How Do You Arrive At Bath Or Bedroom Adjustments?

[CindyR]

I did a really nice residence a couple of months ago that had three (3) 100 gallon water heaters. First time I saw that...lots of twos...but three?

Wow - 16 years appraising in warm and sunny Phoenix and i have never even seen 2 water heaters....

 

[Deleted member 128537]

I'm in a rural area. So doing paired sales etc is worthless. Not happening. Regression analysis doesn't work either. Not enough data. So after years and years and years of doing this I try to be reasonable.

Here is my approach:
1) I look at the cost approach. If it costs $4000 to put in a full bath not including GLA ($2,000 for half) then that's a good place to start. Hard to justify making a 6,000 adjustment when new it costs 4,000.
2) Then I am reasonable. If I'm doing an old home with an old bath it probably shouldn't get a new value adjustment. So if it costs $4000 new and the effective age is 30 years; then maybe 2000 per full bath is reasonable.
3) Then I look at how those adjustments narrow the adjusted values. If they do, then I'm good.
4) Does it make sense? For example: Would people pay $4,000 more for a home with from 1 bath to 2 baths? Makes sense. Cost approach supports it. Adjusted range is narrowed. Go for it.

What bugs me is I see appraisers use the same bath adjustment no matter how old the house, no matter what the quality, etc. etc etc. Doesn't make sense. Goes for other adjustments as well. I did a review one time where the appraiser was doing a 80,000 house. It had an old fireplace and he made a $5,000 adjustment. I'm sorry, that fireplace wasn't worth over 5% of the house value. Doesn't make sense. A new fireplace doesn't even cost $5,000 in some cases. So sometimes you just have to sit back and say, "Does this make sense? Does it narrow the adjustments? Is it credible with the cost approach? Is this how buyers think (ask agents)?"

 

[ucbruin]

I'm in a rural area. So doing paired sales etc is worthless. Not happening. Regression analysis doesn't work either. Not enough data. So after years and years and years of doing this I try to be reasonable.

Here is my approach:
1) I look at the cost approach. If it costs $4000 to put in a full bath not including GLA ($2,000 for half) then that's a good place to start. Hard to justify making a 6,000 adjustment when new it costs 4,000.
2) Then I am reasonable. If I'm doing an old home with an old bath it probably shouldn't get a new value adjustment. So if it costs $4000 new and the effective age is 30 years; then maybe 2000 per full bath is reasonable.
3) Then I look at how those adjustments narrow the adjusted values. If they do, then I'm good.
4) Does it make sense? For example: Would people pay $4,000 more for a home with from 1 bath to 2 baths? Makes sense. Cost approach supports it. Adjusted range is narrowed. Go for it.

What bugs me is I see appraisers use the same bath adjustment no matter how old the house, no matter what the quality, etc. etc etc. Doesn't make sense. Goes for other adjustments as well. I did a review one time where the appraiser was doing a 80,000 house. It had an old fireplace and he made a $5,000 adjustment. I'm sorry, that fireplace wasn't worth over 5% of the house value. Doesn't make sense. A new fireplace doesn't even cost $5,000 in some cases. So sometimes you just have to sit back and say, "Does this make sense? Does it narrow the adjustments? Is it credible with the cost approach? Is this how buyers think (ask agents)?"

I don't understand why it bugs you what adjustments other appraisers make?
Especially after outlining your process...
And I'm not criticizing your process....

 

[JTip]

Wow - 16 years appraising in warm and sunny Phoenix and i have never even seen 2 water heaters....

I typically see two when there is a nice master bath that has a soaking/whirlpool tub. One for the master, one for the rest of the house.

I assumed AZ folks used sweat tents for bathing. lol

 

[Mike Garrett RAA]

Comes back to my contention...Percentage of contribution!

Example: Market median price of say. $250,000. I do paired sales analysis to determine the value of, say, a 3rd bath. That research reveals a $5,000 difference. That would be a contributory value of, say, 2%.

Now I am faced with the same difference in a $500,000 residence. Would I use the same $5,000 for an adjustment? Or, would it be better to apply a contributory value of 2% for the 3rd bath? I might suggest that in a $500,000 property 3 baths is more common and more expected; therefore, having only 2 baths might be functional obsolescence.

I live in a ranch style residence with 1,500 sf GLA and two baths. I can find some comparable sales with 2.5 baths but little, if any, difference in sales prices. So, what should an adjustment be? Is it warranted? Is it supportable? Is it necessary?

 

[hastalavista]

Determining a justifiable bath or bedroom adjustment is really tough to pin down, especially when you are dealing with properties in the $500,000+ range. I always use comp sales with the same bedroom/bath counts when possible, but is there a good method for justifying the value of an additional bath or bedroom? Paired sales is the first method I would attempt to try, but it rarely seems to define an appropriate well-defined adjustment (especially if other factors had to be adjusted for first like square footage, quality, garages, etc.). In a recent "adjustments" class I took, the instructor used mass data comparing multiple 3 bedroom homes to 4 bedroom homes. Makes sense, but I wonder what other factors contributed to any value difference found (factors that weren't considered because every sale in the data set was not analyzed individually).

