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Old 08-30-2012, 11:20 PM
Charles Cales Charles Cales is offline
Join Date: Sep 2004
Location: Phoenix
State: Arizona
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Default non conforming house

THIS IS HYPOTHETICAL IM THINKING AHEAD FOR WHEN IM ASKED TO DO A COMPLEX APPRAISAL. I just took the class and learned nothing that I could apply. I'm doing a complex appraisal for my board exhibit prior to attaining my certification. I am appraising a 3000 sq ft house in a neighborhood of 2000 sq foot houses. No other sold data for a house this large exist in this neighborhood. I am assuming the house suffers from super adequacy and regression. The subject and comparables are similar in all other factors. How do I account for the additional non conforming size in the comparison grid? . Do I take the additional sq footage and value it at a lessor amount? Do I give it full value in and then hit the house for design and appeal? Or functional obsolescence? And if so how much? do I need to find another house in another neighborhood that is nonconforming due to greater size and come up with some sort of discounting factor? And how do I handle this functional obsolescence in the cost approach?

Last edited by Charles Cales : 08-31-2012 at 12:24 AM. Reason: clarification
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Old 08-30-2012, 11:45 PM
PropertyEconomics's Avatar
PropertyEconomics PropertyEconomics is offline
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?1 ... That is the crux of the assignment.

?2 ... That depends on what the available market data shows.

?3 ... That depends on what the available market data shows.

?4 ... That depends on what the available market data shows.

?5 ... That is the crux of the problem (no one here can answer that).

?6 ... Yes this is what you should do.

?7 ... That depends on what the market data shows ....

No one here can do this assignment for you .... look to the market to give you the answers to this appraisal problem you have.
Foxtrot, Uniform, Charlie, Kilo Cancer ... In memory of our friend Bill Waite!
Old 08-31-2012, 12:01 AM
Terrel L. Shields's Avatar
Terrel L. Shields Terrel L. Shields is offline
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You need to find comps that are similarly affected and attempt to extract that by whatever means you can. Multiple Linear Regression. paired sales...cost related..whatever. PFA (Pulled From not acceptable.
"Bigamy is having one wife too many. Monogamy is much the same." Oscar Wilde
Old 08-31-2012, 07:04 AM
J Grant's Avatar
J Grant J Grant is offline
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If it were my assignment, I'd start by trying to find a similar oversize home ( from 2800 to 3500 sf) in a competing neighborhood (assuming there is one). How far to look for a competing neighborhood? Where you think it is reasonable for a buyer for your subject to look. If you find a couple of sales or one sale, see how much more (if they sold for more), they sold for, then smaller homes in their respective subdivision.

Then see how much similar homes sell for in your subdivision versus competing subdivision to see if there is a location adjustment. If there are larger homes selling, preferably 3000 sf plus in a competing neighborhood, it is reasonable to assume buyer would buy a larger home in subject subdivision and pay a similar amount, after applying any location adjustment. They might be paying the same, less, or a diff amount for the additional living area.

Talk to realtors in your subject subdivision as well as competing ones...get feedback, explain in narrative who you talked to and what their comments were. Focus on realtors who have a lot of listings in the area.

If no comps are found in competing areas and there is no indication buyer will pay more than justa marginal amount for your subject's larger area, then it would be an over improvement (more so than a super adequacy). The above methods you mentioned for adjusting for the funct obs of the larger living area would others said, you need to lresearch the market and local trends.

Whatever you conclude , make sure it is consistent throughout the different areas on the report as that is what the reviewers look at. For example, on the first page, if you mark the house is not typical for the area, then on the narrative addendum, comment on it not conforming but still market accepted? Is it an over improvement for the area ? If it is an over improvement, how does that affect marketability?

Don't forget market exposure time, and that it may be different for a larger house like your subject, then the smaller typical homes in the neighborhood... The important point is, whatever the research shows that forms your opinions about this house, such as marketability, and any funct obs, then the application in the various sections of the report should be consistent in the cost approach, in market exposure time, in the sales approach, in your narrative comments, in the adjustments on the SC grid.

Last edited by J Grant : 08-31-2012 at 07:10 AM.
Old 08-31-2012, 07:11 AM
Mike Kennedy's Avatar
Mike Kennedy Mike Kennedy is offline
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[quote=Charles Cales;2290167] No other sold data for a house this large exist in this neighborhood. Time parameters? Contracted and/or Active Listings considered?

