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3 ways price per sq ft is valuable in real estate (even for appraisers)

February 8, 2016 By Ryan Lundquist 17 Comments

My name is Ryan and I use price per sq ft in real estate. There it is. My confession. Are you surprised? I know you’ve heard me talk about how price per sq ft is one of the most abused metrics out there. I still believe that. Yet there are several ways price per sq ft is actually valuable and useful for real estate professionals (even appraisers). So let’s kick around some ideas together below. I’d love to hear your take in the comments. Any thoughts?

price per sq ft value in real estate - image purchased and used with permission by sacramento appraisal blog

1) Price Per Sq Ft Helps Us See the Entire Market: What have buyers been willing to pay in a neighborhood? It’s valuable to see the price per sq ft spectrum to help answer this question. What is the high, the low, and the average? I ran a CMA of sales over the past 90 days in the Mather neighborhood in Sacramento County (a tract subdivision), and the price per sq ft range is $112 to $206.

Mather all sales past 90 days - sacramento appraisal blog

2) Price Per Sq Ft Helps Us See The Competitive Market: Imagine we’re valuing a home that is 1569 sq ft. The question becomes, where does the 1569 model fall on the price per sq ft spectrum that we see above? After running a CMA for model match sales, the price per sq ft range is $184 to $193. That’s a much more narrow range compared to the overall neighborhood, right? Ideally it would be nice to have many more sales, but that doesn’t always happen as we know. This is why sometimes it might be best to look at more than just 90 days of sales and obviously expand the square footage range to maybe 1400 to 1800 or so. Whatever you do, just make sure you have enough data to produce meaningful results.

1569 model in mather - price per sq ft - sacramento appraisal blog

3) Price Per Sq Ft Helps us Talk to Clients About the Market: Some clients are so stuck on price per sq ft that they struggle to think about real estate in any other terms. Here’s how it usually goes. A home owner sees a figure of $206 from a different sale in the neighborhood, fixates on that number, and then expects a value for his own property based on that number (even though no similar sales have commanded a price per sq ft close to $206). After talking through Points 1 & 2, hopefully the client can understand that hijacking a random price per sq ft from the neighborhood isn’t a good valuation methodology. Lastly, it’s critical to actually completely set aside price per sq ft and ask two questions: What have similar properties actually sold for? (sales price) & What are similar listings actually getting into contract for?

price per sq ft in real estate - image purchased and used with permission by sacramento appraisal blog

Application:

  1. Real Estate Agents: Be sure to study the price per sq ft spectrum for the entire neighborhood AND competitive properties in the neighborhood. But make sure you spend a good amount of time finding similar sales and listings. Sometimes agents say to appraisers, “I used a price per sq ft of $215 to price the property”. Okay, but where did you get $215 from? Why not $208, $214, or $225? Remember, appraisers like myself can find value in using price per sq ft to see the context of the market, but at the end of the day we are fishing for comparable sales to tell us what the market has been willing to pay for something similar. So when you communicate with appraisers, I recommend talking about actual sales you used to price the property rather than price per sq ft figures. This helps you speak the language appraisers use, and your initial research with price per sq ft vs. actual sales might even help convince sellers to not get hung up on a list price that is far too high (based on a hijacked price per sq ft).
  2. Appraisers: Sometimes appraisers mock price per sq ft and treat it like a meaningless metric, but there is actually some real value in using it. Not only can we get a more detailed sense of the market, but we can also communicate well with clients. Consider paying close attention to competitive price per sq ft figures (I know, this may not work in rural markets). If you are coming in lower or higher than the competitive range in the neighborhood, just be sure you know why and can explain why. Also, consider using price per sq ft figures in your final reconciliation. For instance, along with statements about comps, I regularly find myself saying things like: “The final value is also supported by trend graphs as well as competitive price per sq ft figures in the neighborhood.”

I hope this was helpful.

reaa-north-bayClass I’m Teaching Next Week: By the way, I’m teaching a class next week in the North Bay to a group of appraisers. It’s called How to Tell the Story of Value in Appraisal Reports (good for 2 hours CE). Come on by if it’s relevant.

Questions: How do you use price per sq ft in real estate? Anything else you’d add to the points above? Did I miss something? I’d love to hear your take.

