Rawlings Design, Inc.
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Original Message:
Sent: 07-10-2011 18:55
From: Christopher Vlcek
Subject: Why Most Architects Don't Understand the Value of Market Value
Other industries have better information provided for products that don't approach the cost & value of a home. The market will dictate the value placed upon energy efficiency, healthy homes, and architectural character - but why are these factors off in the margin rather than front & center? Appraisals are a blunt tool for establishing a bank's risk based on market value. But they are also the only written assessment of a house that makes it to the financial table. This is an issue of consumer information and protection. The bank is lending the money, but the consumer is buying the home.
Take a look at the 'Uniform Residential Appraisal Report', the Freddie Mac & Fannie Mai form created in 2005. In the Comp section line items include: 'Quality of Construction, Functional Utility, Energy Efficient Items, and Amenities' but all they get is a word of description such as 'good' or 'average'. In the 'Improvements' section there's a line item for windows, but my new triple-glazed casements got a rating of 'good'. There's a note about those, and increased insulation, but no benefit was given in relation to the comps! As a profession we should advocate for providing more infromation and greater disclosure. For example, requiring a HERS rating at time of sale and a description of what it means. And having a section for LEED, Passive House, or other certifications. I believe that Architects and perhaps the AIA are working on this front, but they're efforts don't make it to this forum.
Then there's architectural quality & character. Mr. Rawlings makes the valid point that cheap housing of average size is rewarded at the lender's table at the expense of higher qualtiy homes. There is the 'Cost Approach' as an alternate to the 'Comparison Approach', but that section tends to get short shrift as well. Advocacy at all levels, with all the allies we can find - high quality builders & product manufacturers - is the only way to make a difference that I can see.
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Christopher Vlcek AIA
Littlewolf Architecture
Great Barrington MA
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Original Message:
Sent: 07-07-2011 08:53
From: Edward Cazayoux
Subject: Why Most Architects Don't Understand the Value of Market Value
Mr. Rawlings is in the wrong business if expects his spec houses to get more than they appraize for. When he considers sustainable design as "select green gadgets", he has missed the boat on good design all together. So if "The more you spend on stuff, the more the upgrades hurt you.", then no wonder spec housing is so poor. If he considers good design as "gadgets and stuff", what can you expect.
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Edward Cazayoux FAIA
Principal/architect
EnvironMental Design
Breaux Bridge LA
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Original Message:
Sent: 07-06-2011 07:11
From: Eric Rawlings
Subject: Why Most Architects Don't Understand the Value of Market Value
Right now in GA, our appraisers may give you a small bump for select green gadgets. For any upgrade item, the appraiser gives about 1/4 of the actual installation value. Geotherm system @ $30K might give you $8K. If you want to spend $20K more for brick, you might get $5K on the appraisal. At a net loss of $15K, you can have a nicer house too.
What everyone seems to think is that adding more cost and features is helpful on your appraisal, but that is a HUGE myth! The more you spend on stuff, the more the upgrades hurt you.
95% of the appraisal is Location and Size. All the stuff you add makes up the remaining 5%.
Spec builders make the cheapest house that intentionally sells for the least total price, but they tend to be valued at the highest cost per sf. The total cost isn't the profit, it's the price per sf. The closer they build to the average size, the better comps they'll have for comparison. The law of averages pulls the weak up and cuts down the strong. When you add the strong number 10 to the weaker number 2 and divide the total by 2 (average them) then 10 becomes 6 and so does 2. Now would you rather your 10 get drug down to a 6 or your 2 brought up to a 6.
Less effort = More profit. Less effort = Less risk.
More effort + Higher sale price = more sharing of your success with the lazy 2s.
This is why I keep saying that spec builders that produce products, should be required to be valued by their own sales history, not the average of their community of competitors like we do now. The builders in my area love my high comps that they get to sponge off of. One sale of an $800K spec house of mine brings their average $600K spec house up to $700K without doing a thing. I give everyone an instant pay raise every time I do a good job, but when my effort is averaged with theirs, I get penalized for a job well done because my $800K sale makes my next house $700K as well. I'm grossly simplifying this to illustrate the problem. This is how property values went out of control and how home builders ended up filthy rich while we have always been paid pennies on the dollar. They do a lousy job on purpose and we keep trying to do a better job. We need a system that works in reverse to encourage a better job and penalize laziness! It's un-American that we have an industry with an internalized economic sub-system that is sort of socialist when you think about it, yet capable of destroying our capitalist economy.
You will never stop builders from using your work as comps. You have no control over how they influence their appraiser and what they choose to use for comparison. You won't protect yourself with more gadgets and stuff. The check list is pretty basic when it comes to what qualifies as a comp. At best, you might get your appraisers to look at your comps only (if you have enough), but this doesn't solve the problem of sharing your success and encouraging the builders to be lazy while making WAY more money than YOU!
Did you ever wonder why so many spec houses look the same and why it's hard for us to get anything nice done? I hope you all understand that the sales of single family houses are by far the most numerous real estate transaction and guide the industry in how commercial is valued. This effects everyone of us eventually, whether you design houses or not!
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Eric Rawlings AIA
Owner
Rawlings Design, Inc.
Decatur GA
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Original Message:
Sent: 07-05-2011 06:41
From: Edward Cazayoux
Subject: Why Most Architects Don't Understand the Value of Market Value
The suggestion Gregory that the banking industry will respond to the criteria of "durability, sustainability, etc." for a higher value on the home has not worked for me in the past. In having my own home appraised recently, the stronger walls and roof, more insulation, radiant barrier, air barrier, durable materials, good windows with low-E insulated glass, daylighting, healthy interior materials, local materials, rainwater collection, very energy efficient, geothermal heat pump, orientation, thermal grounding, shading, ventilation, etc. did not get me any higher in the rating. However, a chandelier and a Jacuzzi will. It would be interesting to know if the house was LEED certified, if that would make a difference. However, the cost of getting it certified was much more than I was willing to pay. I think the banking industry needs to change. As architects, all we can do is produce good architecture, and make sure the banking industry understands the difference between good architecture and a building.
