Tag: value

Why price per square foot is not the appraisers choice

Often, buyers and sellers are under the impression that it is simple to price a house by its square footage. Nothing is further from the truth, unless of course, all the comparable properties considered are within a couple square feet of each other and have the same quality and condition and are in the same immediate neighborhood with no variation in the value of the site.

Underneath all is the land. This means that a house that sits on a hypothetical 60×120 sqft site should have the same underlying value if the house were 1,000 sqft or 2,000 sqft. If land is selling for $50,000 for this 7,200 sqft lot, then the value of the land does not change in value because it has a larger or a smaller house on it.

Take this following visual for example, it includes median sales prices over time for all sales in an area, as well as median sales prices over time for houses that are between 800-1200 sqft. Notice how the smaller houses measured with the moving average trend line, are sold for quite a bit less than those that encompass the entire market (in this case, a school district). The median size for the houses within the school district as a whole in this sample, were largely between 2,050 and 2,250 sqft. The median size of the smaller houses was largely between 950-1050 sqft. Therefore, the median price would be expected to be half for the smaller houses than the market as a whole, but that is not the case. The median price of the larger market sales was around $360,000, while the smaller houses was around $225,000, or 37% less, not 50% less.

Take the same information looking at price per square foot, and the scenario is now flipped on its head. The blue moving average line is that of price per square foot, which favors the smaller houses, running around $225 per sqft on average while the wider market was showing around $170 per square foot, or around 24% less per square foot.

Another way to look at this is, what is the value of a Tesla per pound? What is the value of a Yugo per pound? Obviously, they are not the same. This is the same idea behind price per square foot for real property valuations. If you have questions about how an appraiser values a property, please reach out to your local appraisal expert and ask questions. Better yet, if you need to know the value of a property, engage a professional to help answer your questions.

Hopefully this helps clear up why it is that appraisers do not simply use the price per square foot method in determining the value of a property.

Saline MI – Wildwood

Every town seems to have a neighborhood which has broad appeal. In Saline, Wildwood is one such neighborhood. Here occupants find wooded lots, walkout basements and proximity to many area amenities. What I thought my readers would find interesting is how this specific market has changed over time, measured over the past 12 plus years as well as what I see happening now. The sales information is gleaned from the Ann Arbor Area Board of Realtors MLS and does not include For Sale by Owner properties.

This first image is a scatter graph of the adjusted sales price of each sale from 2006 to 2/28/19. Prices are clearly trending upward.
The next graph shows the adjusted price per square foot in the same period. Price per square foot is meaningful, in that in a data set that contains different size properties, it can normalize some of the increase that might show if the recent sales are larger properties.

This graph also clearly shows an upward trend in price in Wildwood.
Another way we could look at this is with a chart laid out in how many sales per year occurred, what the average and median sales prices were, the average and median sizes, and average and median price per square foot. This type of information could be useful in showing where the majority of change occurred. So far 2019 has only two closed sales, but these were on average, smaller houses.

The graph that follows uses the average and median sales prices compared to each other from the data above. The blue bar is the median, which is my preference in measuring a market. This layout is helpful in seeing there was a slight dip in the market between 2008 and 2011, with the greatest increase in 2016.

Continuing in the same vein, price per square also shows an increase, but with 2018 running slightly below 2017 in general. If an appraiser indicated the market was slowing, based on this data, they would be correct, to an extent. The past three years showed similar gross living area both in the average and median sizes, with 2017 having slightly smaller sales than 2016 and 2018, meaning the expectation is that the price per square foot range would be higher. That is precisely what shows below, while the graph above shows an increase.

What is the saying? There are three kinds of lies: lies, damned lies, and statistics.

As of 3/1/19, the MLS showed no active available listings in Wildwood. There were three properties under contract. The lack of available properties in a subdivision that has steady turnover, indicates higher demand than supply, which in turn tends to drive prices upward.

All of this information is to help the consumer understand the various elements of the market an appraiser may study to measure what is happening with the market at any given time. Since appraisals are snapshots in time, understanding the market is a major component of the analysis.

You can access my website for information about appraisals, and what services I can provide. Please think of me for your private appraisal needs. https://annarborappraisals.com

For my appraiser friends

I wrote this piece for WorkingRE as I figured the reach would be great there. Seems it has had limited reach as well, so am pressing it here too.

Private appraisal work

What is important to remember is that people who use our services directly normally have little experience with the appraisal process, so we have to craft our work in such a way for them to understand our reports. In my opinion, we owe our customers a very high level of due diligence, and of reporting.

Go forth with competency

Is the sky falling?

Is the sky falling?

 

As an official geek, I really like looking at what is going on in the market by numbers. One simple way to look at this is through a one-year data run that moves forward one month at a time. This is an annualized monthly trend, and it helps to eliminate the seasonality that is seen through analyzing data presented one month at a time. That method is also valid, in particular in measuring when the market is most active.

 

Take a look at the information that follows. The columns refer to the date range, number of sales, median list and sales price, median size, and price per square foot. This is useful in showing how much a market has changed and is one way an appraiser may base a market conditions adjustment they make, or don’t make, on an appraisal report.

 

 

This chart is the Saline market, Ann Arbor Area Board of Realtors MLS data with all sales exposed through this source only. The to be built and new construction properties are excluded. I excluded these new houses, as the trends did seem to be a bit skewed due to the number of new houses that are being placed in the MLS at this time, many of them not immediately available for occupancy.

 

January 1, 2016 through January 1, 2017 there were 310 sales with median sales price of $335,000 and median price per square foot of $152.13. One year later the median sales price was $358,875 and price per square foot median was $162.46.  This means that in this one-year period, the market increased 7.13% in price, and 6.79% in price per square foot. The change from 2016 to 2017 in this market could be easily measured through this method, and correlated anywhere between that 6.79% and 7.13% range. Of course, markets do not move on a straight-line basis, therefore depending on where a sale fell in that period, the appraiser could use that information for an adjustment.

 

Between January 1, 2018 to January 1, 2019 the market showed a median sales price of $360,000 and median price per square foot of $168.86.  Based on the previous years data, this means the median sales price increased 0.31% and the median price per square foot increased 3.94%. Neither of these shows much of an increase, in particular as the median size of the most recent period is 3.49% lower than the previous year. Because smaller houses tend to sell at a higher price per square foot due to the cost of land and development, and diminishing returns, this means there could be little to no movement in price. If the 2018 inflation rate is 1.9% (based on the US inflation calculator), did properties even increase at a rate equal to inflation? What about the current sales price median lower than the last eleven months?  Even the past three months before showed a lower median price. Are we seeing a correction?

 

Considering there are 18 properties under contract with a median asking price of $364,950, it is in line with the last four months asking prices, but the median size has jumped by 11.30%!  To me this indicates the market is not going up in general, and could be pointing downward. Hard to tell until the contracted properties sell, but it is worth watching.