Valuing Real Property in the Seattle Area

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[photopress:lega_emc2_l.jpg,thumb,alignright]My engineer friends are asking off screen for more details on a “scientific” approach to valuing property. You know, something they can put on an Excel Spreadsheet 🙂 Here’s a fairly tried and true method of valuation here in the Seattle Area. This method was so accurate a couple of years ago, that many agents were using this calculation to list property, and many owners knew it and were insisting on this method of valuation. That was before Zillow came out of course 🙂

I do have to caution readers from outside of the Seattle Area and the State of Washington, that this may not be reliable in other areas of the Country.

Here in the Seattle Area we have little niche markets everywhere. West Seattle, Downtown Kirkland, North Queen Anne, Ballard on the Freemont Side, Crown Hill, etc… Every pocket of value is self contained and is often called everywhere around the Country, the “snob” factor. I sometimes call it the “nosebleed” section, particularly in “view corridors”. Every place I have ever worked has had many, many imaginary lines that determine value pockets. Like the little sliver of area that has the zip code of the lower valued area, but the school district of the contiguous higher valued area.

OK, my engineer friends are getting bored with all the words. Here goes. When I first arrived in the Seattle Area and was working over by Green Lake, it was well known that everything was selling at 1.3 X assessed value. “Everything” meaning “all things being equal” and the “good-average home” without a view. Flippers were looking for anything and everything they could get their hands on that was selling at or below assessed value and using 1.3 or more x assesed value as their “worst case” after improvements value benchmark.

The beauty of this method is that you can extract the factor from each pocket neighborhood, and then apply the factor to the assessed value. I’m going to use the mls, but Galen and others, if you let me know of a site that has sold data that includes the inside photos of the sold property, let me know, so I can give the tutorial pointing to sites the Average Joe can access.

I just sold a property that closed at 1.54 times assessed value. Prior to that sale the top rate for that neighborhood was 1.33 times assessed value or less. Agents sometimes hold the market value down on the seller side of things by pre-ordaining the snob factor. Sometimes I can extend the imaginary line and drag the snob factor ratio of 1.5 to 1.6 times assessed value over to the nearby area that has not gotten a fair shake by the local agents for too long a time.

Take all of the solds in the same zone, as in nearby homes of like kind. Like kind meaning you compare view properties to other view properties and non view properties to other non view properties. You don’t have to consider square footage or number of bedrooms, as the assessed value will take that into consideration by going up and down to accommodate the inherent differences. This method is often more accurate than using the number of bedrooms and square footage reported in the mls.

Take the sold prices of each home divided by the assessed value of that home. Once you get the range of value for that area, say 1.4 – 1.48 times assessed value, you look at the assessed value of the home for sale and multiply it by that given area’s factor. If you pay more than that, then you know you are at the high end of the value range and might have to hold the property longer to come out whole. If you pay at or lower than the low end of the range, you can likely sell it whenever you want and make a profit.

View property will generally go for 1.6 times assessed value. The problem comes with flip projects. Flip projects and remodeled homes have jumped to 1.8 to 1.9 times assessed value. These homes, while they may be worth the price, must be evaluated with regard to the improvements of the basic systems and not just the comsmetic changes. If the roof is three layers and the wiring is original and the basement is yukky, but the kitchen has granite counters and the bathrooms are remodeled and the home is staged…be very careful. To garner 1.9 times assessed value, the home should be “like new” not only based on aesthetics, but all of the main components and systems of the home as well AND be a view property.

By calculating the 1.? times assessed value, you can determine how picky to be about the inspection, how much is too much to pay and where you are paying for “snob factor”. If nearby homes are selling for 1.4 times assessed value or even 1.9 times assessed value, and your offer is 1.8 times assessed value…that should tell you something you may need to know.

OK you data crunchers out there. Time for you to test your valuation using the x assessed value method and compare it to your Zestimate. Let’s hear what you come up with. This should work in any part of the Country that does not re-assess based on sale price, such as California.

Lynlee's Tips to maximize seller proceeds

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[photopress:Lynee_Signing_1.JPG,thumb,alignright]

Photo to right: Lynlee Kane w/ clients

We frequently close transactions in which the buyer offers a higher price than the list price in exchange for the seller paying buyer closing costs. Most of the transactions of this type actually result in the seller netting less than if they accepted a full price offer without concessions. We recognize that many buyers are cash poor and need to have the seller pay closing costs.

When writing your contracts please consider that the higher price will result in the seller paying higher excise tax, real estate commissions, escrow fee and title premiums.

