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  • 1.  Broken Value II: Value of the Broken

    Posted 03-01-2011 05:06 PM
    This message has been cross posted to the following Discussion Forums: Residential Knowledge Community and Project Delivery .
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    I want to meet with an appraiser soon and would like any good ideas on the subject of value. I think it is very important for us to first stop thinking of a structure and the land as one and the same. I keep hearing about houses gaining value with no improvement to the structure. The land gained value, not the house. I have literally renovated the same exact houses from the 1910s in different neighborhoods and people refer to one as a $500K house in the nice area and the same house across the tracks is $300K. NO! The house is $150K in both locations. One lot is worth $350K and the other is worth $150K. By complicating the value of land and structures into one price and then comparing this complicated mess to another that happened to sell at the right time is impossible. We've got apples and kiwi in one bag and we're comparing it to cantaloupe and watermelon in another. One lot may be more desirable while the other structure may have been better, but they sold for the same price in that area, so what's worth what? How much did I buy the apple for? This system relies on assuming all houses are built to the same level in each area, which forces the market into homogenization at the lowest level. It's reverse Darwinism. 

    If each area were to develop a market index per sf of land, then the appraisers could instantly calculate the market price for the location based on the area of a lot. This way structures could be priced apples to apples no matter where you are. No longer will comps be necessary because the land index number reflects any market fluctuations on the day to day for each location. The costing of structures would now be based on the less volatile materials and labor market average and depreciated values for existing structures. Of course, the track record of the individual Builder/ Architect would factor in as well. This becomes more like valuing cars, but for long term investments that retain value much longer. This way a Mercedes in CA is still a Mercedes in OK. 

    - During the housing boom-bust we saw everyone gain a ridiculous amount of value very quickly because the system wasn't based on real economic conditions, just sales. By separating the land from the structure, there will be no question where the ridiculous inflation is. Areas would maintain indexes based on sales and economic conditions. The costing of structures would be based on real market value and the track record of those involved. Improvements to properties cost real money and should add real value to the individual's investment in the structure. 
    - I feel it's fair to assess taxes based on the structure's value and not the land. This way sweet Ms Brown next door who is barely getting by on SSI isn't faced with tax hikes because the neighborhood gentrified and is now full of McBoxes. They should pay more for more structure, which is what really matters considering consumption of resources and storm water increases and how that impacts city budgets. Why should Mrs Brown's taxes go up if she's not doing anything different? How would you feel if the guy down the street bought a BMW and now everyone had to pay more car tax?
    - Because people will offer more money for something they desire more, the value of the structure would be the land index subtracted from the purchase price. The desire for location is factored in the land index, so the increased desire for the structure can now be measured! This establishes the Builder/ Architect value score over the baseline. 
    - Builders and Architects should be able to comp their own work regardless of location. A Builder and Architect would now compare themselves to themselves. Imagine being rewarded for your own effort. If your structures sell for more per sf, then it is more likely that you will repeat this success. Appraisers can't value beauty. Some things may be desired that aren't beautiful, but commodities are valued based on desirability, not beauty. When a client or spec builder applies for a loan, the lending amount is based on factoring in the Builder and Architect's comps, not other people's comps that happen to have sold in the area. The bank should want to lend more money to the person with the best success rate and I believe in the old fashioned method of earning it!

    Let me know if you have anything to add to my list.


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    Eric Rawlings AIA
    Owner
    Rawlings Design, Inc.
    Decatur GA
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  • 2.  RE:Broken Value II: Value of the Broken

    Posted 03-01-2011 06:27 PM
    Mr. Rawlings:

    I basically agree with what you have written.  I've a few observations to make, not to defend or knock down your premise, but perhaps to add some clarity.

    The value of the land and the value of the structure are typically separated in the local county assesors valuations.  Local insurance companies also look at these values when they underwrite hazard insurance, as a structure may burn, the but underlying land will not.  The insurance companies also look at replacement costs, which is typically a per square foot number when applied to tract homes.  This cost will vary depending upon market conditions - costs would have been higher in 2004 at the height of the real estate bubble simply because all the contractors would have already been very busy, as compared to say, today.

    Note, however, that assessors values and market values can and almost always do differ in significant amounts.

    Valuation a few years ago was much easier, as an appraiser could count on his number being "low" against similar sales in a few weeks or months time.  When the market is in decline, as it still is in most of the country, he has to be much more careful, as banks do not want to lend more than the property is worth.

    When all the homes are similar the appraiser is working in familiar territory and can establish a value with much more confidence.  When the structure is not typical he will by nature want to get more cautious lest he determine a too high value.

    That said, there is a market value for a home that is "architect designed".  It's a statement that says this is a custom home, not just another out of the tract home mill.  Establishing a value for that is difficult, as some will love the design and others will not, much like any tract home.  Tell the appraiser that the house is  "Rawlings", and thus worth much more than some damn tract house.

    For a custom home perhaps the best way to proceed is to find an appraiser that consistently works with higher end homes.  He or she will be more aware of non-typical items that can increase the value of an appraisal, including the value of the land it sits on.

    I've bought homes as investments, and some investors take the line that the house should appraise for a certain value because they have a buyer willing to pay that amount.  Banks will consider that, but also consider that the greater fool theory may be at work.

    Appraised value may not completely relate to cost of construction.  Probably the best example of this is a swimming pool, which may cost over $20,000 to install, but add only half of that to the homes appraised value.  Sadly, this can also apply to the main structure as well.

    I wish you well on this.

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    Klaus Steinke AIA
    Las Vegas NV
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