Highest priced residence in the county

[Steven Bonner]

The problem is there is a pending sale in a very rural county with a contract price 47% higher than the highest sale in the county ever. That sale is 10% higher than the next highest sale. The last two were in the past year.

The question is how would you determine how much above the highest sale in the county would you go with the appraisal on this sale before you reach the value wall, assuming the subject has significant value related factors superior to those sales.

Any opinions or suggestions will be appreciated so thanks.

SteveB

 

[Chris Harrison]

Steven,
There are many unknowns in you question! If your in a county were the highest value is under $200,000 it's different than 1 or 2 million.
I once did a $6,000,000 home in the Park City area. I had to find comparable homes in Vail, Sun Valley and Lake Tahoe. Folks that can afford a multi million plus home generally aren't getting a 80% LTV and the guidelines for comparable's is very different. It's also not one that I would do on a 1004 or for a small residential fee.
Would you provide a little more information and I'll (we'll) try to help.

Chris

 

[Pamela Crowley (Florida)]

Something like this requires a search of the surrounding counties as well. You want to find sales of similar properties that would be be in similar markets/counties. Extreme due diligence is necessary - hope your fee is high enough! Each comp will need a complete land as though vacant analysis also.

 

[Steven Bonner]

47% above the highest sale price ever is pretty significant regardless of the amount but the highest sale price in the county was $250,000. That was 10% above the next highest sale price and 15% above the next one lower. These sales were over the past year. The predominant for the area is like $65,000. Yes, I think we are talking about being slightly overbuilt, even in a good neighborhood.

Obviously, searching neighboring counties is necessary since there are not enough adequate sales in the subject county. I'm use to that in my area for various types of problem assignments. My question is how would you arrive at the most value, the top limit, above the highest local sale. Those out of county sales are good for place holders in the report but we are not looking for the value of the subject in those neighboring counties. Especially when those neighboring counties all have proven track records in similar sales.

 

[Jo Ann Meyer Stratton]

I have similar problems at times. The typical residential sale in my county is under $100,000. Several times a year a few sales get up to $140,000-$150,000. About once a year there will be one or two sales higher than that. Had two sales this past year at $325,000 and $320,000 (the highest that have ever occurred in the history of the county). One sale last year of $275,000. However, several homes have been constructed that range between $500,000 to over $1,000,000 cost to build. I have appraised several. I used the highest sales in the county even though some of the sales were several years old, had several listings at high value, even went 75 miles away to the nearest town for one sale at $290,000 (highest sale in that county). Those were my first six to nine comparables. For #7, #8 and #9 or #10, #11 and #12 used some land/home packages of the custom built homes (without any prices or construction costs or adjustments) for examples of other homes of similar custom built homes. The land/home packages were for illustrative purposes only and not indicaters of value. Since the median income for our county is less than $22,000 per year (which I also mentioned in the report) I also reported an estimated a one month to five year marketing time for the subject. After considering all those factors, the economics of my area, etc, etc, my final appraised value came in about half of the construction costs of the home. People who can afford to buy a $500,000 or higher priced home are not going to come to my county to do so, unless they got rich some place else, and are coming home to retire. And then they can build their dream home on free land from their family, so they won't be buying an existing loan. So if that lender ever had to repossess one of these monsters--the lender could have that home in their inventory for years. There is no other market or neighborhood or county or town to go to, because of the totally different market factors.

 

[Chris Harrison]

I agree with Jo Ann's approach.

Steven,
I would like to know size???
Is this the largest home in you county? Newest? Located near the major employer? Best view? Land that can be subdivided? Sitting on an oil reserve? Why would any buyer consider paying top dollar for this property? Is it emotional or factual? What is the prospect of substitution? Remember it can not exceed the cost approach.

