valuing epensive and unique part 2 handouts · part 2 the problem with “unique” ... • be more...

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Copyright © 2004- 2016 Kinja LLC / Hagar Institute

Valuing High End and UnusualResidential Properties

Richard Hagar SRAPart 2

The Problem With “Unique”


“Comparables”

To some degree everything is comparable, rarely are there similar properties.


A Bit Extreme?

• For many of the examples I’m demonstrating, you are unlikely to use them for “day-to-day” bank appraising (non-complex).

• Appraising expensive homes and solving unusual appraisal problems requires additional effort and knowledge.

• While it seems like an over the top effort, solving these problems will make you a better appraiser.– Immune from interest rate hikes and slow business;– Better at problem solving;– Better clients;– Higher fees;– You might even discover that appraising could become fun

again.


Outside The Box

• I’m trying to help appraisers think outside the box;• Appraisers need to stop restricting themselves to what they

believe Fannie Mae wants;• Be more creative in problem solving;• Stop allowing the fee to limit the scope and quality of the

work.– The work determines the fee, not the other way around.

• So lets pick up where I left off last week.


COST APPROACH

It cost WHAT ??

Are you kidding?

How can that be!


State of California – InvestigationsCommon Appraisal Deficiencies

The Top 20 List

Copyright 2004-2016 Kinja LLC/Richard Hagar, SRA

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Statement of Charges

MOCopyright © 2004- 2016 Kinja LLC / Hagar Institute

The Same Steps For Any PropertyExpensive or Oddball

1. Highest and Best Use Analysis;– Highest and best as if vacant

2. Land Value;3. Improvement Costs;4. Depreciation;

– Lots of depreciation5. Total.


Appraisers Have No Choice

• Standards Rule 1-1 (a): be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.

• The cost approach is a recognized method.

• My opinion: The cost approach is necessary to produce a credible appraisal.


Standards Rule 1- 4(b) / Cost Approach

• (b) When a cost approach is necessary for credible assignment results, an appraiser must:i. develop an opinion of site value by an appropriate

appraisal method or technique;ii. analyze such comparable cost data as are available

to estimate the cost new of the improvements (if any); and

iii. analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements (accrued depreciation).

Think of this as a step-by-step explanation of what the appraiser must do


Land Value


The Most Important Component- Land Value -

• The value of the land is the single most important component of any…ANY…property.

• Highest and Best Use, as if Vacant is crucial.• Likely includes multiple parcels;• Multiple land appraisals + 1 more;• Prepare a separate report detailing land value.

• Solid land value provides a basis for what will likely be the largest adjustments between the subject and comparables;a) Locationb) Site


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As If Vacant

USPAP

• Appraisers are to consider the most profitable use for the land as if it were vacant. (ignore the improvements)

• Buildings usually add value to land.

• Buildings would be practically worthless without land.


Highest And Best Use

• A Highest and Best Use Analysis is key.– 5 point test, zoning, size, etc.

The big questions you need to answer:1. Does subdividing the site provide the most value?2. Does assembling multiple smaller sites into a large parcel

provide the most value?3. What are the rich buying or looking for?

• These must be answered as apart of valuing the land.– Ask and answer each question in you addendums.


Maybe Multiple small Appraisals

1. One vacant land appraisal for each parcel that has a separate legal description.– You might end up with 3-5 separate appraisals;– The appraisals do not need to have extensive comments, maps, etc.;

KISS– What is the value of each of parcel.

NOW2. One vacant land appraisal with all of the parcels combined

into one big building site.

3. Which has the highest total land value?– Highest and Best Use study


No Single Method

• There are multiple methods available for determining land value.

• Because markets vary and have different levels of information, no single method works every time or every place.

• Sometimes you’ll have to attempt or test different methods until you find data….proof.


Various MethodsThere are numerous ways to discern land value:

1. Land Sales,2. New Construction,3. Fixer-uppers,4. Lowest Priced Home,5. Regression,6. Allocation,7. Extraction,8. Historic Value,9. Blame the tax guy…


Multiple Approaches To Land Value

I’ve used all of these methods in a single appraisal:• Similar site sales;• Kind of similar site sales;• Listings / Pendings / Expired;• Tear downs;• Extraction;• Historic sales;• Assemblage of multiple properties over multiple years.


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Not Going To Explain All

• In this webinar I’m not going to explain all of the various methods for determining land value.

WorkingRE has a webinar of mine:How To Determine Land Value

www.workingre.com/land-value-cost-approach

Explanation of some of the issues you’ll face and how to be creative in your hunt for land value.


