Housing and Community Development

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  • 1.  Broken Value III: Revenge of the Appraisal

    Posted 05-26-2011 01:15 AM
    This message has been cross posted to the following Discussion Forums: Project Delivery and Residential Knowledge Community .
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    The methodology used to value houses ultimately affects all building types. Infinitely more real estate transactions involve single family residences, not to mention this one building type earns more money than any other. The residential sector drives the building industry, not commercial. I'm about to share a recent appraisal that should shock you. This is a perfect illustration of why it's so hard to get nice buildings built. The end results defy all common sense, yet the current appraisal methodology was followed with a few minor criticisms. This is not to question the individual appraiser's competence, but to question the methodology itself. The very same methodology that allowed property values to skyrocket, while our economy was contracting and American jobs were disappearing. Houses doubled in value in less than a decade using the current system. Ultimately, I want to illustrate the flaw in the methodology that typically rewards the worst effort and penalizes those who bother to put in more effort.

    The appraisal is for a house we'll call Architectural grade. It is unique for the area in terms of quality and cost per sf for houses with a sales history. The Appraisal indicated that the house was not over sized for the area and that property values had a small rise in a 36 month period. Five houses were selected from the same area as comparables or Comps. The Appraisal is based on an average between the adjusted values. Values are adjusted to make the houses more similar or comparable. Example: If Comp1 has less floor area than the subject, then you would add value to Comp1 to balance them out, to make them more the "same". In this example, the only adjustments that were made were for area differences and an add for $2K for those with decks. No adjustment for the houses without brick which typically gives $5K. There is quite a bit of difference between the quality of these houses, yet the appraisal sees little. Part of the flaw is in the lack of adjustments that accurately reflect differences in quality. In an effort to achieve sameness, the lesser houses are brought up and the nicer houses are brought down.

    Subject Comp1 Comp2 Comp3 Comp4 Comp5
    Sale$$ N/A $785K $718K $615K $835K $700K
    Area 3829sf 3792sf 3666sf 2578sf 3792sf 2438sf
    Value/sf $189/sf $207/sf 196/sf $239/sf $220/sf $287/sf
    Adjusted $725K $783K $723K $652K $819K $759K

    See Attachments for photos

    The cost per sf in a way, represents quality, or the ability to spend more per sf. Houses that sell closest to the average, tend to hold the highest cost per sf. Comp5 and Comp3 both sold close to the average and may have the same number of bedrooms, but they are over a thousand sf less than the Subject. They both have higher cost/sf than the others because of the difference in size, so they are clearly not comparable. It is these houses that drag the value down the most. Look at the attached photos of each. Comp3&5 have been copied many times. I can see one from my house. I know these builders and they use the cheapest materials possible. They build as many of these as possible and were stuck with several after the crash. One is valued at $287/sf and the subject was $189/sf and these are supposed to be comps? This analysis clearly yielded some inexplicable results. Regardless of taste or opinion, the Subject is clearly a much more advanced and complex design, after all it's not a 4 wall box and it has a 9ft cantilevered roof. To give $100/sf more to the builder box is unbelievable if they are truly supposed to be in the same category.

    I designed Comp1 and Comp4. The same builder built all three as well. Together we have a 7 seven year history of always selling our houses for the highest price. This appraisal illustrates that consistency by selecting two of my houses as the top two Comps in the area. Both of these were spec houses that I guarantee they were designed with less complexity and were finished with lesser quality finishes and equipment. The Subject is an end user house with many extras not found in a spec house. The Subject house is hands down a much better designed and built house, yet the appraiser couldn't even give it equal value to the lesser spec houses designed and built by the same team. This is not the appraiser making a mistake, this is a massive flaw in the system itself.

    Valuing a commodity is in essence a prediction of it's worth. Would it not be more accurate to primarily base appraisals on the work of the designer and contractor if they have a consistent market history? Isn't this how every other commodity and company or brand is valued? Why is BMW better than Honda? The brand speaks of value. How else can my company establish it's worth in the marketplace if my effort is being averaged with those who are clearly not putting in the same effort? My sales history and their history prove my point, yet the guy who always puts in the least effort in this group was valued the highest cost per sf. How can anyone ever build a nicer house when the methodology is designed to reward the least effort and penalize the most effort? This is the most dangerous nemesis to our profession. Because of this mentality most Architects don't design houses. The banks and appraisers are being more restrictive than ever, but that doesn't mean they can't acknowledge individual effort and sales history.

    What happened in my neighborhood during the boom is a perfect illustration of how this system contributed to the out of control property values and thus the crash. As my houses would sell for the next highest price, the builders who did Comp3 & Comp5 were able to ask for the same price while clearly building a much cheaper house. This forced us to keep asking for a higher price and allowed them to profit more and more off our hard work. They should be penalized for their low sales and be forced to comp their own work, not mine! They're having they're cake and eating it too. The value of your work should work like a credit score. If you are a beginner, you start at a base level and your worth improves as your sales improve. Your next project's value should be based on YOUR history, not the whole community. It takes a special builder to resist the better pay for less effort. This is what we are faced with. This system makes it very unattractive for people to hire us and it must be changed if we plan to remain relevant.

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    Eric Rawlings AIA
    Owner
    Rawlings Design, Inc.
    Decatur GA
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    AIA26 San Diego June 10-13


  • 2.  RE:Broken Value III: Revenge of the Appraisal

    Posted 05-28-2011 01:17 PM
    Nice job Eric. Great that you can put some real numbers in front of us. You always seem to be deeply involved in some of the most intresting discussions - keep it up.

    OK - so we all can agree that this is a messed up system that we work in. I just want to point out the most messed up link in Eric's analysis (which wasn't really focused on). I think the biggest part of the problem here is the consumer. The fact is that the consumer isn't descriminating between these homes either. They're the ones who actually paid the higher prices for the lower quality homes. If the end consumer were to descriminate between the homes, then the appraisers would have to follow suite because it would show up in their data. It is a specific few consumers who make those descriminations - the ones who pay architects to design their homes to begin with. We can educate the appraisers, but the market ultimately decides the value of things. That is the real monster here.

    The catch 22 of course is that (because of the proliferation of big builder housing since the 50's) the average consumer has not experienced the benefits of good home design so they haven't learned to descriminate. Somehow, my friends, we need to make ourselves more accessible to the common man. Eric is trying. I am trying. But it is a largely ignored market. It is a market that is (I hate to say it) largely served by the least talented amoung us. If we don't figure this out, we will continue to fall further and further behind in the largest market segment out there for us. We have to get off our high horses and realize that we can make a difference here. A lot of very talented people complain about the housing situation here in the US. A lot of very talented people are unemployed right now. It's time to take the plung and start making a difference. A little at a time and we can start taking this back. Show us what you can do people - you may even find you enjoy it.

    My favorite clients have never been the ones with the most money, but the ones with the least. You'd be amazed how appreciative this group is of getting good design (because nobody's ever given it to them before).

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    John Richert AIA
    Owner
    Crossroads Design, Inc.
    Lake Forest IL
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    AIA26 San Diego June 10-13