I think there is a belief in our industry by some that analysis necessary to conclude an adjustment amount needs to be conclusive to a relatively precise number. In the adjustment CE class I teach, that is not my opinion and I do my best to dispel that belief.
Many times, it is relatively easy to do an analysis that indicates that there is additional value for a particular element or amenity. Looking at a large enough data sample, appropriately filtered, can provide that indication. And one can use mathematical techniques to refine that indication to a point if one chooses to do so.
But more often than not, when one does a set of matched pairs to identify the contributory value of an element, one is going to find that the matched pairs return different results. There is going to be a range. I see this all the time with pool amenities.
I can trend the data and demonstrate that, on average, homes with pools sell for more than homes without pools in certain markets. A formula can be extracted from the trends and a mathematical calculation can be constructed that will provide a point-value for that element.
But when I test that using matched pairs, I've yet to see the result equal the mathematical calculation (and, the expectation is that it wouldn't match the calculation unless all data points fell exactly on their respective trend lines and the trends were 100% correlated over time).
I might see a trend analysis support a pool adjustment at $15,000.
I might include a couple of matched pairs, and see that the value difference ranges between $3,000 and $12,000.
What is my conclusion?
I might conclude that a pool in that neighborhood contributes value (the historical trend). I have data that shows in two examples, a pool can be shown to contribute $3k or $12k. The rest is just picking the point. Maybe $5k fits best within the rest of my assignment's analysis. Maybe $10k, maybe $12k, or maybe even $15k. Once I've concluded that an element warrants an adjustment, and once I have data that gives me a range of where that adjustment falls, I've solved that problem. I just need to pick the adjustment amount and move along.

So that is my point in my post: When we are discussing things like bed or bath count differences, the first order of business is to determine if there is evidence on a large scale to indicate that such an element can impact value. The next step is to refine that large-scale analysis to a specific analysis so that it can be evaluated in the context of the larger data:

"Gee, when I look at a lot of data over time, I can see that there is a price difference if I'm comparing 3- to 4-bedroom homes in this size range. Although I'm not accounting for every difference in this larger-scale analysis, it is reasonable to presume that the quantity of data is compensating for much of those individual differences. Based on the big picture, it looks like 4-bedrooms have contributory value."​

Next, I look at some specific data from the specific assignment:

"Ok, when I do a couple of matched pairs, I don't get the clear-cut difference that I did in the trend. One shows a $7k difference, another shows a $5k difference, and the third actually comes up with a negative value?"​

Finally, I reconcile my findings and come to a conclusion:

I've analyzed the potential contributory value of a 4- vs. a 3-bedroom home from within this competitive market. I first looked at the historical pricing trends and there appears to be a value difference; 4-bedroom homes trend higher than 3-bedroom homes in general and within the same size range.
Next, I analyzed 3 sets of matched pairs. The data indicated that two sets indicated a contributory value of $5k to $7k, but one set showed a negative value.
I considered all the analyses and have concluded that a 4th bedroom in this neighborhood does have contributory value over a 3rd bedroom, all other things being equal.
I've reconciled my adjustment to $5k and have applied that in the grid.
[or]
While the analysis indicates a contributory value for the extra bedroom, that contributory value is less than 1% of the indicated value ranges and not sufficiently significant to make a line-item adjustment.
However, I did consider it in my reconciliation analysis by giving most weight to the 4 bedroom homes; this adequately considers the contributory value that may exist.
[or]
In this price range, that value difference is not significant and not demonstrably conclusive; it is well within normal market imperfections in pricing. Therefore, I've concluded that no adjustments are warranted for this amenity difference.
​

And, in anticipation of the question, "Do you always do that in your assignments?"
The answer is, "When I think it is necessary, yes."
And, it isn't about the size of the adjustment ($5k) in my example that is important (assume we are talking about a $50k adjustment); it is about the process, about not getting hung up on a too discrete point-adjustment, and about doing the analysis when the appraiser determines it is warranted.

My 2-cents.

 

[hastalavista]

I'm in a rural area. So doing paired sales etc is worthless. Not happening. Regression analysis doesn't work either. Not enough data. So after years and years and years of doing this I try to be reasonable.

(my bold)
Bingo!

 

[bnmappraisal]

I think Homesweethome hits it on the head, too, Denis. "I try to be reasonable"

I feel some appraisers try too hard and some try to little in this aspect. Yes, we have all these "tools" available to us these days (stats this, stats that) and obviously these can be very helpful. But I think some get lost in this world anf forget the whole point: Is this a reasonable conclusion/opinion based on the current information at hand.

I recently did a review of a report done for a property not far from me. Personally, I feel I could have done a better job, but at the end of the day, the report was reasonable in its conclusions/opinion. I think we need to remind ourselves of that sometimes.

 

[Deleted member 128537]

Comes back to my contention...Percentage of contribution!

Example: Market median price of say. $250,000. I do paired sales analysis to determine the value of, say, a 3rd bath. That research reveals a $5,000 difference. That would be a contributory value of, say, 2%.

Now I am faced with the same difference in a $500,000 residence. Would I use the same $5,000 for an adjustment? Or, would it be better to apply a contributory value of 2% for the 3rd bath? I might suggest that in a $500,000 property 3 baths is more common and more expected; therefore, having only 2 baths might be functional obsolescence.

I live in a ranch style residence with 1,500 sf GLA and two baths. I can find some comparable sales with 2.5 baths but little, if any, difference in sales prices. So, what should an adjustment be? Is it warranted? Is it supportable? Is it necessary?

I sometimes think we make adjustments just to please the underwriters.

 

[Deleted member 128537]

I don't understand why it bugs you what adjustments other appraisers make?
Especially after outlining your process...
And I'm not criticizing your process....

Same appraiser. Doing appraisal on a 500,000 house with fireplace. Makes $5,000 adjustment for the fireplace. Doing appraisal on 100,000 house with fireplace. Makes $5,000 adjustment for fireplace. Really? A fireplace is 5% of the total value of the house? That just doesn't make sense. And the value of a fireplace in a higher end home is equal to the fireplace in a low end home? That doesn't make sense. This is what I'm talking about.

It's the same as saying all GLA adjustments are $25sf no matter the age, condition, quality. Doesn't make sense.