Land Value - Purchases

• Sale of large parcels in highly developed areas are so rare, you might have to search 10 year history

• Many of the sites are assemblages taking place over many years. – Multiple purchases– $6,000,000 in total purchases over 3 years– Eliminated some of the Tax ID’s– Assembled 5 acres in a densely developed area (Medina)

• When you find house or land “comps,” look at all of the adjacent parcels to see if they were included in the purchase or an assemblage.


We retain copies of old plat & assessor maps.They have the original tax ID # which allows us to trace sales history.


New Construction – Look Everywhere

• Look up the sales history of new construction.• How much did the builder pay for the land?

• If there is no new construction, look for the last time a new home sold in your area.

• Look up it’s sales history which will display the purchase price of the land.

• If necessary, use time adjustments to compensate and bring the historic land purchase price to a current value.


Market Data/New Construction

Current Sales Price: $450,000- Land Purchased: $110,000

= Total Improvement Costs: $340,000

The lot was purchased for $110,000 12 months prior to the sale of the house.


$110,000 = land purchase price.Note the change from 2013 to 2014. Time adjustment (33%)


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Sales Are Great But What If..

• For expensive properties, one of the better methods for determining land value is looking at the other house “comparables” that you considered using for the appraisal.– Used or not, in the appraisal, properties that you

considered, might yield information you can use to value the subject’s site.

• Often other expensive homes are custom built.

• Their prior land acquisition costs, adjusted for time, can be used to help determine current land value.


It’s the Land

• List of potential home comparables

• Determine the land value for each and list them.

– Numerous methods available including Tax Allocation

The list can be used for:a) Helping establish the land value of

the subject,b) Determining the adjustments

between your “comparable’s” property value and that of the subject.

Sales Price Land Value Value attributed to all Improvements

$15,000,000 $9,000,000 $6,000,000$17,000,000 $4,000,000 $13,000,000$15,750,000 $8,000,000 $7,750,000$12,500,000 $9,000,000 $3,500,000$13,000,000 $9,000,000 $4,000,000$14,500,000 $5,000,000 $9,500,000$10,850,000 $1,500,000 $9,350,000$ $ $


Explaining Land Value/Comparables

• For each land comparable we create a separate page.

• What,• When,• Where,• How it compares,• What’s superior, inferior, similar,• Adjustments,• Adjusted price.

• Impress the reader and help them understand your reasoning.



Numerous Methods Available

• Numerous methods for determining land value are available.• Don’t be afraid to use several different methods within the

same appraisal.• When you find sales, make sure you investigate the

surrounding parcels (ownership and inclusion).• Create a standardized format for listing the sales and how

they compare with the subject.


Improvement Costs

or

What's Marshall and Swiftgot to do with it?


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Replacement vs. Reproduction

Replacement cost

The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised, using modem materials and current standards, design, and layout.– No Functional Obsol.

Reproduction costThe estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicateor replica of the building being appraised, using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, over-improvement, and obsolescence of the subject building.– With Functional Obsol.


• Reproduce or replace?• Curved wall took upwards of 3 months to construct due to a

problem with matching the wood grain


• Reproduce or Replace?

• Extensive time was taken by the architect to insure sunlight would be included in the back side of the house.

• Shadows used to create a feeling of larger spaces and break up walls.

• Same colored wood throughout, all clear grain, same color.


Source of Cost Data• Tough to determine costs for these customized homes.• Best source is the property owner.• Likely they kept detailed cost breakdowns.

Warning:Likely filled with items that are not related to construction. Like a trip to Hawaii or… So you will have to read, maybe hundreds of pages.


Source of Cost Data

• Marshall and Swift published a guide titledExceptional Homes: A Cost Guide for High-Value & Unique Residences

– The guide includes costs for such components as wine vaults and carved marble sinks, as well as cost for unusual structures;

– Nationwide study;

• Other companies besides M&S provide costs.



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Costs for: • the house,• garage,• outbuildings,• docks,• guest house, etc.

• If in remote locations, islands or, sparsely populated states, there are additional costs for transporting products and living accommodations for the workers.

• Maybe 30% ++ costs.


High End Might Not Be Enough

• Marshall and Swift’s Expensive Home Costs, or someone else’s equal, might not be sufficient.

• We have run into houses that the High-End Construction Cost books were insufficient.

• Switch over to the source that covers:– Commercial Building - Lobby Costs– Commercial Building - Hotel Lobby

Many upscale buyers view hotel lobbies and go: Oooo Oooo! I want that.


Another Source

• Uniquehomes.com• Privately run but very similar to an MLS for the upper-end;• New and almost new homes – List prices;• Sold listings, but only for a short period (1 quarter);• Listings often include construction costs;• Articles describing materials and building components along

with their costs;


One line magazine• You can search for homes

by location, price, and how they look, compared against the subject.

