"A Tale of Two Pole Barns"

"Fat" and "Skinny" Comp's

Due to the lack of good Comp's -- an issue I've raised repeatedly on this blog -- both appraisers and Realtors find themselves digging for more info on the ones that they do have.

So, I've been fielding more calls than usual from appraisers who want to debrief me on the features, floor plan, updates (or not), etc. of a home I've just sold.

I'm sympathetic, and subscribe to the "you gotta give to get" ethic, so -- time permitting -- I try to be cooperative.

Bottom Line: Less Discretion

Which brings me to the conversation I had the other day with an appraiser working on a refinancing loan.

After giving him some details on the home he'd called about, we discussed his specialty: hobby farms in the west suburbs.

One of the typical outbuildings on a hobby farm is a pole barn, a barn that is constructed with support poles that serve as the underlying support structure for the outer walls and roof (impressed? I looked it up).

Suffice to say that there is a great deal of variety in their size, functionality -- and cost; in fact, according to the appraiser, an elaborate pole barn can easily be worth $25k or more than a simple one.

Nevertheless, spooked lenders now doing everything "by the book" have arbitrarily decided that the maximum adjustment for pole barns is $5k-$10k.

The result?

A hobby farm with a deluxe pole barn is less likely to appraise -- and therefore, sell.

When the Comp's Are "Thin" -- Or Non-Existent

"Active's" Loom Larger in Pricing Decisions

Realtors and Appraisers alike rely on "Comp's" -- comparable sold properties -- to estimate fair market value for any given home.

By definition, a Comp is similar in style, condition, and size as the "subject property" (the one you're trying to price); is physically nearby; and has sold in the same market.

Given that interest rates, economic conditions, listing inventory, etc. are constantly in flux, the "same market" typically means going back no further than six months -- and sometimes three, depending on the lender and price point.

"One of a Kind"

So what happens if there aren't any homes that meet those criteria?

That's especially the case for "upper, upper" bracket homes in the Twin Cities (and elsewhere) right now, which: a) are moving very slowly in today's market; and b) by virtue of their price, size, and finishes, tend to be more unique, anyways. (To be fair, the expected market time for expensive homes is always significantly longer than for more modestly-priced homes.)

By necessity, you then have to rely more on what you're competing against.

Typically, that means scrutinizing the dozen or so "Active" listings that prospective Buyers are most likely to consider along with the to-be-priced home -- then picking a price that beats all of them!

The virtue of that approach is that it (also) satisfies prospective Buyers' insistence on getting what they perceive to be a great value -- a requirement at the top of most Buyers' lists today.

Picking Comp's: Vertical or Horizontal?

What's it Worth? Who Wants to Know?

Pricing well is one of the most important skills a Realtor brings to the table.

In turn, that depends on knowing which "comp's," or comparable sold properties, to choose.

As defined by both Realtors and appraisers, the comp's are the three homes most similar to the "subject property" -- in terms of style, age, square feet, condition, etc. -- that have sold the most recently.

Once you've identified three homes, step 2 is to go through a "compare-and-contrast" analysis juxtaposing each comp with the subject home, adding or subtracting to adjust for the differences (How much? That's another "experience" judgment).

"Vertical" vs. "Horizontal" Selection

By convention, "recently" used to mean the last six months. However, as underwriting standards have tightened in the wake of the housing bust, some banks now insist on three months.

But what if there aren't three good comp's within the last few months? Or even one comp?

That's where it gets interesting.

Appraisers, working for the lender, will typically stick to the shorter timeline and simply look as far afield as necessary to find three similar homes. Call that "horizontal" selection.

By contrast, a good Realtor who knows the area will opt to choose the comp's "vertically," i.e., stay within the immediate neighborhood, and go back as far as necessary to find good sales precedents.

Guess which approach is more accurate?

Inside Information

The latter, because a Realtor who knows the chronology of local neighborhood sales can "connect the dots" going back as far as necessary.

They'll know which homes sold fast, which sold slow, which sale prices were aberrations -- and why.

Armed with that info, they'll have a feel for momentum (or lack thereof) . . . . and can price accordingly.

By contrast, bank appraisers invariably end up comparing geographic apples to oranges.

In their quest to find timely comp's, they'll jump significant -- but invisible -- neighborhood boundaries that render comparisons much more difficult.

Just in Minneapolis and the west suburbs, I can think of numerous, contiguous neighborhoods where you'd never compare a home in one neighborhood with one in another.

Country Club vs. Morningside

To pick just one example, consider Edina's Country Club and Morningside neighborhoods.

Both wonderful neighborhoods, they each have their own characteristic housing stock, supply and demand -- and per square foot selling prices.

Confusing two, disparate areas often leads to homes not appraising when they should -- or Sellers not pricing their homes appropriately.

"It's Not a Comp If . . ."

Misconceptions About "Comp's"

Perhaps no other term in real estate seems so straightforward, yet is so commonly misunderstood, as the term, "comparable sold property ("comp" for short).

As Realtors and appraisers use the term, a comp has a very specific -- and narrow -- definition: namely, a recently sold, similar property that can be used to price the "subject" home (i.e., the one you're trying to sell).

In practice, to be a comp, a property must have sold within the last six months (preferably, three); be physically nearby (in a densely populated city, usually within a mile); and be relatively similar in style, size, and condition.

Take away any of the foregoing attributes . . . and it's not a comp.

So, in that spirit, I offer the following:

"It's not a comp if . . .

--It sold 4 years ago (even if it's your next-door neighbor)

--It's more than twice as big as --or less than half the size of -- your home

--It's in dramatically different condition

--The styles are different (rambler vs. 2-story Colonial vs. suburban split-level vs. Tudor, etc.)

--It's the same size and condition, just sold --- but is across town

--It's a bank-owned foreclosure (at least it's not a comp until there are lots of them nearby).

Realtors, feel free to send this to your clients anonymously (you're welcome!).

Zillow & Social Networking

Is Zillow Getting Smarter?

I've discussed third-party real estate sites such as Zillow and Trulia previously on this blog ("Trulia Hits -- and Mostly Misses"; "Zestimates Wildly Off-Target").

The verdict?

In most cases, you'd be better off throwing darts to establish your home's value.

That's because publicly available housing statistics -- and dated ones at that -- don't convey a home's condition, look and feel, updates, etc.

Not to mention key boundaries that are easy to miss on a map, such as a border between a good and bad school district -- or a a major highway. (That's also why a knowledgeable Realtor's pricing is typically better than an appraiser's).

However, at least anecdotally, I'm hearing that social networking sites (think, Facebook and My Space) are filling in Trulia and Zillow's blind spots.

The result -- at least in the biggest markets where social networking is most active -- is that the real estate sites are benefiting from a positive feedback loop that's making them more accurate.

In other words, they're getting smarter.

Will this trend travel to smaller markets such as the Twin Cities?

Stay tuned . .