): Avoid using only distressed sales when appealing your property taxes or listing your home as a FSBO. These sales may not represent the market. If they don’t represent the market, then you’re probably focusing on a “quick sale” value instead of “market value”

How have you seen foreclosure sales impact pricing in a neighborhood? What other implications do you see when we misinterpret the market?

If you have any real estate appraisal, consulting, or property tax appeal needs in the Greater Sacramento Region, contact me at 916.595.3735, by email, on our appraiser website or via Facebook. 

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