• Once you find something similar to the subject, contact an appraiser in that market and ask for help.

http://uniquehomes.info/publication/?i=257504


• Education regarding floor coverings along with their costs.


Uniquehomes.com

Current edition of their print magazine


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Listings by:• Price range• Area• Type

• Listings include numerous photos, videos and statistics

• They even keep “Sold” properties listed in the magazine/site for a month or two.


Copyright © 2004- 2016 Kinja LLC / Hagar Institute Copyright © 2004- 2016 Kinja LLC / Hagar Institute

Reach Out - Cost Data

• Reach out to builders of high end homes in your neighborhood; (Relationships help)

• You need to talk or know people in your market, or understand the lack of people in your market, capable of completing homes of this level.– If there are no capable craftsman, then costs will be

higher since they have to be brought in from afar.• House on Camano Island 60 miles N of Seattle• The 6 finish carpenters were housed at a local hotel,

during the week.• Many months to complete the finish trim.


Cost Data - Another Method

• Extracting construction data from the sales of similar homes.• Market derived.


Sales Price Land Value Value attributed to

all Improvement

s

Estimated Site Improvements

**

Value attributed to Main House

Reported Square Footage

Price Per Square Foot House Only

$15,000,000 $9,000,000 $6,000,000 $1,050,000 $4,950,000 12,000 $413$17,000,000 $4,000,000 $13,000,000 $2,000,000 $11,000,000 17,000 $647$15,750,000 $8,000,000 $7,750,000 $2,000,000 $5,750,000 17,000 $338$12,500,000 $9,000,000 $3,500,000 $875,000 $2,625,000 13,436 $195$13,000,000 $9,000,000 $4,000,000 $910,000 $3,090,000 11,647 $265$14,500,000 $5,000,000 $9,500,000 $1,015,000 $8,485,000 16,045 $529$10,850,000 $1,500,000 $9,350,000 $759,500 $8,590,500 6,551 $1,311$17,775,000 $8,000,000 $9,775,000 $1,244,250 $8,530,750 16,800 $508$11,300,000 $4,000,000 $7,300,000 $791,000 $6,509,000 17,109 $380$11,250,000 $1,000,000 $10,250,000 $787,500 $9,462,500 10,784 $877$12,125,000 $1,000,000 $11,125,000 $848,750 $10,276,250 8,100 $1,269$ $ $ $ $ $

• By separating land and improvement values, appraisers can obtain information related to construction costs.

• Market derived construction costs are typically more accurate than a cost services (but more difficult).

• In this example I contacted appraisers throughout the US and paid them to supply information about homes in their area. (sales prices, land value, size, etc.)


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We Are Not So Different

• Surprisingly – construction costs in most major cities, all across the U.S., are very similar;– Exceptions: San Francisco and New York– Land is different

• Costs in small town or remote locations are higher and, of course, the most difficult to obtain.


Summary of Cost Approach Information

• Multiple buildings;• Different types and degrees of depreciation for each;• Summarize everything; it will help the reader and

appraiser.


Suggestion

For more help understanding the cost approach and how to find support for land value and/or construction costs, I suggest watching the Webinar:

• Land Value and the Cost Approach

– www.workingre.com/land-value-cost-approach


Depreciation

Things wear out.They have less value as they age.


Depreciation

Three primary types of Depreciation:1. Physical,2. Functional,3. Economic.

• Physical – Things break or need replacement.– New roof, painting, carpet..

• Economic – Items become dated or offer no increase in value, even if they are in good condition.– Swimming pool in a starter home,– Green shag carpet,– Wooden hot tub.


Land Values Increase, Home Value Decreases

If the value of the land increases, the value of the improvements (house) declines over time.

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Time/Years

Increasing Prices

Land Value House Value


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Most Would Believe…

• Most would believe that higher quality homes built with extreme upper end products, have a longer life.

• However, there is a difference between physical life and economic life.

• While an upper-end home can physically last 100-200 years, economically the market life (value) is different from the physical life.


Economic Depreciation

• Physically and Economically, a typical suburban home has minimal value after 65 years (approx.).

• Economically, upper-end homes have minimal value after less than 25 years.– 15 years on average.


Depreciation – Average Quality Home

0

20,000

40,000

60,000

80,000

100,000

120,000

Yea

r1

Year 65

$0 value

Value of the improvementsdecline over time.


