Appraising The Overimprovement

[Have Laser-Will Travel]

Is there a technique for determining how much the market will pay when the subject (SFR) is superior to everything that has sold in recent years?

Searching in another neighborhood for a comparable is a trap because if the sales are higher, it's a arguably a superior neighborhood with greater demand and buyer power.

The subject has a 3,000 sq. ft. Spanish dwelling of magnificent architectural detail. It's one of the most magical properties I've seen. The neighborhood median dwelling size is around 1,100 sq. ft. Public records show that there are 13 other SFR dwellings in existence that are of 2,900 sq. ft. or more, the largest being 4,600 sq. ft. That means it's in the top .1% in terms of size.

Early on in my career, I was taught that there are certain people with good buying power that need to live in the neighborhood they are associated with, even if they could afford a much better area. An example might be a politician. This creates a small and finite market but, the marketing period may be excessive. I just don't know.

Also, and more importantly, I feel in the current low-interest, high-demand Los Angeles market, the subject is likely to fetch a higher price than all the other sales here. The best comparable sold recently for $675,000 and is a craftsman design with good architectural appeal but it's only 2,000 sq. ft. Am I doomed to the limit of the highest sale price?

 

[Randolph Kinney]

Have you examine rental properties and rent analysis? It may point to differences in neighborhoods and how much of an over improvement there is.

There is also the cost approach.

Between the two, you can reconcile the obsolesce or depreciation.

 

[Terrel L. Shields]

The best comparable sold recently for $675,000 and is a craftsman design

That would bracket the bottom of the pile. So I would then go to that higher valued neighborhood and find those comps.... But the secret sauce may be to compare the land prices - the underlying value of the site. That would be the measure of site adjustment. Then see if you can find other larger houses with such issues and try to reverse engineer the cost approach to determine an adjustment for the functional issue.

I just finished a public school that has been consolidated. Thus it is an instant over-improvement. But I found sales and listings that make it clear the depreciation is not entirely based on straight line physical deterioration. There was a huge (more than 50%) discount after taking out the physical deprecation. I then applied that.

I suspect you will find in that kind of property the functional issue is more on the order of 10 -20%...just what I've encountered over the decades. They (large custom homes in less than ideal neighborhoods) also tend to be on the market much longer here as well. That same house on the lake would be snapped up in days.

 

[Have Laser-Will Travel]

Have you examine rental properties and rent analysis? It may point to differences in neighborhoods and how much of an over improvement there is.

There is also the cost approach.

Between the two, you can reconcile the obsolesce or depreciation.

I'll have to think about those. Right now I am looking at the price per sf GLA of the largest neighborhood sale and comparing that to the price per sf for the neighborhood on the whole to determine the diminishing returns. It is a bit misleading since the land contributes the baseline price per sf. GLA.

I am still stuck without being able to show how much the market will bear in terms of price? It would not go up infinitely even at a lower rate of return on the excess GLA.

 

[Randolph Kinney]

Do you have any land sales?

 

[Have Laser-Will Travel]

That would bracket the bottom of the pile. So I would then go to that higher valued neighborhood and find those comps.... But the secret sauce may be to compare the land prices - the underlying value of the site. That would be the measure of site adjustment. Then see if you can find other larger houses with such issues and try to reverse engineer the cost approach to determine an adjustment for the functional issue.

I just finished a public school that has been consolidated. Thus it is an instant over-improvement. But I found sales and listings that make it clear the depreciation is not entirely based on straight line physical deterioration. There was a huge (more than 50%) discount after taking out the physical deprecation. I then applied that.

I suspect you will find in that kind of property the functional issue is more on the order of 10 -20%...just what I've encountered over the decades. They (large custom homes in less than ideal neighborhoods) also tend to be on the market much longer here as well. That same house on the lake would be snapped up in days.

Not unlike the appeal of the lake, this house has super high appeal due to the period details. I don't know if I ever seen anything so enchanting. There are no vacant land sales and abstracting the improvements to determine site...well, I've never felt too confident about that in an older, fully developed neighborhood. I can get sales from another neighborhood but, how can I prove or reasonably support that the market will pay more for the subject than anything else that has sold? The other neighborhoods are differently characterized in terms of price range so, they are superior neighborhoods.

 

[Have Laser-Will Travel]

Do you have any land sales?

I took a look and to my surprise, yes! There 3.

 

[TXTea]

It's been my experience with residential over-improvements that the GLA adjustment/sf is relatively low. For example, if you typically use something around $50 to $75/sf for price points in the $600k to $700k range, the appropriate adjustment in this case might resemble something closer to $20 and $30/sf, maybe even lower. With regards to determining an appropriate location adjustment for bringing in a sale from a neighborhood you suspect to be superior, the land analysis is your secret weapon. Just my one penny's worth.

 

[J Grant]

Does the subject have a contract of sale or is it a refinance ( a contract would at least show buyer reaction). I assume it's a refinance.

Take the highest price craftsman house in your subject subdivision that sold which was 2000 sf. Compare it to 2000sf (or close to 2000 sf) house sales in the subdivision where the superior sales are you might use as comps for subject. That will allow you to develop a location adjustment. Apply that location adjustment ( can develop it in several comparisons), apply location adjustment to the superior sales and see where the value comes out. We just have to work through the steps of an appraisal til the market reveals the value. If you found subject enchanting and magical, chances are at least some buyers will see it that way as well.
Also depends on context of subject neighborhood...the maintenance, location etc, even though most houses are smaller, it may not matter too much to a buyer for a special type house as long as neighborhood is well maintained . A funky or partiallly run down area may limit appeal more.

 

[Randolph Kinney]

I took a look and to my surprise, yes! There 3.

Then you have the basis for extracting improvement contribution to market value from comps.

Have you look at the history of sales in the neighborhoods? Has your subject sold in the past. What was the largest size home sold in the past?

As an exercise for me in the past, I plotted M & S price per square foot and did a curve fit to see if I could mathematically predict. You can.