For example, a very common $10,000 seller concession (offset by increasing the sales price) will cost the seller $778 (6%, 1.78% excise) in excise tax and commissions alone.

Sellers usually do not consider these costs until they come to the closing table and actually review the numbers on the settlement statement. This obviously creates an awkward situation for the listing agent who may have told them it was a wash.

Over the year, we have documented only one case where the listing agent addressed the increase in excise tax via a commission credit. Only about half the time we receive addendums stating that commissions will be based upon the lower or original list price.

While assisting 100% financed borrowers with closing costs is helpful in making a sale, make certain your sellers understand that it may cost them more.

  • Consider Excise tax at 1.78% in most jurisdictions
  • Consider the additional commissions at 6%
  • Consider that title and escrow premium may also increase

Wishing you all the best in smooth closings!

Required Reading…

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Another list of 10:

  1. Worth reiterating: Polly’s comments should be required reading for all agents (including the comments within the post about her comments! 🙂 ).
  2. Claudia Wicks lets us know about this “genealogy” site geared toward homes instead of people… The site includes maps, photos, etc.
  3. Also, are press releases still valuable? A quick search on Claudia shows that a recent press release she put out about being one of the Top Woman Real Estate bloggers dominates the coverage of her name on a google search. Fascinating.
  4. Artemi just emailed me to let me know that he just released a major upgrade to his real estate search site for England. The features that stick out for me are the simplicity, the tags for each property, and the natural language search (like the fact that the site also pre-fills in the search box with relevant tags). Great stuff…
  5. Interesting to read Jim’s perspective on the new website he is building with Ubertor. From what I’ve seen, the website definitely suffices as far as websites go, but if I was searching for an agent, I’d say his blog does a much better job selling himself.
  6. Searchlight had a follow up to their renting is for suckers article that describes some reasons a person should not buy a house. I can’t tell if they read my comment, but they clearly addressed some of the issues I brought up.
  7. Joel gives some insight into the art of being good enough…
  8. And then follows it up with news that Prudential is jumping on the Zillow API bandwagon.
  9. My take? Here are the ingredients for housingmaps style publicity: map. geocode. data1. data2.
  10. Jim’s worth noting column reminded me that I really wanted to mention DataPlace at some point. I saw a presentation of this tool at Where2.0 and was very impressed with the massive amount of neighborhood, demographic, socio-economic, etc. data that the Fannie May Foundation has manage to squeeze into their interface (and it is all free!). To give an overview, check out the massive amount of mortgage information available for the Seattle-Bellevue area or better yet, check out the map that I was able to easy build on post on my site of home ownership rates in the area:

Valuing Homes for Buyers

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[photopress:dartboard.jpg,thumb,alignright]To some extent buyers, especially first time buyers, encourage receiving inaccurate information with regard to value and other home details, by asking the right questions at the wrong time.

Sellers understand that it takes time to work on a valuation. Rarely does a seller call and say, “I live at 123 Great Street, what is the value of my house?”. I’d venture to say that no seller expects an agent to know the value of their house on the spot, nor would they want a two second answer. Consequently, valuing the home properly for a seller, within the framework of the seller’s expectations of the time it takes to give an accurate answer, produces fairly good results most of the time.

Buyers on the other hand encourage shoot from the hip responses fairly continuously. The normal process should be that the buyer view the properties selected by both them and the agent. The buyer should select one or more that they might like to purchase, and then ask the agent to take some time to evaluate and value those properties that they like best.

But that is not normally how a buyer operates. Often they ask all kinds of questions, as if an agent knows every property they are showing in great detail and with a large degree of accuracy. Certainly the agent can, and will if you encourage it properly, do all of the work necessary to know every property. But buyers seem to expect an agent to spend this kind of time on every property being shown before the agent shows the property and before the agent knows if the buyer is even interested in the property. By and large an agent is not going to study every single property he shows in great detail, as it would be a waste of time, especially for the ones the buyer hates at first glance.

When you first look at property, you should simply be advising the agent if you like it or do not like it. Then you should ask the agent to dig into only the properties you like and might buy, and find out as much as possible about those and also value only those. For as long as I can remember, many buyers will go from house to house asking questions like, what do you think of the price? Is it worth it? What is the age of the house, have they had any offers, etc… By asking a lot of questions about every single house, even the houses you hate, you encourage the agent to answer off the top of his head. This starts the whole relationship off on a bad foot. The agent doesn’t want to say I don’t know to all of these questions, but it is not reasonable to expect an agent to know a lot about every single property being shown. Next thing you know the agent is giving sloppy and often inaccurate answers to avoid saying I don’t know to all of the questions.