Depreciation –Physical Straight Line Depreciation

Year 100$0 value

Physically, upper-end homes, can survive 100 years. Economic value after 15-20 years is -0-

Yea

r 20 Yearly depreciation

is massive


Nice House - Long Physical Life

• Dodge Mansion / Grosse Pointe (Detroit);• Rose Terrace;• Considered to be one of the grandest most expensive

homes built in America;• Built in 1910;• $4 million;• 100+ years of physical life.


Rose Terrace I


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Long Physical - Short Economic Life

• Dodge Mansion / Grosse Pointe (Detroit);• Rose Terrace;• Considered to be one of the grandest most expensive

homes built in America;• $4 million;• 100+ years of physical life;• Built in 1910;• Torn down 1931;

• 21 years of economic life.Then…


Rose Terrace II


Short Economic Life

• Rose Terrace II• Built in 1931/34;

• $7.5 million / $186 per foot;• One of the grandest most

expensive homes built in America.. …for a second time;

• 40,313sf • Torn down 1976 (42 yrs. old);

• Cost today $5,000 per sf.


Groat Point – Bellevue WA



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Groat Point

• 2 acres• Built 1986• 15,160+ sf• Massive multi-million

dollar remodel 1996/97• Added SF in 2000• + Attached garage• + Room over the

garage.• 26 years old

Sales History• 1995 $ 8,500,000 +

• 2011 $15,250,000

• Torn down 2012


Two Bits Of Information

From sales like this the appraiser has:1. A land comparable that helps determine the land value of

the subject.2. Rates of depreciation for expensive homes.

3. Physical/Economic depreciation rate is massive so don’t use “typical” judgement or beliefs.


Depreciation – Functional Obsolescence

• Things that might not be a functional issue to most of us, can be a functional failure to the rich.


The commonality among homes over $10 Million

• Usually on unique sites (waterfront, view or acreage);• More than 10,000sf;• Having between 4-12 bedrooms; • 4 - 12 bathrooms;• Extensive garage spaces;• Recreational facilities (Gym, Tennis Court, etc);• Guest houses;• Staff living quarters;• Security needs and privacy are a requirement;• Designed for entertaining around a central room usually

adjacent to a water feature such as a fountain, swimming pool or within 100 feet of a lake shore.

If the subject doesn’t have these items, the house likely suffers functional obsolescence.


• Uniquehomes.com• What’s in demand for high end homes.


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What’s Hot – What’s Not

• www.usatoday.com/story/money/personalfinance/2012/12/23/eight-amenities-high-end-homes/1779535


Functional Issues - How Do You Know?

• Analyze all of your potential comparables; look for the components that the majority also have.– Maybe you’re lucky and they all have the same major

features;– Hopefully the subject has the same components and

features as the majority.– If the majority has something that the subject does not,

then the subject likely has functional obsolescence.Example:

– The majority of potential comparables have 6-8 bedrooms and the subject has 2; oops

– 10 car garage and the subject has 4; oh snap


Functional Obsolescence

Biggest Problems:• No Pool;• 3 or fewer Bedrooms;• No room to party;• Inadequate parking;• Inadequate kitchen(s);• In remote locations – no helipad;

• If Trophy:– Living quarters for live in help– Guest quarters– Room for toys


Many Have Issues

Missing or component to be added

Size Unit Cost Total CostNew

Adding 2 bedrooms 1,000sf $1,525 $1,525,000

3 additional bathrooms (including staff) 800sf $1,525 $1,220,000

Additional Guest Parking 1,000sf $20 $20,000Media Room 1 $75,000 $75,000

Heli-pad 1,000sf $30 $30,000

Total Cost $2,870,000

Additional market impact due to missing components $1,435,000

Total Functional Obsolescence $4,305,000

• The subject’s value, in the cost approach had higher depreciation, and lower value, due to the lack of certain components.

• Due to the home not having components demanded by the market, the total value loss in the Cost Approach is:

a) the Cost to Cure + b) the market’s response due to the missing items.

• Additional market impact is the toughest component to measure.


DepreciationFunctional Over-Improvement

Cost Does Not Always Equal Value


Cost Does Not Equal Value

• Just because they have a pool costing $1,000,000 does not mean it adds $1,000,000 of market value to the property, even when new.

• Many components are VERY customized to the property owner and might not be important to the next upper-end buyer (the rest of the market).

• For the most part we have found that every house in the upper price range is over-Improved.– In other words, it has components that add no value, just

cost.


