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valuation principles

5 reasons why median price increases don’t translate dollar for dollar to actual value

April 28, 2015 By Ryan Lundquist 14 Comments

If the median price goes up by 2% in one month in a zip code, does that mean you have 2% more value for your property? Should you add that 2% to a new listing or appraisal? Or since the median price rose by 75% from early 2012 in Sacramento County, does that mean you have 75% more value? Not necessarily.

NOTE: Understanding how the median price works is important for valuing properties and communicating with clients.

Image purchased and used with permission by Sacramento Appraisal Blog

What is the median price? If you lined up all sales in a county or zip code from lowest to highest price, the median price would be the sale in the middle. Over time this figure can help us see how a market is moving, but applying median price increases from a zip code to a particular home can get us into quick trouble.

5 reasons why median price increases don’t translate to actual dollar for dollar increases:

  1. what-is-the-median-price-by-Sacramento-Appraisal-BlogSales Volume: The monthly median price is based on how many sales there were in a given month. If there are few sales in a market, the median price could see a huge swing, which means it can go up and down very quickly (which means we should be very careful about applying the increase or decrease to our property’s valuation).
  2. Less junk sales at the bottom: In 2012 and 2013 cash investors gutted the distressed market (low-priced short sales and foreclosures), and then flipped many of these low sales at higher levels. This essentially means the bottom of the market was removed. Now imagine the median price again, which is the sale in the middle of all sales if you lined them up by price. All of the sudden the sale in the middle got much higher because the bottom distressed part of the market was removed in a short period of time. Thus the market on paper shows very significant median price increases, but that’s really because of the bottom disappearing, right?
  3. Seasonal Moods: The median price tends to see a huge uptick during the early Spring.. For instance, imagine the median price increased by $25,000 from January to March. Does this mean values increased by $25,000? Not necessarily. It’s just the stale sales from Fall were much lower in price, and now current values are in high gear for the Spring (which is normal for Spring). Sometimes values in the beginning of the Spring are aggressive and they seem incredibly high, but in reality they might be picking up where the market left off at the end of Summer (or maybe slightly above). This is why we need to look at sales well beyond just the past 90 days.
  4. Larger Homes: Imagine there were larger-sized homes that sold last month compared to the previous month. We might look at the median price and say, “Wow, look how much the market increased last month”, but in reality there were simply bigger homes that sold at higher levels that made the median price increase.
  5. Zip Code vs Neighborhood: Not every neighborhood is experiencing the same trends as the entire zip code, and not every price range behaves the same way either. The zip code might show a 2% monthly increase in median price, but are neighborhood listings being priced higher or lower than recent sales? Are listings spending longer or shorter times on the market? Are sellers getting what they ask for? We have to be sure to take a hyper-local look at sales and listings in the immediate neighborhood before blindly applying zip code trends. The zip code might show a 2% median price increase, but maybe after looking at the numbers in the neighborhood itself, values in the neighborhood increased very modestly by maybe 0.50 to 1.0% in actual value over the month.

I hope this was helpful. As always, thank you sincerely for reading.

Question: Anything else you’d add? I’d love to hear your take.

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Filed Under: Market Trends Tagged With: appraisals in Sacramento, big data, downfalls of the median price, house appraisers, how much did values rise, Median Price, price metrics, sacramento home values, Sacramento real estate trends, valuation errors, valuation methodology, valuation mistakes, valuation principles, what is the median price

5 things to remember when using price per sq ft in real estate

February 24, 2015 By Ryan Lundquist 19 Comments

Using price per sq ft can be very dangerous. I know that sounds odd because price per sq ft is about as common as anything in real estate. Home owners ask, “How much is the price per sq ft in the neighborhood?”, and real estate agents might say, “I priced this property based on the price per sq ft in the area.” But having a correct understanding about the way price per sq ft works can revolutionize the way we see the market and value properties. Let’s unpack five principles below, and I’d love to hear your take in the comments.

