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  #1  
Old 12-08-2008, 08:19 PM
hooger hooger is offline
 
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Default Upgrade adjustments

I just completed a VA assignment on a new home which has around $40000 in upgrades. VA in this region says its ok to use cost as equal to contributory value if you think this is the case. That is basically how I have been treating upgrades. However, I also recently completed an FHA with a similer scenario, but in this case I was more critical of the upgrades and only used 50% of the difference as the contributory value. I am just wondering how others are handling upgrades . I don't think there is any right or wrong way, but would like to hear how others handle it. Thanks.
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Old 12-08-2008, 10:37 PM
William Rightsell's Avatar
William Rightsell William Rightsell is offline
 
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The correct way to handle it is NOT to assign some arbitrary percentage of the actual cost of the upgrades and use that for your adjustment. You need to look at resales of homes/units with 40K in upgrades and then see what a unit without those upgrades resells for. Let the market tell you what they are worth, not pull it outta your butt!

Paired sales...they do exist. If you are working a tract/developer type neighborhood (which I assume you are due to the presence of "upgrades" over the base model) then you can find paired sales. Either from the subject development or from similar developments. You just gotta dig a bit.

In my market, I find the builders usually mark up the price of any "upgrade" 100% or more. These are huge moneymakers for the builder. Thats why they all have "design centers" now where customers can come in and go ape***t adding options at double (or more) the actual builder cost. They LOVE these customers. I think if you do the research, you will find that upon resale these options frequently contribute a mere fraction of what they actually cost...

Do the research...you'll find the answer.

todd
  #3  
Old 12-08-2008, 10:52 PM
The Argus The Argus is offline
 
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Paired sales.

In my experience I haven't run in to very many situations where upgrades provide a dollar for dollar return in terms of market value.

Paired sales. Not the most fun part of the job (IMO) but done correctly provide reliable (and defensible) adjustments.
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  #4  
Old 12-08-2008, 11:12 PM
hooger hooger is offline
 
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Gee Todd, Thanks for the great response. In the 30+ years I have been appraising residential real estate I never have pulled anything "out of my Butt", as you just did with your response. Good luck finding out how many upgrades are built into a resale, or the amount paid. Sometimes you have to base contributory value of certain upgrades on past experiance with homes in other areas and try to make a correlation. Not exactly out of your BUTT. The VA has directly addressed this and in this area if the market is willing to pay X amoount for certain upgrades, and the amount is consistently charged and paid in other new home contracts then they accept that as the contributory value. It may not be in the resale market down the road, but in this transaction, it is. Hope that helps you out. Peace out.
  #5  
Old 12-08-2008, 11:26 PM
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Mztk1 Mztk1 is offline
 
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I look at the major upgrades. Let's face it, sometimes half of the upgrades in new construction are added outlets, a computer center, ceiling fans, refrigerators and the rest of the BS that isn't going to add a nickle unless you are in the sale's office hot seat with your significant other, shaking your head in agreement to everything that makes your dream house seem even just slightly appealing. Stamp sucker on my head, cause I was there once.

I'll look at ceiling heights, flooring, kitchen upgrading, baths and look for my resales in the MLS that have similar. I like to look at the interior photos if available. Don't get me wrong, I don't sit there and oooo and aahhh at them, I read the listing and breeze throught the pictures. I can see what I need to see pretty quick. I then separate the comps in camps of similar, inferior and superior to the subject and generally find an adjustment between the differences as a cost per square foot under quality.

I used to do $ for $, years ago, but something about it seems contrived, or like I'm in the developers back pocket.
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  #6  
Old 12-09-2008, 12:48 AM
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William Rightsell William Rightsell is offline
 
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Quote:
Originally Posted by hooger View Post
Gee Todd, Thanks for the great response. In the 30+ years I have been appraising residential real estate I never have pulled anything "out of my Butt", as you just did with your response. Good luck finding out how many upgrades are built into a resale, or the amount paid. Sometimes you have to base contributory value of certain upgrades on past experiance with homes in other areas and try to make a correlation. Not exactly out of your BUTT. The VA has directly addressed this and in this area if the market is willing to pay X amoount for certain upgrades, and the amount is consistently charged and paid in other new home contracts then they accept that as the contributory value. It may not be in the resale market down the road, but in this transaction, it is. Hope that helps you out. Peace out.

If you have been appraising for 30 yrs you should have known how to handle this already...JMHO....

As for finding out the options involved in a property, there are ways...takes some effort, but it can be done. Go back to old new construction appraisals you have down in tract developments and know the options on..then see if any of those ever resold....might surprise you what you can dig up if ya really look and ask questions and make a few calls. They dont even necessarily have to be the same options...just analyze what percentage was returned on resale for a known amount of options....thats better than guessing.