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Two exterior wall layers:1. 4 x 8” sheeted in plywood2. 2 x 4” second interior walls

No!! Squeak floor



COST APPROACH

Over Improvement Items Subject's Cost Typical CostAmount of Over-Improvement

HVAC $1,256,100 $200,000 $1,056,100

Wall f raming above good quality $100,000 $0 $100,000Second exterior wall $50,000 $0 $50,000Vertical Transportation $23,900 $0 $23,900Change Order #4 $271,813 $0 $271,813Roof $412,238 $200,000 $212,238Architect Fee $2,527,662 $2,512,508 $15,154ConsultantsOwners Rep and Expenses $400,000 $0 $400,000xxxxxxxxxxxxx $26,689 $0 $26,689Lighting Design $102,973 $25,000 $77,973Art Installation $50,000 $0 $50,000Closet Designer $50,000 $0 $50,000Fire System Design $15,000 $0 $15,000Interior Design $735,430 $10,000 $725,430

Total overage $3,074,297

Functional Over-Improvement Calculations

Functional Over-Improvement


COST APPROACH

Cost for const living areas 9,480 $1,525 $14,457,000Cost for const Non- living areas 1,800 $500 $900,000

Semi total $15,357,000

Functional Obsolescence -$4,036,500Functional Over-Improvement 9,480 -$3,074,297Economic/Physical Dep. 6.60% -$1,013,562

SUB TOTAL -$8,124,359 -$8,124,359

Site Improvements $1,213,221Dock and Moorage $340,00016% for Arch Fee $181,9832.6% for Buyers Rep fee $31,5448.1 % tax on landscaping $2,555

Total For Landscaping $1,769,303 $1,769,303

$9,901,944

$14,000,000

$23,901,944Value by cost

Total Cost of Improvements

Land Value

$9,001,944

$23,009,144


Replacement vs. Reproduction

• If you use replacement costs, which is the easiest, expect the value derived via the cost approach to be significantlyless than market value.

• Replacement costs are the costs associated with building a new home of similar size and utility without any over-improvement.

– Oh Wow! homes are filled with over-improvements.– Owners are constantly meddling with homes while they

are being constructed – driving up costs.– Make sure you don’t use replacement costs AND then

deduct for over-improvement (double dipping).


Reproduction vs Replacement

• If cost data is plentiful.. use reproduction costs;• If you have good data and can cross-reference it with the

property owners expenses, reproduction costs are very helpful and will likely be closer to the value derived via the sales comparison approach.

• With reproduction, you must calculate and subtract for functional obsolescence and over-improvement.


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The Difference Indicates

Reproduction

• Create a brand new exact duplicate.

• Includes all functional failures and over-improvements.

• Costs will be higher.

• Data indicates $5,000,000

Replacement

• Create a replacement for the home. (close but not exact)

• Does not include functional failures and over-improvement

• Costs will be lower.

• Data indicates $4,000,000

If you perform both methods the difference between them ($1,000,000) is the amount of depreciation related to functional failures and functional over-improvement.

$1,000,000


Depreciation

• Properly calculating costs and depreciation increases the accuracy of your value conclusions and makes the appraiser look like they know what they are doing.

• Calculating depreciation is tough and takes time, money and effort.– Higher fees and repeat business.


The Order Of AdjustmentsIs Important


The Order of Adjustments

• Not only is it critical to make accurate adjustments, but there is also a certain order that must be followed when making them.

• Making adjustments in the correct order is a method for making the important, and maybe the only required, adjustments first.


Adjustments –The Required Order of the Universe

1. Terms; (cash equivalent)

2. Time; (time, changes in market conditions)

3. Ownership; (fee simple, condominium, leased)

4. Location;5. Site Components;6. Physical Characteristics.

• The order of adjustments impacts accuracy of adjustments lower down on the form.

• Common for commercial appraisals;

• Failure on the part of residential appraisals.


Terms

Time

Ownership

Location

Other stuff

The order is already there.


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Determining Adjustments For Improvements

• A class explaining how to determine adjustments, takes hours.

• I would strongly suggest taking a webinar/CE class on the topic.

WorkingRE has a two part webinar:www.workingre.com/support-prove-adjustments-june-2015


Unique, Odd, Different Properties


Expensive and Oddball Properties Scare People

• Just because a property doesn’t fit into the box required by “Fannie Mae,” doesn’t mean they can’t be appraised;

• Think outside the box; try and figure out what would help you determine the value.

• Take these on as a challenge, a crossword puzzle, a test of your abilities.

• Let me walk you through how we tried to solve for the various problems.


Is There A Market?

• “Unusual” homes can be so…. unusual, that there are no buyers. If so, these properties may be nothing more than land value.– Again, land value counts!!

• “Unusual” homes will have high levels of functional and maybe economic obsolescence.


How do you find comparables

• You look everywhere and I mean everywhere.• Do not limit your search to your market area or even state.• If….. you’re lucky enough to find a similar “unusual” home,

be happy.

