ucbruin
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"It would all depend...."
On how much to just fall a few thousand dollars short of contract price!!!!
Just messing with you....
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New Home Builder Upgrade Adjustments
- Thread starter Gweedo
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"It would all depend...."
On how much to just fall a few thousand dollars short of contract price!!!!
Just messing with you....
But my question is, how would you better support your contrbutory value adjustment used over that of the actual cost paid for by the new home buyer as demonstrated by the closed sales price of the comps used in the grid? The sales price used for the new home comps already include the total upgrade cost, and by not adjusting $-$ to make all things = then value is still being given for the upgrades/model differences - just not proportionately?
J Grant
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It depends what we are trying to achieve....price or value ( or the equivalence between the two, which imo is what market value means....)
If appraisers are just concerned with price, which seems a segment of them are , then using the exact builder cost figures are perfect. But appraisal theory is price does not always equal value. So if we look at it in terms of value, then it is better to make rounded, and contributory value adjustments for the upgrades or lot premiums rather than straight line builder costs.
Look at it like this: A house built 3 years ago had $54, 999 in builder upgrades. But now on open market after adjusting for other factors, those upgrades might be returning $40,000. If subject has $57,988 in builder upgrades. Would we adjust a base with no upgrades model to subject up by $40,000, by $50,000 or by $57,988? I can't answer definitively, since every appraisal is different, but I might be inclined to adjust it by $50,000.
When we adjust any other home but new, do we adjust by cost or contributory value ? If a home had a recent remodeling and it cost $60,755, do we adjust comps upward by that exact amount, or by what market is returning for that level of remodeling ( which might show $50,000 or $60,000 or $75,000, if market is returning higher contributory value than cost.
hastalavista
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I think the OP's original question is a good one.
Here is the deal as I see it: New home purchase (from a merchant builder, KB Homes, for example) is the one instance where a buyer can semi-customize their home with finishes and upgrades to their taste (within whatever is being offered by the builder, for the most part) and include those modifications as part of the purchase price. It is the one scenario where we have an itemized breakdown of what that buyer and that seller agree those differences are worth. In the resale market, that dynamic doesn't exist; although we can see something similar. In many of my markets, homes are sold as the "before"; the buyer is purchasing the home with the intent of spending money to do X and Y to get to the after. Cost is certainly a consideration in their purchase decision, and the price differential they pay for a home in X condition vs. what the Y home sells for includes cost.
Depreciation is what we use to adjust for something that is new today vs. what it is worth after aging 5 years. Most appraisers apply that in the age or condition rating adjustment. In theory, if someone were overpaying for an upgrade in a new house, that would be treated as functional obsolescence. I don't see too many adjustments in the cost approach for new homes for functional obsolescence due to updates/upgrades (but certainly, if a buyer opted for the highest priced upgrade for all options, that would likely create some functional obsolescence. So while I rarely see it, it can happen).
By using a re-sale, we have additional data to include in our market value analysis of the subject. But all things being equal, the expectation would be that the newer home sells for more if for no other reason than depreciation (the resale has it... the new house probably doesn't).
Not all markets are the same, but in the markets I work within, and in regard to merchant tract development...
A typical buyer would prefer the new home vs. the resale (even a year old), all other things being equal.
A typical buyer would consider purchasing the resale vs. the new home if the price of the resale was less, all other things being equal.
The discount necessary in price of the resale vs. the new home in order to get the typical buyer to purchase it vs. the new home is depreciation (again, all things being equal).
So the expectation (in my markets) is that all things being equal, a new home will sell for more than the resale, all other things being equal. That's the new home premium; in stable and rising markets, it exists. In a declining market, it may diminish or disappear..
Assume that a "good" kitchen upgrade for a new home costs $35k (a number we get from the builder's list). This includes appliances, cabinets, and countertops. If you look at Life expectancy tables, you are going to see that (while each component has a different life expectancy), the blended life is going to be somewhere around 20-25 years. Let's split the difference and go with 23 years.
5 year old resale has the same overall quality of kitchen. What's the supportable adjustment using cost & depreciation alone? About $7.5k. If everything else is the same except for the kitchen, and assuming the the improvement has a Total Economic Life of 65 years, the 5-year old home with an effective age of 3 years has 2% depreciation. If the improvements cost $200k to build, then that is $4k in physical depreciation.