I am assuming the house suffers from super adequacy and regression. Unwise to "assume" until all competitive market data (immediate neighborhood and directly competitive adjacent neighborhoods) is identified and analyzed.

Unless the hypothetical assignment you are contemplating on stipulates compliance where possible with "standard GSE or bank guidelines" - they do NOT apply to the task at hand.
Kill the Contract Review Bull$eye - Now.
Old 08-31-2012, 07:26 AM
J Grant's Avatar
J Grant J Grant is offline
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Research older sales in subject area also...for historical data. Go back at least 5 years.
Old 08-31-2012, 10:15 AM
Denis DeSaix Denis DeSaix is offline
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Many neighborhoods (and, based on your description, your hypothetical neighborhood) are fairly consistent in the type of residential improvement that exists within their boundaries. Because of this consistency, the Principle of Conformity comes into play: Real property value is created and sustained when the characteristics of a property conform to the demands of its market. (The Dictionary of Real Estate Appraisal, 4th ed.)

At a point, price exceeds the ability of the neighborhood to support it. At this price, the typical buyer will move to a better neighborhood rather than purchase a house at the better neighborhood's price-point in the inferior neighborhood.

This is why one can have 3,000sf homes selling for $400k in one neighborhood, and 2,500sf homes selling for $410k in another.

All the techniques discussed are appropriate methods to determine how the market reacts to the non-conformity. While it may be true that a specific buyer will pay top dollar for an over improved property in a particular neighborhood, in general, the typical buyer (which is the identified type of buyer in the "market value" definition) will not.
In my experience, properties like you describe are over improved because an existing owner decides to add-on/upgrade his/her conforming house to a style that suits his/her specific needs, but is not in demand (does not conform) to that particular neighborhood.

Understanding this dynamic, one can then look to other neighborhoods within the general market area and ask the question, "where would a buyer move-up to in this market?" The price point for that market will probably set a ceiling for your subject's market: at that point, the typical buyer would rather pay the price to live in the better neighborhood rather than paying a premium to live in the inferior neighborhood.

When I'm faced with this type of problem, I'll follow most of the suggestions already offered (historical, competing neighborhood data, I'll look at cost, etc.), but then I always look at where the next best neighborhood is to determine what its price-point is. As a rule, prices in my neighborhood are maxed out at near the entry level for the superior neighborhood (it isn't a hard stop, but there definitely is a transition range in price).

As far as adjustments go, I've done it a few different ways:
A. Adjust the GLA at the rate which is market supported for the typical home, and then make a lump-sum adjustment in the functionality box to offset the over-improvement. This approach ensures I'm adjusting the comps correctly for how the market reacts to differences in GLA, and then modifying the adjustment for the fact that the market will not pay a full premium for the additional GLA.
B. I'll make a determination that for the neighborhood, the maximum size it would support (principle of conformity) is X, and I'll adjust to X only. In your case, that may mean the market would pay for a 2,350sf home at the identified GLA adjustment rate, but at 2,351sf, that price pushes the buyer into the superior market.*
C. Modify the GLA adjustment above the supported range to something less. This makes some sense; over size X, the market is not going to pay a full dollar more, it will pay something less; the over improvement of the GLA is adjusted by this "something less".

Regardless of how I do it, what always creates a ceiling to the adjustment (and my opinion of value) is the subject neighborhood's ability to support that price.

*As a rule, I use option "B". I find this the simplest and most direct way to explain the dynamic. Most people can understand that at a certain price point, a buyer will purchase in a superior neighborhood. If larger GLA adds incremental value to a home within the neighborhood's conforming size-range (which it usually does), then at a point, it will no longer contribute value because at that higher price-point the buyer will purchase in a superior neighborhood. That's the point where the excess GLA no longer contributes value: I cut off my adjustment at that point.

The key is to explain how the problem was analyzed, what the results of that analysis conclude, and then how the analysis is applied in the valuation problem.

Last edited by Denis DeSaix : 08-31-2012 at 10:42 AM. Reason: typo
Old 08-31-2012, 11:26 AM
CANative's Avatar
CANative CANative is online now
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Good post Denis. I supposed you could have just copied and pasted from Chapter 3 of the 4150.2...

o Relation of Ownership Expense to Family Incomes.
Families usually select homes in neighborhoods where
typical occupants have financial means similar to their
own. A home that is too costly for these families to
purchase or maintain will have limited marketability.
You have been removed from this discussion.
Old 08-31-2012, 01:17 PM
J Grant's Avatar
J Grant J Grant is offline
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Denis provided an excellent post that is on point.
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