• Expect that during your sales comparison/adjustment process, you are going to perform a matched-pair analysis on the unusual or expensive home.– The goal? What is the adjustment between “unusual”

and non-unusual in that area/market.


General Steps

1. Find a similar unusual home;2. Locate its last sale;3. During the same time period and in the same

neighborhood, find a home that is as similar as possible,excluding the unusual construction.

4. What is the difference in the sales prices between the two?5. Perform matched-pair analysis on 2-4 more properties.

– They will likely produce the same adjustment for “appeal” or “style.”


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More Steps

• Now that you have found the sale of 1 unusual home, now try and find 2-4 more– anywhere, – in any state, – at any time.

• Find other sales in the neighborhood and perform additional matched-paired analysis with the goal of determining the adjustment for the unusual feature.

• You NEED proof of the adjustment.


Distant Mountain Top


In The Middle Of Nowhere


Unique, Most Expensive, Small Town

Most important features:1. Small town;2. Mountain top;3. 50 Acres;4. Security/Privacy/Self-sufficient;5. High quality;6. Building and rooms with unusual shape (Oval).

Identify and list the 5 or 6 most important features; these become your primary search criteria.


First Thing…

Call the bank and increase your fee!!!!!!

• I suggest an hourly fee but if they demand a fixed fee, then go big!! $5,000 - $10,000

• Request that you speak to the senior appraiser for the bank;

• Describe the property to them;• Describe the numerous buildings;• Shoot them an aerial view of the propert;• Perform a quick survey for “comparables;” • Really impress upon them the difficulty in appraising a

property like this.• “I’ve researched an area of more than 100 square

miles and there’s nothing like it.”


Searching

• For every search, write down your criteria.• By keeping tabs on what you’re doing you will improve

your odds of finding something and can use the information in your appraisal to impress the client.

• When data is scarce, by reviewing your search criteria you’ll likely come up with another way to search.

• For every search that produces poor results, repeat the search with expanded criteria.

• Think of it as a pyramid with the first search small and focused. Each successive search is wider and farther afield.

• Land value is key so let’s start there.


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Search CriteriaSubject = 50 acres

Searched for vacant land sales:• Everything with same small town mailing address, as the subject;• Over 10 acres;• Selling in the past year;

Second search: Same as above, but going back 3 years;Third search: Same as above + listings, pendings, expired listings.

Why expired? We know what isn’t selling.

Fourth search:Everything on 10 acres, selling in the past year, with mailing addresses of the surrounding small towns.Fifth search: Same as #4 but going back 3 years.


Subject’s Mountain Top

One last search:• All of western Washington for any vacant land sale,

5 acres+, located on a mountain, higher the better.• View• Privacy

• We got lucky and found sales 100 miles away.• These land sales were used to build custom homes.• Not only did we find land sales, we found potential

comparables for the house.


Now Switch Search CriteriaSubject = 50 acresUnusual, high quality home.

Searched for high quality homes:• Everything on 10+ acres, same small town mailing address;• Selling in the past year;

Second search: Same as above, but going back 3 years;Third search: Same as above but for, listings, pendings, expireds.

Fourth search: Every high quality or unusually shaped home, selling in the past year, with mailing addresses of the surrounding small towns, and skip worrying about site size;Fifth search: Same as #4 but going back 3 years.Sixth search: Anywhere in the State going back 5 years.


What We Found

• 1 home on large acreage, in the same small town, selling 3 years ago;

• 1 home on large acreage, in a nearby small town, selling 1 year ago;

• 1 had unusual shapes and similar features;• Similar homes but on small acreage, 80 miles away, on an

island;• Remote mountain top, recent sale;• Remote mountain top, selling 5 years back.

• We had to adjust for all of the dissimilarities but at least we had sales that bracketed the main components of value.


Mountain Top

• On a mountain top, 100 miles North, we found a custom built home on 30 acres.

• By checking it’s sales history, we found that the site had sold for approximately the same as the subject, at the same time.

BINGO!!!! • Site sale;• Location and site adjustments ($ -0-)• House sale;• Proof that some segment of the market is willing to buy a

house on a remote mountain top.• Only required minor adjustments.


Adapt And Conquer1. Try to find the same house and land combination, but when

that fails….2. Bracket the land:

– Bigger, smaller– More and less expensive– With and without special features

3. Bracket the house:– Bigger, smaller– More and less expensive– With and without that unique feature

• Remember the goal is to find properties that can be used to point to the general value of the subject.


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Market Analysis / Comparison

Market Value

High Value Properties

Unusual Properties

Low Value Properties

Narrow Value Range

Subject’s Value


Unusual Construction

• Log homes,• Dome homes,• Underground homes.• ?