Asking your agent if the asking price is reasonable, is of course a very good question. But just as the seller gives the agent hours and sometimes days to come up with that answer, don’t expect an answer on the spot for every single house you are shown whether you like it or not. If you do ask the question, and the agent answers immediately without taking at least an hour or two to research the answer to that question, don’t be surprised if the answer you do get on the spot is a knee jerk, inaccurate answer.

By encouraging the agent to answer inaccurately, you set up a relationship where the agent continues to give you shoot from the hip responses even on the property you eventually purchase. Look at property from your perspective. Do you like it or not. Then ask the agent to research the properties you like. This will insure a more accurate valuation and more accurate facts. First the agent calls the listing agent to see if he has any offers and if so, what time are the offers being presented. If you have a few hours to get your offer in, and you usually do, set an appointment for a couple of hours later and ask the agent to research the properties in detail before you sit down to discuss the price and terms of the offer.

Often it is not a good idea to ask ALL of your questions before making an offer. If the buyer’s agent calls the listing agent and asks tons of questions like How old is the roof, Did they ever have water in the basement, etc., that buyer will not be given good consideration if there are multiple offers. Many questions, especially negative toned questions, should be asked after you “tie up the property” and most of them should be asked of the home inspector during the home inspection.

Sorry, I seem to have covered two topics in one there. Just following the normal sequence of errors buyers often make when viewing property and prior to making an offer. Often the seller is more negotiable with a buyer who loves their house, than one who is “kicking tires” from the getgo. Timing is everything. You should ask your agent all of the questions you may have and he should answer all of the questions including the ones you didn’t ask. Leaving the agent room to apply proper timing to obtain the correct answers, without alarming the seller or seller’s agent at the wrong time, can make a huge difference in whether you get the property and how much you pay for it. Once deemed a “difficult or squirrely” buyer by the listing agent, you will often have to jump through more hoops to get the property, if you can get it at all. Give your buyer’s agent enough room to play everything to your best advantage and don’t look at him like he is stupid, if he doesn’t know every answer to every one of your questions “off the top of his head”.

How to Value a House

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[photopress:bullseye.jpg,thumb,alignright]While “market value” and “appraised value” are not always one in the same, calculating a home’s value is both a science and an art, whether the value is being ascertained by an appraiser or a real estate professional.

The purpose of the valuation can actually have some bearing on the value itself. If you have a client who is purchasing a property to remodel and flip it, the value for that client has to take into consideration the cost of the improvements and the eventual resale value. Consequently, one has to be involved in both knowing, and making recommendations with regard to, which improvements will produce the greatest return, before the client makes an offer on the property.

Just as a lender has to take into consideration many factors when recommending various loan programs, a real estate professional has to take into account many factors before determining a home’s fair market value. When you are representing a seller, you have to lean towards the high end of the value range. An appraiser would call this “highest and best use”. A real estate agent would call that “if purchased by a person of the best buyer profile. For example, someone purchasing a property to live in it, will pay more for a property than a builder who is going to tear it down or an investor who is going to remodel and flip it.

When you represent the buyer, you have to consider the home’s resale value and any money left on the table by the seller. A seller leaves money on the table by various means that are generally not reflected in the asking price itself. I use this test when valuing a property for the buyer: If they called me in a very short period of time to sell it because they decided to move back from where they came from, could I get them out whole, meaning purchase price plus the costs of purchase and sale. By being a “listing agent” in your mind when representing a buyer, an agent will perform a better valuation than if they are just considering how much the buyer wants or likes the property. Of course, the buyer can always choose to pay more than that value and say “I don’t plan to sell it as I plan to live here for a very long time”, but they will at least know how much they are overpaying for the privelege of getting the home. Very important when the buyer is trying to determine the cap on their escalation clause.

Let’s go to the science part of the valuation. Some houses have what are called “true comps”. This would be most true in a very large community of newer homes. I am not going to spend a lot of time on valuing property with “true comps” because here in the Seattle Area, there are very, very few houses that can be valued by those normal methods. In fact the only ones I have been able to value by normal methods have been newer townhomes. Proximity to the subject property is not always relevant, especially in Seattle vs. Eastside. The comps have to be ones built in the same “finish period” and have the same “buyer profile”. For instance, a property built in 1991 may have white cabinets, gray countertops, white appliances and 4″ white tile in the baths. Using that as a comp to a property built in 1995 with granite tile countertops vs. gray laminate and maple cabinets vs. white cabinets, will not produce a reliable end result. Nor would using a comp with granite slab counters, stainless appliances and hardwood floors.