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Filed Under: Appraisal Stuff Tagged With: appraisers in Sacramento, how to talk to appraisers, how to value properties, Price per sq ft, real estate metrics, Sacramento appraisals, talking about value, talking to appraisers, talking to clients

The housing market is like a…

November 17, 2015 By Ryan Lundquist 11 Comments

I’m a huge fan of housing market analogies. Of course we can keep it plain by sticking to the numbers, but there is so much more flavor when we use a fitting comparison. Not only can analogies capture people’s attention, but they can also help break down complex ideas to communicate to the masses. Moreover, sometimes a funny or relevant comparison can open up the door to further conversation about trends. Today let’s take a look at some housing market analogies that complete the sentence, “The housing market is like a ….” Thank you to everyone who contributed to this post.

housing market analogies by sacramento appraisal blog - donut image purchased from 123rf dot com

Do you have any other analogies to add? I’d love to hear your take.

Donut
The New York City market was like a donut in 2014, strong on top and bottom and weak in the middle (Jonathan Miller).

Pizza
The Sacramento market is like a pizza. We are affordable, there is a piece for everyone, and even when we cool off a bit, we are still great (Barbara Lebrecht)

Matryoshka Doll
The market is like a matryoshka doll. Just as there are many little dolls within one large doll, there are many sub-markets within the larger market (Ryan Lundquist).

A market within a market - purchased and used with permission by sacramento appraisal blog

iPhone
The market is like an iPhone. Everybody has used it, some people use it too much, but few really know how it works (Gary Kristensen).

Coffee
Real estate is like a cup of coffee – too hot you’re going to get burned; too cold you don’t want to drink it; but when it’s just right you’ll probably have another cup or two (Michele Skupic).

Ocean Waves
The market is like ocean waves. There are many things that create the waves and their size, and it’s always changing – just like the many things that make real estate values move (Craig Dunnigan)

Stock Market
The housing market is like the stock market in that a home is worth what the market says it’s worth at a point in time; if a seller isn’t happy with the current value, he can wait and hope it increases, but as with the stock market, the value could also decrease (Dean Rinker).

real estate bubble - Image purchased from 123rf dot com and used with permission - sacramento appraisal blogBubble
When real estate values are inflated, we like to say the market is like a “bubble” because we think at some point values will “pop” or correct. Interestingly enough, the National Association of Realtors used to describe the previous housing “bubble” as “a balloon with a slow leak” from 2003-2007 (thanks Jonathan Miller for that tidbit).

Roller Coaster
The market is like a roller coaster…and we are hanging on for the ride (Paula Swayne).

Teeter Totter
The market is like a playground teeter-totter, it likes to be in balance, but adults keep coming along and screwing things up (Gary Kristensen).

Parent who Threatens Consequences (and doesn’t give them)
The Fed’s talk of raising interest rates is like a parent who threatens consequences but doesn’t give them. We all know interest rates will eventually increase in the future, but we’ve been hearing about an impending increase for years now. All we know for sure is rates will definitely, probably, maybe increase soon (Ryan Lundquist).

Relationship
The housing market is like a relationship, meaning it’s full of ups and downs. Any meaningful relationship has both good and bad days, right? That is very normal, and the same exact thing is true in real estate. However, one of the temptations in the real estate community is to talk like everything is always good as if values are always increasing (Ryan Lundquist).

Multi-Layered Real Estate Cake
Value in a real estate market is like a multi-layered cake since there are many “layers” in the market that help impact or create value. When one of the layers changes, it can change the rest of the market. See more here (this is my favorite analogy to use). Source: Unknown (though I first heard it from Dennis Lanni over a cup of coffee years ago).

multi-layered-cake-analogy-cake-by-Joy-Yip-text-by-Sacramento-Appraisal-Blog-yellow-text

I hope this was a fun read. Thank you again to everyone who contributed some thoughts. On a serious note, analogies can be an amazing way to describe the market, and I hope you feel encouraged to use them even more.

Questions: Do you have any analogies or metaphors to add? Which one(s) work best for you? I’d love to hear your take in the comments.

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Filed Under: Random Stuff, Resources Tagged With: describing real estate, explaing the market to clients, housing analogies, housing market descriptions, housing metaphors, real estate market trends, talking to clients

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