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Edward Cazayoux FAIA
Principal/architect
EnvironMental Design
Breaux Bridge LA
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Original Message:
Sent: 07-04-2011 10:21
From: Gregory Walker
Subject: Why Most Architects Don't Understand the Value of Market Value
Eric,
At some point, the comparisons you're making become purely straw arguments. You're talking about how one might value a house. In reality, there are as many value propositions as there are sellers and buyers. Banks, those entities which guarantee the loans, are talking about risk management.
The latter depends on quantifiable data beyond the personal sales history of an individual architect/builder/etc. The latter also does not determine, purely, the underlying value of a property, only what risk they are willing to take in backing the loan. Everything you've laid out over 75 posts now would be true without the pesky need for them to back a loan - if someone can pay for the "BMW" upfront, without borrowing, then the value is determined only by what the buyer and seller are willing to agree upon. As we all know, that simply isn't the case - people get loans. Loans, especially going forward, require more advanced forms of risk management. If one can address those needs creatively, you won't have to worry about the market valuing your services.
If the goal is to advance the opportunities for architects to design more spec homes - a worthy goal btw - then I'm going to suggest (yet again) that we focus our efforts on creating a better set of objective criteria that define a higher value home. Durability, sustainability, etc. are all on the table. The sheer talent of the architect, quite simply, isn't. There's simply too much subjectivity involved. However, show the lenders that you're creatively satisfying their risk management need and they will listen. Comparing yourself to a BMW in a Honda world won't.
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Gregory Walker AIA
Houser Walker Architecture
Atlanta GA
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Original Message:
Sent: 07-03-2011 09:49
From: Eric Rawlings
Subject: Why Most Architects Don't Understand the Value of Market Value
This message has been cross posted to the following Discussion Forums: CRAN Custom Residential Architects Network and Residential Knowledge Community .
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The reason why most Architects have a hard time understanding what value really means in the market place is because we choose to fight the system used to determine real market value. When we design end user houses, we avoid the judgement of the free market. The term "sales history" doesn't resonate well with Architects because we design mostly houses for wealthy end users which always sell in the market place as "used", eventually. The Spec builders always sell their houses as "new". The cost per sf is higher for the new house than it is for the end user house that is eventually sold as used. This makes our houses appear to be less valuable than a builder box when it comes to sales history and the market price per sf. I designed a spec house that sold for almost a million dollars in 2006 and was later sold as used in 2010 at more than 30% less. New went to used in a few years and the value was almost cut in half. Now the housing crash didn't help, nor did the short sale when Corp McDs dumped the house as quick as possible when relocating their employee. Had I designed it for the end user directly and had I never been known as the first and possibly only Architect to design a million dollar house to sell at market in my neighborhood, I would be forever cursed as the guy whose Architectural design sold for the least per sf in the last decade, including tear downs. I'm blessed when it sold at spec, cursed when sold used. This is the kind of story people in an American Idol society love to remember. The professional gets bested by the amateurs. The same exact house made me the million dollar Architect and the schmuck who can't design a house of good quality (i.e. the price per sf) according to when it entered the market place and how. Nobody cares about when and how, they only care about the final sales figure.
Below are some Laconic talking points concerning the value of Architecture in the market place:
If we judge two houses with the same check list of items, how do we determine which one is better?
A check list of the same items can only be made better when arranged in a better way, this is also known as the design.
Our profession depends on design making the difference. If design makes the difference, then how can we prove this?
Who decides if one design is better than another? The consumer decides, not the appraiser or the bank.
Beauty is only one component of desirability. Functionality and cost are as well.
What consumers desire more in a specific arrangement of the same parts (design) cannot be represented by averaging the success of a community of competitors, nor by creating a more complicated check list of value for it's parts.
Spec houses are the only new houses as far as the market place is concerned.
A spec house is a product that a builder takes out a business loan to create and this product is sold directly to the consumer as a new, off the shelf item including a one year warrantee.
An end user house is a personal possession that a private owner commissions to be built.
An end user house can never be valued in the free market as a new item since the possessor is the facilitator of it's creation. (This is like valuing a car you made in your garage. We will only know what it's worth when someone buys it, but the next BMW coming out in 2012 already has an inherent value because the company has an established sales history.)
BMW is a spec builder and so is Armani and Wonder Bread.
Architects must sell new houses (i.e. spec houses) if they want to compete for new house sales histories.
We cannot convince the market place that design makes the difference unless our sales history can prove it.
If it takes an average of 10 years for Architectural end user houses to be sold at market, then it can take a long time to establish a sales history as a designer of used end user houses.
The only reason a new BMW can be sold at a higher price than a new Honda is because of their sales history. Same holds true with their used cars.
The key to the quality of profitable new construction is based on how much the bank will lend per sf. The remainder comes from either your pocket or the buyer's.
End user houses can never have a new sales history, but are valued as new by the lender when considered for a construction loan.
If spec houses are the only houses on the market capable of having a new sales history, then how can the value of a new end user house be established without comparing it to spec houses?
Who is more likely to invest more money than the appraised value of a new house, a spec builder who has to sell it right away or lose profit OR the end user who intends to live there?
How can a spec house be compared equally to an end user house, no less more favorably? This is the question that has us all scratching our heads and the number one reason we avoid the judgement of the market place by designing unique end user items that can only be sold as used rather than products created by companies with a business model and directly sold at market as new items.