Sacramento Appraisal Blog

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original list price

Choosing comps in a lopsided market

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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.

Different colorful shapes wooden blocks on blue background, flat lay. The caption says "choosing comps in a lopsided market."

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.

A picture of a unicorn with a statement saying, "One lofty unicorn sale doesn't all of the sudden mean the rest of the market is now going to be at that higher level."

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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How much are buyers paying above the asking price?

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“Buyers are crazy!!! How can they be paying these prices?” That’s what we tend to hear from people who are NOT trying to buy a house right now. It seems like onlookers really don’t understand what it takes to get an offer accepted these days. But for anyone actually in the game, the truth is blatant. If you want the house you’re probably going to have to pay above the list price.

Fresh stats: Today I have some brand new stats. I’ve never broken out numbers like this before and I’m excited to share. Even if you’re not local I hope this gives perspective or ideas for how to visualize your market. 

Quick thoughts: On average properties sold four percent above their original list price last month in the Sacramento region. Or in other words, buyers on average paid $23,787 more than the original list price. Keep in mind these stats represent the average and there are many properties that went above and below this amount. There are also quite a few homes that sold at the original list price. In short, this doesn’t mean literally every buyer paid $23,787 above asking. Also, there are few sales below $300K, so take that stat with a grain of salt.

Four reasons why prices have risen so quickly:

1) Supply & demand: Prices have been increasing rapidly due to supply and demand being so lopsided. It’s no secret we have a shortage of listings and excessive demand. This has created a market that feels like chaos where the median price in April in the Sacramento region is up 11% since January. Of course rates below 3% have also played a role in supercharging the market.

2) Appraisal gap: Buyers are paying above the appraised value or bridging the “appraisal gap” so to speak (the difference between the appraised value and the contract price). In some cases appraisal waivers are also helping properties close at higher levels. 

3) Priced too low: Let’s be real. Some listings are being priced way too low and this causes properties to get bid up. I’m not minimizing how aggressive the market is. I’m just saying there are cases where listings are painfully low. 

4) More at the top: We’ve been seeing more sales at higher prices in the local market as well as across the country. Therefore when looking at lofty price stats we have to realize some of the massive growth has to do with what is selling rather than pure price appreciation.

I hope this was helpful. Thanks for being here.

Questions: What stands out to you about the stats or points? If you are a buyer, what are you experiencing out there? What did I miss?

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The Golden State Killer’s house, selling lower, & price changes

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I have three things on my mind today. Let’s look at the accused Golden State Killer’s house, a new visual I’m testing out, and some fresh stats.

Huge thanks: First off, thank you for reading my blog this year. This will be my last post of 2019, so I wanted to say I’m truly honored to have you here and I hope you’ll continue to journey with me into the new year. As always, I’m open to your ideas too, so hit me up if you have topics in mind.

GOLDEN STATE KILLER: There’s no holiday cheer with this topic, but we’ve been wondering what would happen if the accused Golden State Killer’s house came to the market. Well, now we know. Sort of. This property sold as a private sale to an FHA buyer a few weeks ago. The SacBee did a piece on it here.

What do you notice about the final price?

Unfortunately the home wasn’t sold on MLS, so we don’t really know the details of how the price was established, but it clearly sold at the lower end of the market. Was the low price due to stigma? Could it be due to condition or lack of upgrades? Or maybe it was the owner selling at a discount? We may never know the details, but it’s interesting nonetheless to see.

House History: It’s sobering to think Joseph James DeAngelo, the accused killer (aka East Area Rapist), was pursuing the “American dream” of home ownership while destroying people’s lives. Here’s a history of the house:

  • 1980: Bought the house for $77,000
  • 1993: Refinance
  • 2003: Refinance
  • 2012: Refinance
  • 2019: Private transfer to family member
  • 2019: Private sale for $320,000

SELLING LOWER (NEW GRAPH): I’m testing out a new graph and I wanted to see what you think. Here’s a look at Roseville and East Sacramento. Would you like to see other neighborhoods? The goal is to see how close a property sells to the original list price vs how long it’s on the market. Thanks Braden Gustafson, MAI for the graph inspiration on Twitter.

The takeaway? The longer a property sits on the market, the further it sells from its list price. I know this is what we’d expect to see, but it’s still cool to visualize. By the way, I used the original list price instead of the most recent list price because it’s a more complete picture of the market.

PRICE CHANGE IN NEIGHBORHOODS: Last week I pulled some stats to prepare for an interview with Channel 10 about price dynamics in Oak Park. So I crunched numbers in about a dozen neighborhoods to help get a wide view of both higher and lower-priced areas.

The Sacramento Bee actually did a piece on my stats too.

I looked at both the dollar change and percentage change on purpose as this helps give a well-rounded view of the market. I also looked at huge chunks of data too as this compared almost an entire year in 2012 vs the same time in 2019. The problem with neighborhood data is if we look at one month only, the numbers can end up being all over the place. 

NOTE: If you want this data in a PDF, just send me an email.

Again, thank you for being here. From my family to yours, Merry Christmas and Happy Holidays. In coming weeks I hope you get a little time off to connect and reflect. Blessings to you.

Questions: Would you feel comfortable buying this house? Would you expect a discount? Any thoughts on the new graphs or price stats? Anything to add?

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Two things to understand about Zillow’s accuracy rate

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How does Zillow’s accuracy rate work? Let’s talk about two important points. I’m not writing because I’m angry, but only because the public places enormous trust in this brand, and I see this accuracy rate quoted everywhere. Well, let’s at least know the fine print so we can have informed conversations.

Two quick points on Zillow’s accuracy rate:

1) Median makes all the difference: Zillow says their median error rate is 5% for the United States. That sounds impressive, but we have to realize this is a MEDIAN error rate, which means the Zestimate is within 5% of the purchase price only half the time. So Zillow’s slogan could be, “We’re within 5% half the time.” But that doesn’t sound as polished as “Our median error rate is 5%”.

2) Zillow uses the most recent Zestimate: This is such an important point – even if it feels a little technical. I have an example to help show what I mean too. Zillow states “Zestimate accuracy is computed by comparing the final sale price to the Zestimate on or before the sale date.” Let me show you why this matters.

An example: Imagine a property listed for $380,000 and the Zestimate was also $380,000. But then after a series of price reductions, the home sold for $350,000. That would be 8 percent lower than the original Zestimate. That’s not very good, right? Well, now imagine as the list price was reduced, so was the Zestimate, and the most recent Zestimate was $353,000, which is only 1 percent higher than what the property sold for. Here’s the kicker: The home may have sold for 8 percent below the original Zestimate, but for its accuracy rate Zillow can claim 1 percent because it uses the most recent Zestimate instead of the original one.

In short, the most accurate stat here would be 8%. After all, the home literally sold 8% lower than what Zillow said it was worth. Thus when Zillow uses the most recent Zestimate instead, it’s a clever way to get much sexier stats. 

One more thing.

Chasing the List Price & Fixer Upper TV show: What sort of effect does the list price have on the Zestimate? In other words, does the list price actually change Zillow’s value? This might not happen in all cases, but here’s a glaring example of the “shotgun” house from the TV show Fixer Upper. It’s a one-bedroom that was listed for $950,000 and didn’t end up selling.

In this example the list price was outrageously high, but Zillow’s algorithm looks to have simply matched the Zestimate to the list price. This might not happen in all cases, but it certainly did here.

I hope that was interesting or helpful.

Article I wrote: Here’s a piece I wrote about online valuation sites for Comstock’s Magazine last month.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on May 28th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: What do you think? Anything else to add?

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