For the most part, we are lucky to find one recent sale that is quite similar to the property we are valuing. I call that the home’s “significant other”. An appraiser will still use three solds, whether similar or not, to ascertain value. A real estate agent will pull the significant other from the solds and move to properties that are pending and STI and ACTIVE in determining what a buyer will pay or should pay or what a seller should set as an asking price.

A few recent examples. When I valued a property for a seller back in May, I had comps of $325,000, $327,000 and $337,000. I priced the townhome at $350,000 and it sold for $350,000. The upward momentum of the marketplace from May was a significant factor. For this particular townhome, best buyer profile was someone who was relocating to the area and the buyer was in fact relocated here for her new job.

When I recently valued a newer townhome at this time of year, I needed to be more “right on target” as we are in a sluggish month of August aka “agents take vacation time month” and running into September which generally has two weeks out of four that are hot. The buyer profile of this particular townhome was a single person who would take in roommates. It did sell quickly and at full price to a student taking in two roommates. The danger on this one was pricing against new construction. You have to be as high as you can without encroaching on the price at which a buyer can get a brand new townhome nearby. I could not use the comps at all when valuing that property, because the subject property was built in 2001 and the comps were 2003 and new. The interior finishes were not comparable and could not compete, so to get a fast full price was their best chance of not having to bargain down to a level below the highest achievable price.

Let’s flip to buyers and how I value a property for a buyer vs. a seller. I’ll have to make this another article as the Vicodin for the root canal is kicking in and I’m going to barf.

John Mudd — The Original Real Estate Blogger

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Becky Troutt let me know earlier today that John Mudd quietly passed away of natural causes last month and it is confirmed on one of his blogs. An article from his local newspaper gives some more details.

[photopress:John_Mudd_1.jpg,full,alignright] John Mudd has had a huge influence on my style of blogging. He was the first to key me into the importance of building up a personal brand through blogging. While not always explicit, his actions (like the fact that he appeared to be in every online real estate discussion) showed me that the most important way to play in the game was simply to show up. However, he did a lot more than just show up. Inside the blogging community he was opinionated and passionate, two great qualities for a real estate blogger. In addition to blogging, I’ve seen his writings appear all over the place: from trade magazines, to other blogs and given a little more time, I’m sure he would have completed the real estate blogging book he was writing.

When I read over the interviewed him I did with John last December, I can’t help but remember just how big the John Mudd presence loomed over real estate blogging when I first began writing. He was everywhere and it seemed like he knew everyone. In my mind, he will always be The Original Real Estate Blogger.

Addiction to technology can be damaging to your mental health

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Yesterday’s list of ten stories was fun to write… So in cleaning out the 400+ unread stories that had accumulated in my feed reader, I came up with these ten stories for today:

  1. I’ve had countless people ask me about how to set up a wordpress blog, so I was glad to see Matt point out that CNet now has a video that details the steps of setting up a WP blog. It’s a simple video, but that is appropriate since the instillation of WP is simple. However, if terms like “FTP”, “domain” and “web host” don’t mean anything to you, then skip over this video and go straight for a hosted blog like blogger or wordpress.com.
  2. Technology bloggers are so much more advanced in their blogging problems that they have to worry about things like the Echo Chamber. Since linking is still a novel enough concept in real estate, this is not really an issue within the real estate blogosphere. None the less, advice like “say something original once a day” is good stuff that we could all benefit from.
  3. I include the next article only for the last paragraph: ‘Employers provide programmes to help workers with chemical or substance addictions. ‘Addiction to technology can be equally damaging to a worker’s mental health’. (It’s one thirty in the morning as I type this, I obviously need help.)
  4. In an effort to separate addiction from hype, Seth Godin reminds us that “just because people know who you are doesn’t mean they’re going to buy what you sell… the best way to succeed is to have a really great product.”
  5. In relation to real estate technology, I can’t imagine why anyone with $17M would think that Reply.com is a good idea… How do they justify the business model that they are going to allow anyone to make an offer on any house? From their CEO: “every home in the country is for sale – for the right price!” The idea seems like a fun exercise for a graduate level economics course, but an actual product??? I don’t get it. Please feel free to let me know in the comments if I’m missing something…
  6. Also, Joel points out that Reply’s product is not likely to make Glenn very happy since he’s working on a similar service and even taken a patent out.
  7. More web technology that seems misguided to me: I can think of plenty of people who are in search of a good blog, but I can’t think of any other blogs that are in search of a good blogger…
  8. And then sometimes, people take misguided to such a different level that I start to doubt my own sanity. How smart do you have to be to refuse $1M? (Really! What does he know that I don’t???)
  9. Barely on topic… There is an interesting house that was recently (re)listed in the NWMLS. Turns out the owners were not doing a good job showing the house from 1000 miles away, so they took it off the market while they reorganized their efforts. During that time, a friendly conversation on staging turned into a full-on listing for one RCG contributor. So far, the owners have been blown away by the difference that this one woman can make in preparing a listing for sale. If you saw the place before, please considering checking it out again because the changes are phenomenal. A neighbor said she barely recognized the inside of the house.
  10. On a related technology note, I found out that the previous listing was “live” again because it showed up in my feed reader based on a listing feed I created for my zip code from Robbie’s fantastic Zearch tool. Anyone in the Puget Sound area can use this tool to be easily updated every time a new listing shows up in their zip code, city, neighborhood, etc.