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5 principles to remember when using price per sq ft in real estate:

1) There is a price per sq ft spectrum in a neighborhood: There is never just one price per sq ft figure that applies to every property in a neighborhood. For instance, a neighborhood might easily see a price per sq ft range from $100 to $250 when looking at all sales.

2) Similar houses tend to have a similar price per sq ft: When homes are similar in size, location, bed/bath count, etc…, they tend to have a similar price per sq ft. That’s obvious, but the contrasting factor is that non-similar homes might have a VERY different price per sq ft that shouldn’t be used to value your home.

3) Property characteristics can quickly change the price per sq ft: When there are differences in condition, location, lot size, quality of upgrades, bed/bath count, size, etc… the price per sq ft can change dramatically. We might see a small remodeled home selling at $250 per sq ft, a model match fixer selling at $175 per sq ft, a short sale model selling at $185 per sq ft, and a home with an adverse location selling at $215 per sq ft. Thus even for one model there could be a price per sq ft range from $175 to $250.

4) Smaller homes tend to have a higher price per sq ft: It costs more to build smaller homes, so smaller homes tend to have a higher price per sq ft than larger homes. This is why it’s dangerous to use a price per sq ft figure from a smaller sale to value a larger home. A smaller home might sell at $250 per sq ft, but a larger home might be closer $150 per sq ft. Here is a quick video below (or here):

5) Price per sq ft provides a valuable context: When you can talk through price per sq ft figures in a neighborhood, and explain the above points, you are an incredible resource. Appraisers, pay close attention to the price per sq ft range in a neighborhood. Some appraisers treat price per sq ft as a meaningless metric, but it’s actually valuable. If your value does not fall within the range (especially the competitive price per sq ft range), it’s important to be able to explain that.

CONCLUSION: Be careful about using price per sq ft to price a property because sometimes it’s like putting the cart before the horse. I recommend starting a valuation with an “apples to apples” approach where you first and foremost try to find other similar sales and listings in the neighborhood, and then subtract and add value based on any differences with your property. After you have a grasp of similar sales, research price per sq ft figures for the entire neighborhood as well as competitive properties. Ask yourself if your value makes sense in light of price per sq ft figures.

Questions: Any thoughts or insight? I’d love to hear your take.

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Filed Under: Appraisal Stuff, Resources Tagged With: appraisal methodology, appraiser in Sacramento, how to value a property, larger homes, Price per sq ft, price per square foot, real estate 101, real estate principles, sacramento appraisers, smaller homes, using price per sq ft in real estate, valuation principles

Price per Sq Ft and The Costco Principle

March 3, 2014 By Ryan Lundquist 12 Comments

Using the wrong comps can lead to the wrong price or value. I realize that’s a no-brainer, but at the same time it’s still a common mistake when using price per sq ft figures to list or appraise a house.

A Recent Scenario: The subject property is a 3-bedroom unit at just about 1500 sq ft. There were zero sales at the contract price and really no reason why it should be selling so high, so I asked the Listing Agent what influenced him to price the property at that level. He shared that the price per sq ft of two nearby homes supported the value. The only problem was that the nearby sales were closer to 1200 sq ft, which was about 300 sq ft less than the subject property. While this might not seem like a big deal, the smaller homes actually had a higher price per sq ft than than 1500 sq ft models. Take a look at the graphs below.

Price per sq ft in nhood 1100-1300 sales

Price per sq ft in nhood model match sales

Price per sq ft in nhood

The smaller units were easily between 180-190 per sq ft, but the houses very close in size to the subject property were much closer to 170-ish. This just goes to show how important it is to compare apples to apples in real estate. Or in other words, it’s vital to use data from similar properties when making a comparison. As a rule of thumb I might suggest using sales 10% or so above and below the square footage of the property you’re working with. In this scenario the smaller units easily had a 5%+ higher price per sq ft. You may wonder of course how a property could get into contract 5% too high. Remember that inventory is still tight, but most of all the offer was from an FHA buyer putting very little money down. When you’re not spending your own money, you tend to offer more, right? That’s how it usually works.

peanut butter costcoThe Costco Principle: Why do smaller homes tend to have a larger price per sq ft? Because they cost more to build. It’s sort of like buying one can of 16 oz peanut butter at your local grocery store for say $4.00, but then going to Costco and getting 96 ounces for $12.00. Just as it can be less expensive to buy groceries in bulk, the same is true in real estate when building. Think about how much less it costs to build a second story on top of a one-story house. During new construction it saves a ton of money to simply add the second level because there is no need for an additional roof, foundation or much infrastructure below because it’s already there. This is also exactly why a house double in size is probably not worth twice as much because it didn’t cost twice as much to build.

