Tag Archives: #appraisaltehniques

Add Histograms to Your Appraisal Tool Kit

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It was my pleasure to speak at the Sacramento chapter of the Real Estate Appraisers Association last night at the Story of Value class with my good friend Ryan Lundquist. I discussed ways to explain markets in residential real estate appraisals and focused on using graphs and was surprised to see that maybe half of the crowd didn’t include graphs in their reports. This post is the first to offer advice and instructions on how to create meaningful graphs for residential appraisers.

Gross Living Area Histogram

Four appraisers out of 50 in the room reported using histograms. The histogram is a great tool for analyzing residential real estate markets that all appraisers should use.

What is a histogram?

For our needs, a histogram is a graph that shows the distribution of one continuous variable. The histogram splits the variable into equal-sized bins and counts the number of occurrences. It works well for important residential real estate variables like gross living area, lot size, age, and sale price.

Bin size is key to creating a useful histogram. Bins too wide loses meaning as your data is clumped together. Bins too narrow spreads the histogram out too much.

The graph above shows the sales of homes in a market area with homes of certain sizes. There is one sale less than 1000 sf and one more than 3500 sf. The most frequent size of home sold recently is around 2000 sf with the bulk of the homes in the 1400 sf to 2000 sf range.

Every report prepared for a lender asks the question “Is the subject conforming?” At a glance, any home sold in this neighborhood with between 1300 sf and 2600 sf is reasonably conforming in size. There are no sales in the 4000 sf to 5000 sf range so any homes in the neighborhood of that size are likely non-conforming. The two extreme sales, at 800 sf and 5000 sf, are unusual and likely non-conforming.

Sale Price Histogram

This next histogram examines the frequency of sale price in the market area. The most frequent sale price is in the $240,000 to $280,000 range with $360,000 to $400,000 the second most frequent range. A home in contract at $375,000 is fairly typical. A contract price of $700,000 is very unusual and is indicative of a non-conforming home.

The first two graphs were generated using ggplot2 in RStudio. Here’s an example from Excel 365 showing the year built for homes of sales in a market:

Year Built Histogram

Most homes sold in this market area (Placerville, CA small residential acreage) were built in 1970s and 1980s. A couple of homes were built in the 1800s and there are a couple of newly built homes.

The lender forms used by appraisers ask for similar information in a table format:

Table or Histogram, which is better?

Which describes the market better, the two histograms or the table?

Make A Histogram in Excel

Here’s how to use the latest version of Excel to make a histogram. This page has instructions for the latest version and older versions.

Start with your data in an Excel workbook with the top row field names and rows below sales data.

Starting with the field name, select the data to generate the histogram (ctl + shift + down arrow will select all consecutive data down)

Press F11 to insert a graph. Then chose Change Chart Type

Select Histogram then press Ok

You’ve made your first histogram!

First Histogram

However, it’s really ugly. Standard formatting for histograms is to have no space between the bins (columns). To fix that, double left click on one of the bins to activate the Data Series editor. Select the bars to active Series Option

Change the Gap Width to 0%. Notice how the columns come together. If you like having gaps between the columns, set the Gap Width to 6%.

First Not Ugly Histogram

To change the bin width, double left click on the x-axis labels (GLA in this case). Using the Format Axis Axis options, select the Bin Width control and type in what you want. Play with it until you’re happy with the shape of your histogram.

Default Bin Width

Excel defaulted to a bin width of 370 sf. Below is what the histogram looks like with bin width equal to 100 sf:

100 sf Bin Width

Here’s bin width equal to 500:

500 sf Bin Width

Here’s bin width equal to 200:

200 sf Bin Width

Which one appears most useful to you?

Context

I use histograms to understand some aspect of a market. How big are the homes? When were the homes built? How big are the lots in the neighborhood? What do homes sell for in the market area?

Then consider where the subject fits in the market. Is it bigger than typical? If so, you have support for concluding market value is higher than typical. Is it smaller? Well, now you can show a reason why the price is lower.

The Subject’s Position in a Market Area

Let’s consider the histogram above. The subject is one of the larger homes in the neighborhood but still relatively common in size. I would expect, without knowing anything else, that the subject’s market value is on the higher side for the neighborhood but with a reasonable number of homes larger than the subject. Take a look at the graph below.

The Subject is one of the bigger homes….

What if the subject was one of the largest homes in the neighborhood? The subject’s market value is likely on the upper end of the neighborhood range. Also, there are fewer directly competitive sales, implying market value may be less reliable in this market area than for a smaller home. Now let’s look at an extreme case.

