There are no reported sales! Now what?
How many times have we, as reviewers, heard the following: “But there aren’t any sales within the subject’s development.” Or, “But the subject is the finest house in its development.” Of course there are rare instances when this is true; however, even in the instance where there are no sales that have taken place in the subject’s development within the last 12 months, the appraiser should be able to show sales at some previous point in time if the development is not newly developed. New construction appraisals will be a topic for a future post, but for the sake of this discussion I am going to focus on well established developments.
Oftentimes appraisers will find a property that has been improved beyond its development, or will be faced with valuing a home that is located in a development where there has been no market activity in the last 12 months. First, we will address the non-conforming property appraisal, then we will address an appraisal in a stable market.
When a property has been improved to a point that it is now larger than any other home of similar age, quality or location, this property is often referred to as an over-improvement for the area. A property that was once 1,000 square feet in size with a garage conversion, had an addition and now totals 2,000 square feet in gross living area is a great example.
It, of course, would be best to find a home that had a garage conversion and addition exactly like the subject on the subject street with the same prevailing winds which sold and closed on the date of value; however, in the real world appraisers have to demonstrate two things with this type of property.
First, they must demonstrate what improvements were made and how those particular improvements have affected the value of the property. This is generally accomplished by showing all of the sales in the subject’s development that were similar to the subject before any changes were made. Then, in lieu of a model match sale, the appraiser should find other competing developments that share the same basic location that was built in the same decade, had similar homes (prior to improvement) and find homes with additions and conversions that would reflect the same functional appeal as the subject.
This research project is not as difficult as it once was because of the MLS systems that are prevalent in most major markets. The appraiser can export the sales data to excel and easily demonstrate the market reaction to garage conversions and homes with additions and then apply this pairing to the valuation of the subject. The selection of the comparable sales should reflect as many of the subject’s characteristics as possible in order to minimize the required adjustments. Nonetheless, when an adjustment is warranted and has been proven in the market, the appraisal report should reflect the proper adjustment.
It would not be an appropriate comparison to simply find other homes that were built in the same year as the subject that originally contained 2,000 square feet in gross living area. The reason that this comparison would be inappropriate is for several reasons. 1) The quality of a home originally built containing 1,000 square feet and 2,000 square feet are quite different; 2) the functional design and appeal of a home that was originally designed by an architect would have a logical flow and professional design as compared to a home that converts the garage to living area and adding additional space generally will increase the number of private rooms or public rooms. However, the functional utility of an existing home with an addition or garage conversion is not the same as a home that was professionally designed to contain 2,000 with a garage.
Remember market reaction is what the appraiser is measuring, thus, if the appraiser does not select comparable sales with similar features and characteristics, the market reaction can not be accurately measured. Oftentimes to develop an accurate market reaction the appraiser may have to consider sales from differing time periods. This is a reasonable approach. The reaction should be measured as a percentage of price so that this percentage can be applied to data that sold within the time period that represents the date of value.
The second thing the appraiser must demonstrate is how the subject relates to its particular marketplace. This market reaction is closely tied to the first question, but what you are really asking is: “How does this additional space add to or detract from value in the area. In other words, if a 1,000 square foot home is in a homogenous area of other homes of same size, design and quality it has one value. A home that has had an additional 1,000 square feet added to it with neighboring homes that do not share the same additions will suffer functional obsolescence because the marketplace will not pay “full price” for the improvements. This obsolescence should be addressed and proven within the market data.
When appraising in a stable marketplace, the first thing an appraiser or underwriter/reviewer should look for is how many homes have been listed for sale in the last 12 months and what was the market reaction to these sales. A truly stable market area has very few listings and when these listings are placed on the MLS they sell in a short time frame. When this is the case, a simple historic comparison between the subject development and an active competing development should be sufficient to demonstrate the location adjustment.