Appraising The Overimprovement

[J Grant]

Thanks for clarification. I was thinking of over improvement in valuation terms... per fannie, would be addressed that subject is an over improvement because it is larger and of a higher quality period finish than typical for area and above predominate price, however there is marketability and demand for houses of superior architectural detail as evidenced by recent sale of craftsman house ( and any other sales she can find in past 3 years), last prior sale price of subject, and from feedback from interviews of area RE agents (any other support)

 

[TXTea]

I think a lot of people on this thread are over-thinking the over-improvement. There's an old engineering term that's tried and true, "Keep it simple stupid." If it's truly an over-improvement due primarily to size (which I think is where you're going with this), then the market will only give you a marginal premium for that additional square footage. So what does that GLA adjustment look like?

Well, first, you must (and I can't emphasize this enough) find a bracketing comparable or two. It will most likely come from a superior neighborhood. And that neighborhood will command a higher land value. Estimate it. It's your location adjustment for that comparable. Next, select the largest and most similar home sales in your neighborhood. Account for all other factors like bath count, pool, outdoor living, parking, etc. You should probably go ahead and deduct any concessions. What you're left with is the GLA adjustment. This is where you play with the numbers. Pair your bracketing comparable with all of the other comparables to determine the GLA adjustment/sf that best smooths the data. And what you'll find is a relatively low GLA adjustment which effectively illustrates the marginal premium the market is willing to pay for that additional square footage. It works every time.

Hopefully, your conclusion of market value will be close to the top of your neighborhood, maybe even a little higher (and just because it's higher doesn't make it wrong). Explain the steps you took in detail to your client in the narrative. If you want to get fancy, cite the relationship between the largest property sale from another neighborhood to the predominant and see if that relationship is similar to your conclusion. That would add some credibility. Over-improvements are always subjective because the market reacts differently on any given day on any given property. But these are the steps you can take to try and apply some logic to it. All y'all can disagree but this is how I've handled it.

Remember, residential buyers are unsophisticated and they're not logical like commercial investors. But they will know not to pay as much for your home as they would for a similar home in a superior neighborhood. That's the relationship you are trying to quantify and convey to your intended user(s).

 

[Eli]

I think a lot of people on this thread are over-thinking the over-improvement. There's an old engineering term that's tried and true, "Keep it simple stupid." If it's truly an over-improvement due primarily to size (which I think is where you're going with this), then the market will only give you a marginal premium for that additional square footage. So what does that GLA adjustment look like?

Well, first, you must (and I can't emphasize this enough) find a bracketing comparable or two. It will most likely come from a superior neighborhood. And that neighborhood will command a higher land value. Estimate it. It's your location adjustment. Next, select the largest and most similar home sales in your neighborhood. Apply the location adjustment to all of them. Account for all other factors like bath count, pool, outdoor living, parking, etc. You should probably go ahead and deduct any concessions. What you're left with is the GLA adjustment. This is where you play with the numbers. Pair your bracketing comparable with all of the other comparables to determine the GLA adjustment/sf that best smooths the data. And what you'll find is a relatively low GLA adjustment which effectively illustrates the marginal premium the market is willing to pay for that additional square footage. It works every time.

Hopefully, your conclusion of market value will be close to the top of your neighborhood, maybe even a little higher (and just because it's higher doesn't make it wrong). Explain the steps you took in detail to your client in the narrative. If you want to get fancy, cite the relationship between the largest property sale from another neighborhood to the predominant and see if that relationship is similar to your conclusion. That would add some credibility. Over-improvements are always subjective because the market reacts differently on any given day. But these are the steps you can take to try and apply some logic to it. All y'all can disagree but this is how I've handled it.

Remember, residential buyers are unsophisticated and they're not logical like commercial investors. But they will know not to pay as much for your home as they would for a similar home in a superior neighborhood. That's the relationship you are trying to quantify.

Your applying simple quantitative and qualitative analysis. Good points. When she takes all the advice given in this overall thread, which will take a couple days on and off or more, it will get clearer. Your bracketing point is so important and analyzing that superior and competing neighborhood against the subject neighborhood ( both quantitavely and qualitatively) is so helpful many times. I always remember the principles of progression and regression, which I think was tested on in my first appraisal class.

 

[bnmappraisal]

Good thread. Interesting advice. Thanks for sharing and to the OP, good luck! Sounds like a helluva assignment

 

[glenn walker]

It would help to know what City in California ? High cost areas of Los Angeles buyers will pay a premium for large Craftsman or Spanish style homes and many pay all cash. Move that same property Inland and the Subject is a white elephant because of lower incomes and FHA financing constraints. Looks like you received some very good advice from the forum and there is nothing to add except finish the report

 

[Have Laser-Will Travel]

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.

This was my thinking too however, when faced with the fact that the typical $ SF adjustment factor fails to reconcile value when there is a large disparity in GLA., I had to rethink things. What I came to realize was that since the price per sq ft GLA also reflects lot, location, view, condition, etc., what is actually happening as the GLA rises is you are seeing an increasingly clearer picture of the true contribution to value from the GLA as the other attributes proportionately diminished. That doesn't mean that there isn't a diminishing return but, it also doesn't mean there is.

 

[Have Laser-Will Travel]

Thank you everyone! I got some great advice and learned some new techniques!

 

[Have Laser-Will Travel]

Super! Thanks!

I really like the nugget concept. Turned out to be so true!

 

[Have Laser-Will Travel]

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.

Awesome! Thanks!

 

[Have Laser-Will Travel]

It's not an over improvement unless there is virtually no market for the improvements ( if virtually no buyers would pay anything more for it being bigger/better). But if there is a viable market , even if more limited due to location, then its not an over improvement, its atypical for the neighborhood in being the biggest or nicest (or both)

It may command less $ than if it were located in a superior neighborhood, but it will still get more $ within its' own neighborhood for being bigger/nicer...if you determine there's marketability/demand. Talking to some area RE agents can help as well.

I agree but FNMA has a different understanding of an overimprovement. It's like they made up a definition all on their own because they could! LOL! It's also vague and if you take what they say literally, nonsensical. But, I can't risk putting my client in a bad position with them because of the way I handle it.