Charge big bucks if you get this subject

I pity the appraiser asked to appraise a 6500 sf house in this market. However, you do have sales either smaller or larger. Here’s the time to really open your eyes to what is a competitive sale. Throw this graph in your report and your client will immediately see your data difficulty.

After you arrive at market value and as part of your reconciliation, consider using a histogram to support your market value.

Support for your market value conclusion

“The subject is newer than typical, above average quality custom home on a larger than typical lot. As shown above, the subject’s market value is on the higher side for the greater market area, as expected based on its superior characteristics.”

I hope you agree that histograms can be a powerful tool for appraisers.

Ways to use histograms:

  • Exploratory analysis to understand characteristics of a market area
  • Assist in determining reasonable search criteria for sales comparison
  • Visual representation of the subject’s position in a market area
  • Support for market value conclusions

I learned about histograms from George Dell. Thanks George. Get smart by taking his Stats, Graphs, and Data Science classes or at the very least, sign up for his blog. More info on George’s website.

Postscript: I am working towards moving away from Excel to using R, the data analysis package. I’ll link to the R code used for the two graphs as a separate post/update soon.

What’s A Comp And Why Should You Care?

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Sample Comparable Search in Woodland, CA

Two recent posts from my friend Jamie Owen at the Cleveland Appraisal Blog plus a planned realtor office visit inspired me to write this. Jamie did a great job blowing up the myth that comparable sales need to be within one mile of the subject in this post. He also tackled geographical competency, or the need to have boots on the ground knowledge about a market in order to credibly value properties in a second post.

Both posts touch on the subject of what is a comparable sale and why should anyone in real estate, or even the general public, care? The quick answer is that “comps” are the basis for how we, both those in the real estate industry and the man on the street, value residential real estate.

Per the Dictionary of Real Estate Appraisal, 3rd Edition, comparables are:

“…similar property sales, rentals, or operating expenses used for comparison in the valuation process; also called comps.“

Comps are used in the Sales Comparison Approach to Value, especially in residential real estate appraisal. All of us, appraisers, real estate agents, and folks considering buying a home, use the theory of substitution to determine the value of a home. What would the typical buyer shopping in that neighborhood buy instead of the subject?

A comparable sale is a sale of a home that the typical buyer of the subject would buy instead of the subject.

Subconsciously, everyone who owns a home compares it to homes in their neighborhood. We learn about a recent sale on our block and place a price on ours based on whether we think it’s better than ours, relatively similar, or inferior.  The formal version of this is the sales comparison approach used by appraisers.

We appraisers find the most similar sales, adjust the comparables for differences from the subject, leaving each adjusted comparable sale an indicator of value for the subject. The vast majority of single family residential appraisals in the US rely upon this methodology.

In the context of the sales comparison approach to value, the key is to identify the comps for the subject.

The easiest way to get the value of a single family residence wrong is to get the comps wrong!

As my mentor George Dell says, “What does similar mean?”
(Now go subscribe to his blog. He’s really smart. Then take his classes)

Residential real estate, such as a house, a condominium, a home on a small acre lot outside of town, etc., have characteristics (“dimensions”) that serve as descriptions of a specific sale for a specific property. The more similarities between a sale and the subject under consideration, the better a comp. We can go into a deep dive, like George does in his classes; instead, I want to talk about what I do specifically for simple single family residential work in conforming neighborhoods.

Some examples of dimensions and characteristics important to valuing homes include transaction terms (financing, credits, etc.), motivations, location, views, quality, design, condition/age, floor area, and amenities.

Some dimensions/characteristics are more important than others and can vary dramatically in importance depending upon the location. For example, pools are valuable in the Sacramento region but have less value in the Pacific Northwest where the weather is cooler. Basements are common in the Midwest and East Coast but not so here. In the Whisper Creek Subdivision in Arbuckle, CA, a tract of large homes on half acre lots, RV parking is a significant factor unlike other nearby markets. This is why the geographical competency that Jamie discusses is so important. Appraisers with geographical competency understand what characteristics define a true comparable and get the subject’s value right.

Time usually matters except when it doesn’t. If a market is rapidly changing, using the most recent sales can reduce the impact of market change. When a market is relatively stable, time is less important and so using older comparables is reasonable. I downplay time frequently because time is usually the easiest and most reliable adjustment to make.

For a typical tract home in my area, the most important factors are motivations for the purchase or sale, time, location/proximity, and size/floor area. I start with a map search using my neighborhood boundaries and go back 12 months prior to the date of value for closed sales. I exclude from consideration REO sales, short sales, and other transactions where motivations likely had an impact on sale price.