Would it be unreasonable to see a $10k to $15k difference in price between the resell home and the new home, given the above? No, it wouldn't. Would it be unreasonable to see a $50k difference? Yes, it would; A $50k difference would need more investigation. A $10k to $15k difference? No, that would be more in line with the expectation.
Here is the deal as I see it: New home purchase (from a merchant builder, KB Homes, for example) is the one instance where a buyer can semi-customize their home with finishes and upgrades to their taste (within whatever is being offered by the builder, for the most part) and include those modifications as part of the purchase price. It is the one scenario where we have an itemized breakdown of what that buyer and that seller agree those differences are worth. In the resale market, that dynamic doesn't exist; although we can see something similar. In many of my markets, homes are sold as the "before"; the buyer is purchasing the home with the intent of spending money to do X and Y to get to the after. Cost is certainly a consideration in their purchase decision, and the price differential they pay for a home in X condition vs. what the Y home sells for includes cost.
Depreciation is what we use to adjust for something that is new today vs. what it is worth after aging 5 years. Most appraisers apply that in the age or condition rating adjustment. In theory, if someone were overpaying for an upgrade in a new house, that would be treated as functional obsolescence. I don't see too many adjustments in the cost approach for new homes for functional obsolescence due to updates/upgrades (but certainly, if a buyer opted for the highest priced upgrade for all options, that would likely create some functional obsolescence. So while I rarely see it, it can happen).
By using a re-sale, we have additional data to include in our market value analysis of the subject. But all things being equal, the expectation would be that the newer home sells for more if for no other reason than depreciation (the resale has it... the new house probably doesn't).
Not all markets are the same, but in the markets I work within, and in regard to merchant tract development...
A typical buyer would prefer the new home vs. the resale (even a year old), all other things being equal.
A typical buyer would consider purchasing the resale vs. the new home if the price of the resale was less, all other things being equal.
The discount necessary in price of the resale vs. the new home in order to get the typical buyer to purchase it vs. the new home is depreciation (again, all things being equal).
So the expectation (in my markets) is that all things being equal, a new home will sell for more than the resale, all other things being equal. That's the new home premium; in stable and rising markets, it exists. In a declining market, it may diminish or disappear..
Assume that a "good" kitchen upgrade for a new home costs $35k (a number we get from the builder's list). This includes appliances, cabinets, and countertops. If you look at Life expectancy tables, you are going to see that (while each component has a different life expectancy), the blended life is going to be somewhere around 20-25 years. Let's split the difference and go with 23 years.
5 year old resale has the same overall quality of kitchen. What's the supportable adjustment using cost & depreciation alone? About $7.5k. If everything else is the same except for the kitchen, and assuming the the improvement has a Total Economic Life of 65 years, the 5-year old home with an effective age of 3 years has 2% depreciation. If the improvements cost $200k to build, then that is $4k in physical depreciation.
Would it be unreasonable to see a $10k to $15k difference in price between the resell home and the new home, given the above? No, it wouldn't. Would it be unreasonable to see a $50k difference? Yes, it would; A $50k difference would need more investigation. A $10k to $15k difference? No, that would be more in line with the expectation.
residentialguy
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That is correct. Use other similar C1 sales to find the market value of a C1 home. Just make sure your costs are not just from the same builder. Adding in a comp 3-5 years older shows the depreciation from new and is not necessary, regardless of JG's rant. If you have to use it due to lack of current similar C1 homes, just make sure that the variances are adjusted from C1 to C2, so that it reflects the most probable price of the subject in a sale with conditions defined in Market Value.
J Grant
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it is not my "rant", look at what Denis posted and what Kyle and others have posted . YOU, and a segment of appraisers choose to use C 1 only. After all these posts the concept completely escapes you why resales are used or analyzed. - it is to find contributory value vs cost and adjusting a reasonable amount depreciation /new vs C2 or C 3 amount, as Denis describes above, can then show an extraction for upgrade contributory value. Which is used to help determine your adjustment for builder new upgrades ( including support for making it $ for $# equivalent if that is the better supported)
J Grant
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Using C 1 only finds the PRICE of a C 1 home, not necessarily the market value of it. Of course we use C 1 sales as very viable comps for both price and value, but using ONLY C 1 sales and literally using the builder cost /line item charges $ for $ for the adjustments is a circular regurgitation of prices .
