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Does this make sense? Input wanted

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Jeff Horton

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Alabama
Appraising a proposed construction. Cookie cutter home, 1250 Sq Ft. in rural location. I have good comps except they are in town. Appraisal is for one of my good customers, a bank VP and he wants honest values. Novel idea isn't it?? :)

The hitch is the owner is building it and we are both concerned about the quality level once finished. All the sales I have "I assume" will be superior quality. So I want to make an across the board adjustment. Problem is how to determine the adjustment. No comparable sales of the same quality that I can find. All the sales are spec. homes and average quality.

At the suggestion of a friend I did a M&S cost on the house and adjusted the quality level until it roughly equaled the selling price of the comps. All three homes sold at the same price and very similar to each other. So I feel this gives me a good basis to match my comps to the proper quality level in Marshall & Swifts. I ended up with a Fair Quality (#2) which is what I suspected it would be.

I then lowered the quality level to Low (1) while changing nothing else. Printed out he results (I use the software not the books). When I compared the two cost I come up with a difference of 10% or $6700. I then reasoned that since there is no market data this is my best data and I made an across the board negative $6700 to all my comps. since they are all new construction and similar quality.

Now does this make sense? Am I missing something? I need to turn this in tommorow (Friday morning).
 

George W Dodd

Senior Member
Joined
Jul 9, 2002
Professional Status
Certified Residential Appraiser
State
Virginia
Jeff,

The hitch is the owner is building it and we are both concerned about the quality level once finished. All the sales I have "I assume" will be superior quality. So I want to make an across the board adjustment. Problem is how to determine the adjustment. No comparable sales of the same quality that I can find. All the sales are spec. homes and average quality.

Why is the assumption made that it will be inferior to average quality? Are the materials different? Or is it the workmanship?

You might want to include as one of the conditions of the appraisal that the work be done in a "professional workmanship maner".
 

Jeff Horton

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Alabama
Jeff,
Why is the assumption made that it will be inferior to average quality? Are the materials different? Or is it the workmanship?"

Main reason is that is what the client asked for. After an inspection of the property (construction is started) I am comfortable with the request. Based on the existing other improvements that are there it seems a sound assumption.We both feel the finish will be below average and the quality of materials will be too.
 

Phil Rice

Member
Joined
Apr 22, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
The part that I don’t understand is why make any adjustment at all? You say “proposed construction”, does this mean that the subject is not complete? Has not even started?

Are you thinking that the home owner is not a pro builder and is likely to make a mess of it? He may do better than the people who get paid by the hour. Your home owner might be a talented craftsman. Is there any objective reason for making an adjustment?

As to the amount of the adjustment:

If the house is not complete, it is going to be a shot in the dark. How common is it for an individual to build a home in your area? If buying a piece of land and building your own home is a realistic option in your market, then the cost approach is relevant.

If building your own home is something that is very rare, I think your market experience would be more relevant than the cost approach, even if you have to guess. Think about condition and quality differences that you have seen recently, and the kind of affect it has on market appeal, and let that be your guide.
 
A

Anonymous

Guest
Jeff,
I assume that the client has provided you with plans and specifications. If you do not have them do not complete the appraisal. Once you have the plans (complete blueprints) as well as the architects specification you will know the quality of construction and materials because they will all be stated. Make your report conditional upon completion per plans and specs. Your quality adjustment should reflect market acceptance of lower quality finish, not costs.
 

Jeff Horton

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Alabama
OK folks. I have done lots of new construction and I am not lost there. Thats not my question.

My question is with my adjustment. I need to make a quality adjustment with no data to work with. What I want to know is my method reasonable and is it defendable since no other data exists.

Make the extraordinary assumption that I need to make this adjustment and I know what I am talking about. :)
 

Phil Rice

Member
Joined
Apr 22, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
If there is no good data to work with, you can:

1) use bad data, or
2) use no data, or
3) make no adjustment

you seem to have ruled out choice #3, which narrows it down to choice #1 or #2.
 

Lee SW IL

Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Illinois
Jeff,
You figured the inpact of the quality of construction on the cost approach.

But, how the market reacts to an inferior quality of construction may or may not exceed the difference in the quality of construction in the market comparison approach.

I think to figure the adjustment in the market comparison approach, you would need to take the home as finished and then figure a cost to cure to up the quality of construction to that of the comparables.

A $6700 difference in cost approach, may be a $10,000 + adjustment in the sales comparison approach.

Now does that make sence?? It made sence to me. :wink:
 

Jeff Horton

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Alabama
I think to figure the adjustment in the market comparison approach, you would need to take the home as finished and then figure a cost to cure to up the quality of construction to that of the comparables.

Now does that make sence?? It made sence to me. :wink:

Makes total sense. Sounds like what I just did. Cost to cure is the difference in the cost of the two quality levels. :lol:

I don't mind using "Professional Opinion." I just don't have one on this so I prefer something I can stand on and document this time.
 

BenLuby

Senior Member
Joined
May 28, 2002
Professional Status
Certified Residential Appraiser
State
Georgia
Jeff,
If it is a proposed construction, and, as you state you do a lot, look at the materials cost list, and compare it to another recent proposed of typical quality that you have done for materials.
That would probably let you know if the adjustment is even warranted in this case.
Not trying to get on your bad side, but you seem to be making the decision prior to completion that the subject property will be built in fair/poor quality.
Isn't the extraordinary assumption being that, prior to beginning, you already know the quality?
 
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