Questions: Any thoughts or insight? By the way, chunky or creamy peanut butter? I say chunky all the way.

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Filed Under: Appraisal Stuff, Resources Tagged With: comparing properties, comps, Costco, graphs of price per sq ft, Home Appraiser, House Appraiser, how to value a property, Price per sq ft, pricing principles, pricing properties correctly, Sacramento appraisals, valuation principles

5 tips for valuing a lake location in real estate

December 5, 2013 By Ryan Lundquist 2 Comments

How do you know what a lake location is worth? How much value should you give to a house with a lake view compared to a house across the street without the view? I had this conversation recently with a real estate agent who had some questions about pricing a lake house, so I wanted to share some tips for uncovering value from an appraiser’s perspective. It’s honestly quite a bit in principle like valuing a golf course location. Have a read and let me know what you think.

lake-location-by-Sacramento-Appraisal-Blog

5 Things to Consider When Valuing a Lake Location:

  1. Lake sales vs non-lake sales: It’s going to be important to find sales on the lake at some point because these sales will help indicate how much buyers have been willing to pay for a lake location. It’s obviously helpful if you have recent sales, but even if you have to look over the past ten or so years of sales, find something that sold and then compare how much of a premium it had at the time to similar-sized non-lake homes. For instance, if you find a 1600 sq ft house on the lake, compare this house to other 1600 sq ft sales at the time to extract the value difference for the lake. Or if you find a 2300 sq ft house on the lake, compare this house to other competitively sized homes at the time without lake locations. Once you find a few sales to work with, you can then apply the percentage difference between these sales to your situation. Keep in mind the perception in the market among buyers could have changed though over time, so know your market. Also be aware that builders may sell homes with very large lake premiums. It may be best to look at the resale market to see how much buyers are willing to pay without any builder mark-ups.
  2. Subject Sale: If the subject property sold previously in recorded MLS history, you may have a good example of how the market has viewed the subject property. Was there any premium for the lake in the previous sale? If so, how much? This can be great secondary support, especially if the subject property has sold multiple times recently.
  3. Use Other Competitive Lake Houses: You can attempt to find a competitive neighborhood with a lake, extract the percentage value of the lake by completing Step 1 above, and then apply this percentage to your situation. However, a competitive neighborhood might be really far away, and the real issue becomes whether the community is truly similar or not. These are important things to keep in mind because you want to compare apples with apples so to speak.
  4. Conversation with Local Pros: Talk to local pros who know the market well, explain your situation, and ask them questions. It’s ideal to compare actual sales, but if there are none for whatever reason, nothing will beat the knowledge of agents who know the idiosyncracies of a market (they’re often spot on – though not always). Also be sure to look at withdrawn listings and current listings to see if there is any potential helpful data to mine.
  5. Be Aware of the Lake: Be aware of the location of the house on the lake, the view and how much frontage the property has. Also, can a dock be installed? If there is a dock, does it matter much for value? Does the property owner have rights to the lake? Are those rights any different from the rights for other nearby properties? This probably isn’t an issue for a man-made lake, but having water rights (riparian rights if you want to sound fancy) will very likely make a value difference elsewhere.

I hope that was helpful. Anything else you would add? If you’re in real estate, what have you learned about lake locations?

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Filed Under: Appraisal Stuff, Resources Tagged With: appraisal house on lake, appraisal principles, appraise house on lake, lake location, Sacramento home appraisers, valuation principles, value of house on lake, value of lake view

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