And my response was not pulled outta my butt as you state. It was merely a suggestion to use established and proven appraisal practices to determine a proper adjustment.

As for the higlighted part above (my bold), I dont even know what to say. That logic is totally flawed and leads to flawed reports. Cost doesn't necessarily equal value. And you can't randomly assign a percentage of cost for your contributory value which is what your OP implies (when you arbitrarily decided the options were now only worth 50% for FHA vs 100% for VA).

You asked..I answered..appropriately I might add. Sorry you didnt like my response.

todd
  #7  
Old 12-09-2008, 02:02 AM
The Argus The Argus is offline
 
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I was taught early on that making dollar for dollar adjustments is just asking for trouble.

Paired sales takes a while to get the hang of but it's well worth learning how to do, regardless of how long you've been appraising. I think a $10,000 adjustment for a deck that cost $10,000, attached to a house that's worth $120,000 would raise some eyebrows. I try to approach it in terms of market reaction to the upgrades involved and it's not too often that I've seen dollar for dollar market reaction, sometimes it's more, more often (in my experience) it's less, but I don't think I've seen it be equal.
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  #8  
Old 12-09-2008, 09:32 AM
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Mark K Mark K is online now
 
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Quote:
Originally Posted by hooger View Post
I don't think there is any right or wrong way, but would like to hear how others handle it. Thanks.

Have to disagree. There IS a right and a wrong way.

Right way: Adjust according to what the local market dictates as determined by comparable market sales (Sales Comparison Approach), not builder contract sales (Cost Approach).

Wrong way: Using the cost as a basis for adjustment without verifying that the local market perceives a $ for $ increase in valuation.

I believe that VA and FHA both want market value appraisals so I don't understand why you'd use cost for one and market reaction for the other.
  #9  
Old 12-09-2008, 11:05 AM
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Mike Garrett, RAA Mike Garrett, RAA is offline
 
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Common sense....always a good way to handle anything. If buyers are typically paying for upgrades, according to the builder's up grade list, then, most probably, that is the market reaction to the value of the upgrades.

Ever wonder why a buyer will pay $800 for a microwave from a builder when they can go down to Lowes and buy the same unit for $400?

How about paying $10,000 for upgraded floor coverings when they can be bought for $6,000. When we bought our house, we paid $6,000 for ceramic tile floors in the entry, kitchen, hallway, and baths. Would a buyer, buying our house as a resale, be willing to pay $6,000 more because we have ceramic tile flooring?

Ever buy a new car? How much are the accessories (add on's)? Why is a buyer willing to pay $8,000 over the base price of the car for these things? What happens the minute that car becomes used?

Market perception of value is one thing when dealing with a new product and another when dealing with a used product. The convenience of "rolling into the mortgage" upgrades is a very real thing in new construction. This is the reason I personally believe new construction is a totally different market from resales.

Cost vs value. One of the things that we, as professional appraisers, must determine. How we do it...smoke and mirrors or professional anlysis...you tell me.
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  #10  
Old 12-09-2008, 04:09 PM
Mike Boyd Mike Boyd is offline
 
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Quote:
Originally Posted by Mike Garrett, RAA View Post
Common sense....always a good way to handle anything. If buyers are typically paying for upgrades, according to the builder's up grade list, then, most probably, that is the market reaction to the value of the upgrades.

Ever wonder why a buyer will pay $800 for a microwave from a builder when they can go down to Lowes and buy the same unit for $400?

How about paying $10,000 for upgraded floor coverings when they can be bought for $6,000. When we bought our house, we paid $6,000 for ceramic tile floors in the entry, kitchen, hallway, and baths. Would a buyer, buying our house as a resale, be willing to pay $6,000 more because we have ceramic tile flooring?

Ever buy a new car? How much are the accessories (add on's)? Why is a buyer willing to pay $8,000 over the base price of the car for these things? What happens the minute that car becomes used?

Market perception of value is one thing when dealing with a new product and another when dealing with a used product. The convenience of "rolling into the mortgage" upgrades is a very real thing in new construction. This is the reason I personally believe new construction is a totally different market from resales.

Cost vs value. One of the things that we, as professional appraisers, must determine. How we do it...smoke and mirrors or professional anlysis...you tell me.
I agree with Mike G. Believe me, working in new home sales, if you DO NOT recognize the add-ons, you will not get an opportunity to do more homes in that tract. However, you have to demonstrate that additional value with comps in the same tract and preferably, with model matches. In my opinion, you cannot use a 5 year old resale for a brand new house. Other tracts in that same market area are doing the same thing so use 3+sales in the same tract and at least 2 in an outside tract. I would adjust dollar for dollar as long as the "upgrade" is not just a color change or a location change for a door or window. How can you document in a re-sale of a 5 year old house that you are merely driving by in order to get the photo? Even if you went inside, an upgrade might not be visible. There are too many variables.
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