only comps in another city, adjusting for location

[Tim Schneider]

I'm working on a report for a custom Q1 home in a city with no sales/listings of similar properties in 5 years. There are a few similar homes, all custom built and not sales. Limited market, but there are busineses and a hospital in town, so there are some wealthy people. So, the most proximate sales I have available are in a city 30 miles away.

So, I am working on a location adjustment for the smaller town location. Without paried sales of Q1 homes, I have to look for other options. Would a comparaision of median home prices (all sales/listings) over the past year be a reasonable basis for adjustment?

 

[J Grant]

I'm working on a report for a custom Q1 home in a city with no sales/listings of similar properties in 5 years. There are a few similar homes, all custom built and not sales. Limited market, but there are busineses and a hospital in town, so there are some wealthy people. So, the most proximate sales I have available are in a city 30 miles away.

So, I am working on a location adjustment for the smaller town location. Without paried sales of Q1 homes, I have to look for other options. Would a comparaision of median home prices (all sales/listings) over the past year be a reasonable basis for adjustment?

Seems like a lot of data lumped togeter, esp if all sales and listings include small homes and homes not similar to subject.

Since there are no Q1 homes to compare, try comparing the largest, most upscale homes avail that are similar in both cities. For example, if the closest cluster of sales in each area are newer built 2000 sf homes, that might make a comparison for a location adjustment.

Talk to area realtors that serve both locations, if possible. Does the fact that there are Q1 home sales 30 miles away mean more were built there then in subject city? And if so, why? Your subject might be an overimprovement for area...there are marketability issues in play. You can't just assume a location adjustment solves all problems, because if very few resale buyers for your subject want to live in subject location, the market exposure time could be much longer, for example, then in the city 30 miles away. That might be true, or might not be true...depends on which section of the city your subject is in, why they built there etc...is it in a pretty area on a large lot? What are the homes around it ? Is it likely an upscale buyer would buy in the subject location assuming they want to live in that city?

Are there avail vacant lots to buy and build on?

A problem with Q1 homes is that, since they are custom and often newer built, the other option buyers have is purchasing land and building their own dream home, so that enters into analysis as well. An area with few or no vacant lots, a Q1 home might have high marketability, an area with abundant vacant lots, the Q1 resale might be worth less, because if they were going to pay close to cost approach high $ for it, then why not just go buy a lot and build a brand new one specific to their taste?

We have that problem in a few communities in my area. Three year old, beautiful, highly improved Q1 homes have no buyers or sell at very reduced prices, because the builder still has lots left and the wealthy buyers would rather spend the $ building their own, since it is an option available.

 

[Terrel L. Shields]

If going secondary market, gluck.... They will roast, barbeque, and chew you like a dog on a bone. "Please provide a comparable within the same city" ...

I do a lot of commercial property where we have small cities, towns, smaller towns, and wide spots in the road. If working a small town, I will look for comps in other small towns. I rely as much on the lot values as the improved values.

If a town has lots selling for $10,000 or less (or less than $1/SF) then I want to stick to towns with similar economics. If I am in a town where land can sell for $8/SF, then I will go to the towns with similar land prices for add'l comps.

 

[David Mescon]

Tim, you're on the right track. Using paired sales to extract a location adjustment should work, assuming you have adequate and reliable data with which to do so. Good Luck!

 

[DMZwerg]

I'm working on a report for a custom Q1 home in a city with no sales/listings of similar properties in 5 years. There are a few similar homes, all custom built and not sales. Limited market, but there are busineses and a hospital in town, so there are some wealthy people. So, the most proximate sales I have available are in a city 30 miles away.

Is the lot size unusual? View? Anything?

If so then it may well be that the market area for that type of home may be much larger than what is typical. I see this with water-front/-view lake properties and more especially with rural 20+ ac "gentleman's estates" quite regularly. So the 1st item is to determine if potential buyers are looking at a wider market area than you are.

If not then the factor may be that the smaller city has changed and these type are a recent addition to the local market area. In that case what you said after my quote and what David stated (see quote) sounds like the best answer.

Tim, you're on the right track. Using paired sales to extract a location adjustment should work, assuming you have adequate and reliable data with which to do so. Good Luck!

Only quoted to bring up another thought on it and then to agree

 

[mark hurlock]

I'm working on a report for a custom Q1 home in a city with no sales/listings of similar properties in 5 years. There are a few similar homes, all custom built and not sales. Limited market, but there are busineses and a hospital in town, so there are some wealthy people. So, the most proximate sales I have available are in a city 30 miles away.

So, I am working on a location adjustment for the smaller town location. Without paried sales of Q1 homes, I have to look for other options. Would a comparaision of median home prices (all sales/listings) over the past year be a reasonable basis for adjustment?

Tim,

I have used unimproved lot sales to justify location adjustments on many occasion.

My reasoning is that there are too many variables in improved sales to extract a reliable location adjustment so unimproved lot sales solve that issue.

In many cases you need to pull lot comps anyway to support site value.

I have never used statistical data to justify a location adjustment.

This is not an opinion. I am just telling what I have done and why.

 

[sputnam]

At various times, I've used vacant site pairs, improved pairs, and statistical analysis to arrive at location adjustments. All are viable. Which is best for a particular case, depends on the data that is available. You do not have to be right, you just have to have some reasonable support for your adjustment. Or as a wise old appraiser once told me..."Base it on something. It doesn't have to be something good, it just has to be something." If you are diligent, no one will have better data than you do. They might disagree with your conclusion, but they can't prove you are wrong.