• Where do we find comparables for these?• It requires at least two steps more than a

“typical” appraisal.


Dome, Log, Unusual

• Same starting point – the land.• By determining the subject’s land value, you will likely take

a giant step toward determining the total market value of the property.– The search is similar to any other complex search.

Cost Approach:

• Search, find, and contact builders of the unusual style/quality homes.

• Call them and ask nice questions. Often they already know your subject; might even have built it.

• Reproduction and Replacement Costs should be provided in the appraisal. Differences can indicate obsolescence.


Dome, Log, Unusual

• Now for the house.• Look for:

– Recent sales of conventionally built homes of similar size, quality, and age in the subject’s neighborhood &/or market area;

– Search for sales the very same way you would a “conventional” home.

• Lets say you find nearby similar size, age, and/or quality homes but they are “conventional” in construction & style.

• Now for the tough part, you’ll have to determine what the market adjustment is between a “conventional” home and a dome, log or, unusual home.– Matched pair analysis to the rescue.


Matched Pair

• Search everywhere for a sale of a dome (or unusual) style home.

• Once you find one, try to find a similar size, quality, “conventional” home selling in the same area.

• Compare the dome home against the “conventional” home using a matched-pair analysis.

• If you’re lucky, and they are similar except for style, any difference in price is the adjustment for the “style” or unusual construction of the subject.

• You are trying to determine the adjustment between “conventional” and unusual style/construction homes.

• Now do the search/analysis two or three more times.


Distant Matched PairDistant

Dome HomeDistant

Comparable

Sales Price $200,000 $250,000 $50,000Site Size 1 acre 1 acre -0-House SF 2,050sf 2,000sf -0-Condition C3 C3 -0-Style Dome Home

2-StyConventional2-Sty

$50,000 Difference in price, theadjustment20%

Based on the sale and matched-pair analysis of a distant dome home, in a different neighborhood, the market appears to indicate that there is a 20% ($50,000) adjustment for style.

Want to be sure, find another home, or two, and do it again.


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Now Back To The Subject’s Neighborhood

• We performed 4 matched pair analyses of dome homes in different neighborhoods.

• All of the comparisons indicate a 15-25% loss of value due to the dome construction method.– Or log, or underground, or…

• We used 6 sales in the subject’s neighborhood, just like any other appraisal and made a “style” adjustment of -20% to the sales prices of each of the neighborhood “comparables.”


Cross-Check

• Cross-checked our adjustments and value by….• We also used the sales of the distant dome homes and

placed them on the grid as comparables 7-9.• Since we know the land value of the subject, we were able

to determine and make adjustments between distant dome home sales and the subject, for location and site size.

• Two were older sales so we also made time adjustments.


From Three Directions To The Middle

1. Local sales adjusted for style;2. Distant sales adjusted for location;3. Historic sales adjusted for time.

Indicators of Market

ValueIt’s the same search function and adjustment process for any unusual components or property types.


Waterwheel - Windmill

Electrical power from an unusual source


Solar / Waterwheel

• Style, size, quality, etc. are not the most important components – it’s the source of electricity.– Not everybody will live in a house like this.– Reduced market acceptance.

• It’s unusual and will have unusual problems.– Maintenance issues;– How steady is the water, electricity production?– What happens if the water stops, or the sun doesn’t

shine?– Limited market appeal;– All of these must be analyzed and answered in your

appraisal.


Same As Before

• The same search criteria process that I just explained in looking for unusual style or expensive homes you will use for unusual power sources, or any other component.

1. Search for similar nearby homes;2. Search for homes, anywhere that have the same power

source.3. Match-pair analysis between similar homes with and

without the waterwheel, or solar cells.4. After all adjustments for size, quality, etc., what is the

remaining difference in price?– That is the market adjustment for the unusual item


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They are not similar but they are “comparable”

Looking for a sale with a waterwheel as the power source, we searched:1. The entire western part of the state;2. 10 years back in time for “waterwheel”

– Found 1

3. Searched for any sale with a windmill;– Found 1, selling 4 years ago

4. Searched for any home that depended on solar cells;– Found a current listing.

5. And searched for similar homes in the subject’s market area (which was in the middle of nowhere).

• Crazy and numerous adjustments. It is what it is.


If Data Is Sparse

If you have limited sales data, expand the search criteria.Try:• Expand until you have data.• Greater distance;• Different city;• Farther back in time;• Pending, expired, listed;• Different sales price, quality, condition;


The Adjustment Not The Value

• You are not restricted to properties just like yours and only in your neighborhood.

• Look for whatever, wherever necessary to find any data that helps.