J Grant
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Whether to use $ for $ builder line item charges (cost ) as the adjustments is the same version of whether to use $ for $ cost to cure, or market return as an adjustment for a repair or condition.
Because cost does not always equal value is one of the core fundamentals of appraisal, how can an appraiser justify simply using straight $ for $ in either one? If the rest of market information supports $ for $, then it is supported to do so as the market return for upgrades or repair.
There is a relation between cost and value but many things in the market influence the outcome. For example, tastes change with upgrades. Upgrades done 8 years ago that cost the same as upgrades done today, not just depreciation is present but trends change and better performing or more trend style or more energy efficient materials can be had now than 8 years ago.
Complicating matters is that a resale might have some better, "custom" upgrades done since purchase as well. So the new home upgrades are brand new appeal but the resale has additional crown moldings and custom paint...might equal the two out. That , among other reasons is is why every appraisal is different. (even on so called cookie cutters, if appraiser bothers to factor in the differences)
Depending on price ranges and who the builder is, their upgrades can range very ordinary t luxury....but there is a point where builder upgrades are rather generic and buyers may opt to add their own custom or on trend upgrades in addition to builder or in place of.
Because cost does not always equal value is one of the core fundamentals of appraisal, how can an appraiser justify simply using straight $ for $ in either one? If the rest of market information supports $ for $, then it is supported to do so as the market return for upgrades or repair.
There is a relation between cost and value but many things in the market influence the outcome. For example, tastes change with upgrades. Upgrades done 8 years ago that cost the same as upgrades done today, not just depreciation is present but trends change and better performing or more trend style or more energy efficient materials can be had now than 8 years ago.
Complicating matters is that a resale might have some better, "custom" upgrades done since purchase as well. So the new home upgrades are brand new appeal but the resale has additional crown moldings and custom paint...might equal the two out. That , among other reasons is is why every appraisal is different. (even on so called cookie cutters, if appraiser bothers to factor in the differences)
Depending on price ranges and who the builder is, their upgrades can range very ordinary t luxury....but there is a point where builder upgrades are rather generic and buyers may opt to add their own custom or on trend upgrades in addition to builder or in place of.
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I understand contributory value-- but your trying to extract this from resale homes with depreciated upgrades. Brand new upper tier carpet is only new once and depreciates greatly just by moving into the house, new trendy hardware depreciates with the next new release a different finish, upgraded appliance depreciate after their first use, ect, ect. But are we not appraising the new home without depreciation on these upgrades? How do you justify that the extracted , estimated and averaged contributory value of these depreciated upgrades, ( based on MLS photos and descriptions ) is more accurate then total upgrade cost provided by the builder?
It appears like builders expect appraisers, and count on them to use comps with a larger total of upgrades to support a increase in base price, especially when not adjusting 1-1 for upgrades or model differences. As demonstrated by initial example - the subject property had a base price of 136.34 sf. Comps had a base price of 134.47 sf, 151.65 sf, $139.91 sf. By constantly using /suppling appraisers with different model of comps with higher levels of upgrades builders can continually get appraisers to justify their increase in base price when they don't adjust 1-1. New home builders have their (Preferred Mortgage Companies) , buyers are given incentives to use them. But they don't disclose that in doing so- these (Preferred Mortgage Companies) will use their (Preferred AMC) in turn will used their (Preferred Appraiser) whom will not adjusted 1-1 for model difference and upgrade cost, thereby allowing the increase of base price of the subject- so why even order an appraisal? -
It appears like builders expect appraisers, and count on them to use comps with a larger total of upgrades to support a increase in base price, especially when not adjusting 1-1 for upgrades or model differences. As demonstrated by initial example - the subject property had a base price of 136.34 sf. Comps had a base price of 134.47 sf, 151.65 sf, $139.91 sf. By constantly using /suppling appraisers with different model of comps with higher levels of upgrades builders can continually get appraisers to justify their increase in base price when they don't adjust 1-1. New home builders have their (Preferred Mortgage Companies) , buyers are given incentives to use them. But they don't disclose that in doing so- these (Preferred Mortgage Companies) will use their (Preferred AMC) in turn will used their (Preferred Appraiser) whom will not adjusted 1-1 for model difference and upgrade cost, thereby allowing the increase of base price of the subject- so why even order an appraisal? -
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