 

[J Grant]

Unimproved lots, assuming they are similar in size and location (one to another ) will work for an adjustment, but there are still marketability issues to consider. As far as vacant land, you need to find a lot in close proximity to subject and a lot in close proximity to comps you would use 30 miles away for the adjustment to have any relevance, and then as others said you could apply a percent.

Doing that of course still raises the question...if there are vacant lots near the subject to get that adjustment from, for a C1 home, the implied competition in subject area is a buyer can purchase a vacant lot and build their own brand new dream home. You stated there are a few C1 homes in area close to subject but none have sold, so building new might be the trend in subject area. Appraisers have to discuss such trends, we can't just take an adjustment from 30 miles away, stick it on the grid and be done, because buyers don't think that way... and if buyers don't think that way, the market may not react the way. An adjustment transposed from 30 miles away has to be tested in the market.

You need to talk to area realtors in both locations (if one realtor services both areas that is ideal)

If there are a number of recent sales 30 miles away of C1 homes, that might indicate that is a much more popular area for people to buy homes of this sort. What makes that area more appealing? It is likely that a buyer for 30 miles away wants that area, and would not buy in subject area even if the house was 10% cheaper (if that is what your adjustment shows). The area 30 miles away due to distance and amenities sounds like a different market ith different schools, surrounding homes, services, etc, would you say it is unlikely a typically motivated buyer would consider both areas ?

When comparing, research might show your subject to be an overimprovement for it's specific area, whereas a large Q1 home 30 miles away is not an over improvement for it's area.

 

[Peter LeQuire]

Conceptually, if the market is, indeed, demand driven rather than supply pulled, what rationale suggests that the house that's been described will be marketable? Since the "comparables" are 30 miles away, is there not a strong suggestion that people buying that sort of house aren't going to live in that town? Regardless the "support" for adjustments, or the "rationale" for how those adjustments relate to the property being appraised and its market, how do you support the assertion that such a house would be marketable at a particular price in a specified period of time?

Perhaps it's different in the town where your Q1 house is located, but - IME - a potential buyer of a Q1 house is generally pretty particular about their house, its quality, finish, fixtures, etc. and building the house they want is very often the preferred option. They may choose to buy an existing Q1 house, but will often hedge any offer by the amount of $ and hassle required to remodel it to their specifications. Or, even though there are some wealthy people in Smallville, is the lack of sales indicative of a 5 year marketing period?

Absent any sales of similar houses, can you develop the appraisal with a value definition that is couched in terms of "typical" motivation?

I can understand very large distances between comparables and a subject if the property being appraised is a "landmark" property, large waterfront property, or has some other uncommon site, size or reputational attribute (Fallingwater, Elvis, etc,), or if "typical" buyers of similar properties are reasonably indifferent to location (Aspen of Vail, for example) but I would think that proving some standard of comparablity other than price and quality would be necessary to establish credibility for an appraisal. Without supporting the assertion that the property is marketable as a Q1 house in its market, it's extremely speculative to assert a location adjustment: perhaps the market is saying that Q1 houses are overimprovements and that its value would be better supported by determining, to the extent possible, the amount of overimprovement that exists.

And, if the appraisal is being done in connection with a GSE transaction, it just may be reality that the property doesn't meet GSE standards.

 

[hastalavista]

Most of my markets are best described as "urban" (The San Francisco Bay Area). Although the major employment hubs are San Francisco, Oakland, and San Jose/Silicon Valley, workers will live throughout the larger market area and commute to work. Certainly different areas and local markets have variances in appeal, marketability, and (naturally) price, but the 3-county area shares the same, basic infrastructure and mostly rises/falls in unison.
I did an assignment last month where I had to use comps from two areas: My subject was in an area called "Woodside", some of the comps (due to the quality of the subject) was in the City of Menlo Park. Land sales, improved sales, and broker interviews all supported the 25% location adjustment between the two areas (Menlo Park being superior for this type of home).
Although the location difference was significant, and one had to skip over another town (Atherton) to get from Woodisde to Menlo Park, as the crow flies, the distance was only about 3-miles.

If, however, I was doing an assignment where I had to go 30-miles to get a comparable, and I was not convinced (or unsure) that the two different markets shared the same overall employment and infrastructure dynamic, in addition to the traditional paired-sale type analyses discussed, I'd want to also at least look at the income demographics between the two areas (household income). Specifically, I'd want to look at the upper-tier income brackets (as, presumably, those the the potential buyers of a Q1 home). If the income gap is significant, or the number of high income-earners between the two areas is significantly different on a percentage basis (and, for this discussion, let's presume that the 30-mile distant area is superior to the smaller, local area where the subject is), then the traditional paired-sales analysis may not tell the full story. There may be no one (or very few) potential buyers for my Q1 home in my market (as Peter is alluding to above). In such a case, that gap/difference is going to have to be accounted for by:
A. An additional discount to the market value from the superior area, or
B. A significantly longer marketing time

There are various websites where such information can be obtained. I subscribe to STDB (Site To Do Business): that website makes it relatively easy to do such an analysis as one can geographically define a market study area.

I do not think such an analysis is "over and above" what one should do given the complexity of the assignment described.
At a minimum, I would gather and attempt to analyze the information, and include it in my report. I think it should be considered.

Good luck!