• Even in different neighborhoods or market areas.

• The goal is to locate indicators of value and proof that can be used to determine adjustments.

• Don’t allow some stupid reviewerto limit finding what YOU need.


Will Fannie Mae Touch This?Question:• Are loans secured by unique or non-traditional homes eligible for delivery to

Fannie Mae?Answer:• Yes. Fannie Mae does purchase loans secured by unique or non-traditional

housing types, such as, but not limited to, log homes, earth berm homes, and geodesic domes, which can be located in all areas, including rural locations.

• Loans on these types of properties are eligible for delivery to Fannie Mae provided the appraiser has adequate information to develop a reliable opinion of market value.

Question:• Is there a required number of comparables that must be of similar design or

appeal as the unique or non-traditional home that is being appraised?Answer:• No. There is no requirement that one or more of the comparables be of the same

design and appeal as the property that is being appraised. However, appraisal accuracy is enhanced by the use of comparables that are the most similar in design and appeal.


Even Fannie Mae Gets ItQuestion:• Is it acceptable for an appraiser to use sales that are not

truly comparable to the subject?

Answer:• Yes. • If there is a shortage of truly comparable sales in the area

where the subject property is located, either due to the nature of the property improvements or the relatively low number of sales transactions in the neighborhood, the appraiser might need to use as comparable sales, properties that are not truly similar (or comparable) to the subject property.


• When appraising unique properties, if the appraiser cannot locate recent comparable sales of the same design and appeal, but is able to determine sound adjustments for the differences between the comparables that are available and the subject property and demonstrate the marketability of the property based on older comparable sales, comparable sales in competing neighborhoods, the existence of similar properties in the market area, and any other reliable market data, the property is acceptable as security for a mortgage deliverable to Fannie Mae.

Summary:a) Locate something that can be a source of comparison;b) No limits on when or where;c) Utilize correct methodology for determining adjustments;d) LOTS of explanations.


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No Building Permits

What! Permits, Government permission impacts value??Get out’a here


Problem

• Nice house, built at the water’s edge.• Problems:

– No building permits– No functioning septic tank system

• How do you determine it’s current market value?


What The New Owner Built


What Was Permitted

The appraisal problem was to determine the value of the property, as it really existed, without building permits.


One Potential Sign• Note the lack of an

address.• Sometimes the lack

of an address indicates the county never assigned an address to the property, because to their knowledge, no building permit was issued.


The Problem

• What is the market value of the property, as it really exists, without building permits.

Step #1:

• We appraised it under the hypothetical assumption that it was legal and there were no problems.– This sets the maximum value.

• Fixed appraisal fee

Step #2:

– Appraise it as it really exists – reality.• A second appraisal fee based upon an hourly rate.


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We Searched

• Using the search term “permit” and “failed” we searched the MLS.

• Looking for any mention of a building permit problem.– Looking for any failed septic tank or well systems that

made the house uninhabitable.– We found some!!!!

• Searched the MLS for every waterfront sale and expired/canceled listings. (Sales fail for a reason)

• Checked the building permit status of every potential comparable.– We found numerous unpermitted homes on the island !!!– Numerous homes with failed septic tank systems.


The Other Guy

• In trial, the other appraiser stated that the non-permitted waterfront property’s value was reduced by “the cost to cure by obtaining building permits.” lazy approach

• He was absolutely wrong. Cost to cure was not sufficient

• We found that homes without permits, built on the edge of Puget Sound, lost at least 50% of their value.– There was no relation to the “cost to cure.”– What was a million dollar home was worth less than

$500,000

– Trial court agreed with our conclusion.


The Point• We didn’t give up; we figured out how to find something that

helps the appraiser determine value.

• By looking we found “comparables.” (lottery ticket)

• Because of our tenacity, our ability to think outside the box, we have been able to solve problems and get paid more.

• You can too!• The information provided in these webinars applies to

unique, high-end, oddball homes as well as downright ugly appraisal problems.

• Use the information and charge out there and make more money.


Not Just Anybody

• Not just any agent, appraiser or, lender can play in this sandbox.

• Experience and knowledge counts!

• Working harder and smarter pays off.


Questions and More Information

• Visit the web site: www.hagarinstitute.com

• Questions: [email protected]

Phone: 206-236-0787

Real Estate, Mortgage & Appraisal Classes For:• Agents• Attorneys• Appraisers• Mortgage industry• Regulatory agencies• Law enforcement / prosecution• Consumers


WorkingRE Magazine

OREPInsurance for Real Estate Professionals

[email protected]


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Richard Hagar SRA


valuing epensive and unique part 2 handouts · part 2 the problem with “unique” ... • be more...

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