UPDATE: After playing with the service, Joel goes so far as to give Reply.com the 3-finger salute.

"Tiptoeing" through ethical minefields

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It’s getting a little warm in the kitchen of Real Estate

Two questions have been eating at me for some time.
First, one of the most difficult questions to answer deals with my own brethren in the escrow industry. Why is it that a traditionally transaction “neutral escrow company or service” only receives compensation if a transaction successfully closes?

To me, at least in the realm of escrow, this is the mother of all potential conflicts of interest. Isn’t it a conflict of interest to the parties involved and our fiduciary duty to the lender (yes, folks we do have a duty to protect the lender from potential fraud, which is clearly stated in escrow instructions from some lenders) if we are only paid if the deal closes? Wouldn’t that create a lot of problems, particularly if you have pressure from loan officers or Realtors to “just get it done

10 Great Conversations

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Just for fun, I started recording notes on real estate conversations I enjoy following and I decided that when the list hit ten, I’d hit publish:

  1. David Smith has a great (no wining allowed) article about the housing bubble. I only wish David interacted with the real estate blogging community a little more because his stuff is great but easily missed…
  2. Continuing on the bubble topic, Dan Melson puts on a great effort describing why renting really is for suckers (and what yo do about it). For me, this is a great example of why real estate professionals should not write about the bubble (David Smith being the exception! 🙂 ) It reminds me of the “fool“ish investment advice so popular in 1999/2000 that said it didn’t matter what price you bought a stock at as long as the company was good, you would make money in the long-term. Here’s my problem with this argument… If rents are cheaper than the interest payment (i.e. both of these being the completely sunk costs) and home prices go down slightly in the near future (which doesn’t seem inconceivable for selected markets in the country), then no amount of number juggling will replace the fact that if a potential home owner would be best served waiting to buy until the prices bottom out. I realize there are more than a few “ifs” in my statement, but my goal is not to say that it is a bad time to buy, only that a blanket statement “it is always a good time to buy” falls on deaf ears.
  3. On a related note, it is timely that the NYTs notes that rents are rapidly rising across most of the US (with Seattle being a highlighted area!).
  4. Greg shows off his custom signs. I think these are brilliant marketing moves and every agent should look for ways to market themselves through their listings. Beautiful stuff…
  5. And talking of beautiful ideas, Claudia Wicks mentions a very simple marketing idea ($1.50 simple) that could go a long way… There’s a beauty in simplicity (and it reminds me of an idea that Anna and I were batting around a while back…)
  6. And if you really want beauty, Fraser Beach takes staging to a new level by hiring actors (beautiful ones!) to play house during an open house…
  7. It takes a certain level of confidence to have fun with your previous mistakes. (Kris is clearly a confident agent and I like that!)
  8. ActiveRain is getting some hype from both the Real Estate Tomato and the Future of Real Estate Marketing. I definitely think that Matt Heaton is onto something interesting, and he doesn’t get particularly phased by either Greg or Joel, which I think is a great sign.
  9. Because I’ve been there…
  10. Greg (Linden this time!) creates a list with (nearly) all the Seattle start-ups and their associated Alexa rankings. It is a list that is definitely worth checking out as you might be surprised at the massive activity within the Seattle start-up community! For those interested, the rank of the real estate sites were: Zillow (976), Homepages (21,720), Redfin (22,117). RCG was not included in his list, but we are ranked at 75,844. You might also be interested to know that despite the fact that we’re not ranked as high as some of the other sites, our reach is right up there with HomePages and Redfin. (not bad for a site with no paid staff and $120/year hosting fees!). And since I mentioned ActiveRain earlier (and they are based in Kirkland), I think it is interesting to note that they are seeing awesome growth in the number of pageviews that is blowing away all the local real estate sites save Zillow. Considering their Alexa ranking is only 108,655, they are obviously creating a sticky user experience.