I search for homes a little smaller than the subject because most buyers can make do with a slightly smaller home. Because the typical buyer can accept a larger home than the subject, I set the upper boundary on my floor area range wider than the lower bound. For example, if the subject has 2300 sf of living space, I will search for comparables with 2000 sf to 2800 sf of living space (300 sf smaller to 500 sf larger).

After I set my criteria in the MLS search, I run the search and review the results.

Metrolist Search Results
Search Results

I mentally draw a box around the subject’s important characteristics so I can place it in the competitive market. This is known as bracketing. Reasonably, would the typical buyer consider the sales found suitable substitutes for the subject? Are the sales similar in quality and design? Are there differences in lot size or age? Do I have larger and smaller homes? Do I have homes in similar condition, or inferior and superior? I try to account for every significant characteristic of the subject so I can show, by comparison, the value of the subject by using these comparables.

If I’m comfortable with the sales found, I can start my adjustments analysis. If not, I revise my search criteria and run the search again until I am happy that the sales found reasonably describe the subject.

Once I have my initial candidate comparable sales identified, I dig in and look for most representative comparables of the subject and decide on which sales to research further (view the exterior, contact agents involved in the transaction, etc.). I review outliers, sales outside the normal range, and try to determine why the sales deviate from the norm. I either adjust for the issue or remove the outlier from consideration. The remaining comps, after adjustment, are my indicators of value for the subject.

Comps are usually easy to find in conforming neighborhoods as long as the subject is similar to the rest of the neighborhood. When the subject is unusual, or when there are few sales available and they are all different (“non-conforming”), comparable selection is difficult. The appraisal becomes complex and beyond the scope of this article. I do have tips in my article about appraising complex residential properties.

How do you search for comparables? What are some tips for a real estate agent or new appraiser you can share?

Detrimental Crime Scene Discounts

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Home of the Suspected East Area Rapist

Recently Joseph James Angelo was arrested outside of Sacramento and was accused of being the East Area Rapist. The East Area Rapist terrorized California in the 1970s and committed more than 50 rapes and 12 murders before disappearing more than 30 years ago. My friend Ryan Lundquist started a poll and conversation on his blog: What discount would you expect if the East Area Rapist’s house came on the market?

The results are interesting. Most respondents were in the 0-10% and 10-20% brackets. I was in the 0-10% bracket based on the one time I’ve worked on a similar problem.  Several years ago I was completing an appraisal on a house for a purchase in one of my markets and I noticed a weird note in the listing. “Blessed by a deacon.” What the heck did that mean?

I called the listing agent, a friend of mine, and asked her what she meant by that. Turns out there was a murder on the site within the past six months.  Would have been nice if she’d let me know when I scheduled the appointment that, oh, by the way, there was a murder at the subject….

I frantically called the lender to warn them that a murder had occurred at the subject in the past six months, that I would need time to analyze this new evidence, and that I needed more money for the report because of the extra due diligence. I called my mentor to get advice on how to deal with this and to see if he had any data (nope). I then searched MLS over the past 10 years but for some reason, listing agents don’t normally advertise “recent murder here” when trying to sell homes so struck out again. No one at the local Realtor meeting could remember any sales of homes after a murder or similar circumstance either. One of my comparables, however, had a death by natural causes within six months of date of sale.

So after a bunch of due diligence, I had jack squat for data. I took a step back. This was an entry tier home at a time where inventory was low in a relatively safe neighborhood where the murder was unlikely to occur again. Three full-price offers were received for the subject and all three potential buyers were aware of the home’s history. Was there a discount because of the murder? My best evidence, the three full-price offers, showed little to no market reaction from the murder. I discussed my research in my report and concluded no market reaction and sent it in. The purchase closed less than a month later.

This is not the exactly same situation as if the East Area Rapist’s house was on the market. First, no reports to date suggest that crimes were committed at the accused’s house while the house I appraised was the site of a murder. Second, the murder at my subject’s property was one off with little news coverage outside of the community where it occurred.  The East Area Rapist is notoriously known throughout California, if not the US, especially for those of age at the time of his crimes. A better but not perfect model might be Dorothea Puente, the landlord in Sacramento who murdered at least seven people and buried them in the backyard. Ryan plots the sales of her duplex on his poll results post.

Tony Bizjak, the real estate writer for the Sacramento Bee, liked Ryan’s post enough to turn it into an article and quoted me for the story.

p.s. Randall Bell, PhD, MAI is the national expert on diminution in value and determining crime scene discounts. His book Real Estate Damages is highly recommended. He thinks the discount will be closer to 25% if the home of the East Area Rapist hits the market.