This message has been cross posted to the following Discussion Forums: Housing Knowledge Community and Custom Residential Architects Network .
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Property = Lot + House
Currently, there is no distinction between what portion of the real estate sale is attributed to the value of the Location and what portion is due to the desirability of the House itself. The value of a Lot in any given Location should be based on the current sales in the area and should be a market value that fluctuates from month to month. A house is a site made product, created by a company with a business model and a sales history. This product often outlasts the companies that make them and should have a much more stable value than the Lot it sits on. Today the value of a Property (Lot + House) is based on averaging the sales in the area, which is a reflection of the value of the Location only and gives the House itself no consideration for it's uniqueness, quality, or desirability at market. This is to say all houses in the same area are the same. Buyers are more likely to look in another Location for the House they want rather than accept a House they don't want because they like the Location. We put all the emphasis on the importance of Location, yet people spend months and sometimes years searching for the right house for their needs.
If the price of the Lot and the House were separated, we could more accurately track what the market is desiring about the individual houses. Companies that consistently provide the highest sales in the area should be rewarded for a job well done rather than share their success with their competitors by being averaged with those selling houses for less. Right now it is impossible for a company to have their Houses appraised at the same value as their sales history if they are always selling their product for the highest price in their area. The variable market value of a Lot and the stable value of a product with over 100 years of life expectancy would be more accurately defined as separate values and should be allowed to fluctuate independently.
The Tax Assessor already separates the value of the Lot from the House in most places. In areas with little sales data, the appraisers typically use the Tax Assessor's numbers for the Lot value when using the Cost Approach to calculate value by component. We already have an accepted system in place for identifying what the price of the "Location" is worth and it should become standardized and improved upon. The value of a new house could then be compared more accurately to other houses built or designed by the same company, rather than comparing them equally to houses made by their competitors who just happen to build in the same area. Unique houses could be calculated by component using the Cost Approach to more accurately credit unique features, energy efficiency, and more expensive materials than what is typically found in the area. Our current system of averaging values is the only reason a larger or higher quality House is considered too expensive for the area. If someone purchases a Lot at market value, then it shouldn't matter what they build on it.
Valuation of New Speculative Houses:
Speculative builders provide the largest amount of housing stock for sale at market. In order to establish value for the initial business loan for a spec house, companies without established sales histories should have their new project's value based on the average sales price in the location they choose to build, as they currently do. After a speculative builder has three sales, the value for the fourth loan should be based on an average of their sales history of the last three projects. If the value of the Lot and House were separated, then these results would be easier to calculate in terms of the House itself and could transfer to other Locations. Products that resonate with the market place will be rewarded and those who do a poor job will no longer benefit from their more successful competitor's sales results. This would also eliminate the common phenomenon of a single high sale being used as the top comp on the appraisal of every builder in the area creating a disproportionate rise in value compared to the actual sales in the area. This was one of the main reasons that Property values skyrocketed (next to fraud). The price of the Lot should be based on the average sales in the area and the price of a new House should be based on the sales history of the companies who built and designed them.
Valuation of New End User Houses (not for sale):
Custom Architectural Houses are typically designed for the Owner who plans to occupy the House. These Houses are valued by the Tax Assessor in order to collect Taxes, but they currently do not contribute to the Real Estate Appraisals in any given area as far as the banks are concerned. The value of a Location is not just based on the quality of the Houses for sale, but many people choose Locations because of how nice the schools are, how nice the parks are, and how nice the infrastructure is. These Location amenities are paid for by Taxes. The Tax Assessor's Appraiser and the bank's Real Estate Appraiser should be on the same page. If a unique house is being Taxed at a higher mileage rate due to it's uniqueness, then it should be Appraised for more by the bank for the same reason. Why are there two completely different Values for our Houses and which one is the correct one? A more consistent system will provide more market confidence and much less room for fraud. If the Designer and/ or Builder do not have a sales history for similar houses, then the Cost Approach should be used to determine value by component. If there are truly comparable Houses in other Locations, then these values could be used as well. Unique Custom Houses should be treated like all other unique, one of a kind commodities. They should not be compared as equals to mass produced items just because they happen to be in the same area. Designers with a reputation should have their work valued like other Designers with a reputation like in the fashion industry for example. If their work is desirable enough, it should be worth as much as people are willing to pay for it. A reputation like this can only be established with real sales. It is erroneous to think that just because a unique House sells for a high price, that all the mass produced Houses in the same area should also be this valuable as well. The price of the Lots in that area should rise, but not the value of the rest of the Houses themselves that are being built and designed by other companies. If someone has spent more money than average for a personal House and they are contributing more in Taxes, then their property should increase the value of the Lots in that area, not the Houses.
Property = Lot + House -------------------------------------------
Eric Rawlings AIA
Owner
Rawlings Design, Inc.
Decatur GA
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