Chris

 

[jtrotta]

Steve

Some ideas, but you need to sort out what may or may not be applicable for your area-can't really tell, you've left out quite a bit;

it would appear that you have a circumstance of a specific event; there are many ways to approach the different factors involved. When you go for the out of area sales, would think you should also gather land sale data from all area's; to measure variations; similarily with the housing, so that you could estimate an allocation method if need be. It could be possible to measure the existing larger sales data; estimate the growth (market) to give some support and so forth.

the problem I see would be a downside in the market (as Joann indicated) you need to prepair the Lender for that perspective of the market, no matter what their Risk is.

8)

 

[Steven Bonner]

Ok, let’s assume the subject is 4,400 sf GLA with another 1,100 sf of heated area that is not included in the GLA, not directly accessible from the living area. Let’s assume it also has a triple car garage, large porches, patios, balcony and is very good quality with a replacement cost of $428,000 on a 3 lot site, not included in the replacement cost above. Yes, this is a fairly new and likely the highest cost home in the county by far. Let’s assume a $370,000 contract price. The highest priced sale in the county was $250,000 ever, but it was within a year. As you can see the price of the subject is already discounted from the cost but is it enough of a discount in a market where the vast majority of annual sales are below $100,000? The economy of this very rural county is at best stable with a high unemployment rate, though that would hardly be a factor for this value home. Still, homes in the hundred thousands are appreciating due mostly to a limited market of transferring doctors and a few company execs. (There are only a handful of sales in the hundred thousands per year.) Yes, the size, quality, amenities and cost are definitely there.

The question again is is there a method or theory that would indicate a reasonable ceiling for a market above the highest sale price? I guess I am looking for something substantial to indicate a ceiling of 25% (or whatever) above the highest priced sale to use to discount this white elephant. Incidentally, it was on the market for 7 months in a typical 2-4 month market. Not as long as I would expect but stranger things have happened (possibly some bragging rights factor here). I am thinking it must be worth more than the highest priced sale since it has significantly more size, amenities, lot value, etc but how much more, $120,000 more? It’s worth the full contract price to the buyer at a 95% L/V but one sale is not a market and the buyers investment is not encouraging.

BTW, your comments are helpful. Thanks

 

[Jo Ann Meyer Stratton]

With a 95% LTV the buyer is having the lender bet on the economy and value of the house in that area. If the buyer was putting down a much larger down payment, then the buyer would be showing a more definite opinion of the homes value. Right now they are not risking very much if they decide they don't like the area or the house or the paint in the living room--they could easily walk away. And then what will the lender have to sell this "white elephant" for, which could be a very lengthly time frame and way below a 95% loan based on the current sales price. What would the market's reaction be if it was a lender's sale as of the date of your opinion of value---and a loan officer worrying about their commission??? Are there any other potential buyer's out there that would be more of a committment into the property?? What would other potential buyer's pay for the property that would be applying for a lower LTV or paying cash?

 

[Steven Bonner]

Exactly. And of course when we can use comps that bracket the characteristics and value, then they direct us to the market value. But when the characterisitcs and sale price cannot be bracketed with sales from that market then how much above the highest sale will the market support when there is no historical support to rely on? We can go to other markets to pull comps but they are not really telling us what the subject is worth in the subject market but what the subject is worth in those markets. At least until we make a location adjustment. But even then, how do we support a significantly higher value in a market where there is no historical market support demonstrated? Are we left to intuition, the appraiser's experience, a guess, or some method or formula that will direct us to some sort of supportable value?

When the appraised value comes in less than the contract price and significantly below the replacement cost on a newer home how do we answer the lender that comes back with "Well, how did you arrive at that figure? It's not the contract price, it's much lower than the replacement cost, it's above the highest sale in that market so on what basis are your adjustments, especially the downward adjustments, made?"

Can highest end sales be said to be supported in 10, 20 or 30% increments above the highest sale? If we are only reporting the market then what in this type of market will indicate the practical ceiling, if not the highest sale? Or after the highest sale are we in no mans land where a higher value is arrived at only by intestinal fortitude and the amount of your E&O?