• Welcome to AppraisersForum.com, the premier online  community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.

Superadequacy

Status
Not open for further replies.

Don McRoberts

Freshman Member
Joined
Nov 25, 2015
Professional Status
Certified Residential Appraiser
State
Minnesota
I am trying to appraise a new construction duplex that will cost $900,000 to build and will have 4,000 sf of GBA.
This property is slated to be in a neighborhood of 80-100 year old homes with the highest price for a duplex is $400,000.
There are no other similar contemporary duplexes of this style, size or quality anywhere in the entire Twin Cities area.
What is the process for calculating an adjustment for this property?
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
how much more in rents will people pay for a new duplex per unit? Find that out and use income approach for at least one measure market value of the property , the loss between cash flow rental and cost to build will point to the superadequacy
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
What would the older duplexes cost (RCN)?
If the building is new, one can argue that the cap rate would be lower (longer remaining life) therefore, a straight line extrapolation of rents might not reflect the accurate picture of the investment. Such investments tend to be logarithmic or even power law declines.

Say rents are $2000/duplex a month for $400,000 property - GRM of 100. And say the rents on a $300,000 duplex is $1800/duplex...that's a non-linear relationship. (100 GRM v 83 GRM)... But we can extrapolate that a new building might have a much higher multiple...maybe 150. So if rents are say $3000 per side on a $900,000 building, the GRM would be 150. "Curve fitting" the GRMs for as many local duplexes as possible and hopefully finding a new duplex (even if in an outside subdivision) to compare rents and GRMs to would allow you to extrapolate an appropriate GRM and the difference then between the proposed rents and this would reflect any functional obsolescence in new construction (or if you prefer to think of it as an externality related to market demand but that argument can wait.)
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
:rof:

Thank you Terrel, that made my morning.

:)

One other point to what Terrel said,

check with the planning department and follow up on land sales, to see if any other similar new duplexes are in the planning/approval/construction phase other places. This would indicate an expectation of future benefit, newly being recognized in the investor market.

(y)

Things change, we have to keep up.

.
 

Michigan CG

Moderator
Staff member
Moderator
Joined
Nov 1, 2006
Professional Status
Certified General Appraiser
State
Michigan
Let us just say your market has a GRM of 100. Who in the heck is going to pay $4,500/month in rent? In Minnesota?
 

Gobears81

Senior Member
Joined
Nov 7, 2013
Professional Status
Certified General Appraiser
State
Illinois
What would the older duplexes cost (RCN)?
If the building is new, one can argue that the cap rate would be lower (longer remaining life) therefore, a straight line extrapolation of rents might not reflect the accurate picture of the investment. Such investments tend to be logarithmic or even power law declines.

Say rents are $2000/duplex a month for $400,000 property - GRM of 100. And say the rents on a $300,000 duplex is $1800/duplex...that's a non-linear relationship. (100 GRM v 83 GRM)... But we can extrapolate that a new building might have a much higher multiple...maybe 150. So if rents are say $3000 per side on a $900,000 building, the GRM would be 150. "Curve fitting" the GRMs for as many local duplexes as possible and hopefully finding a new duplex (even if in an outside subdivision) to compare rents and GRMs to would allow you to extrapolate an appropriate GRM and the difference then between the proposed rents and this would reflect any functional obsolescence in new construction (or if you prefer to think of it as an externality related to market demand but that argument can wait.)
There also appears to be a similar relationship in price ranges. A $20,000 home might rent for $550/ month (a 36 GRM), but a $600,000 home might get $3,000/ month in rent (200 GRM). Perhaps some could be attributable to effective age differences, as you mentioned, but a large portion partially reflects the motivations of the market and the predominance for owner occupants on the upper end of this market.

With that said, is the predominant purchaser an owner occupant for this property? The principle of regression comes to mind here.
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
is the predominant purchaser an owner occupant for this property?
I know a few duplexes with a larger unit that was owner occupied and the other rented. And most of our duplexes in that size range would cost maybe $350,000 here...rents around $1200-1400/mo. GRM 140 or so.
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
I am trying to appraise a new construction duplex that will cost $900,000 to build and will have 4,000 sf of GBA.
This property is slated to be in a neighborhood of 80-100 year old homes with the highest price for a duplex is $400,000.
There are no other similar contemporary duplexes of this style, size or quality anywhere in the entire Twin Cities area.
What is the process for calculating an adjustment for this property?

Using rentals to find out obs/has been covered in all the above posts. That will deliver the loss between cost to build and market rate income. In addition, the definition of MV states a well informed or well advised buyer acting prudently. The subject owner building a 900k duplex in that area might be considered not well informed/well advised/and or acting imprudently. A person is free to do whatever they want, including building white elephants and spending X$ to do so. But, as appraisers, our model is the typically motivated buyer, ( as defined in the MV definition. )

One other point, what is the construction qualify of the duplex? And lot size? And does the dwelling feel and live like a private house on each unit? Because one possible additional comp might be a newer built single family home in the area, if the likely buyer for duplex would be an owner occupant also looking for rental income . Even if you don't use it as a comp, might be useful to run a search on similar newer sf built in the area (if there are any)
 

Dale Smalley

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Florida
We have a market that converts duplex properties into new construction twin condos. MLS A10138284 is a new listing at $795k . per unit.
A10138284_101_12 twin.jpg
 

Gobears81

Senior Member
Joined
Nov 7, 2013
Professional Status
Certified General Appraiser
State
Illinois
We have a market that converts duplex properties into new construction twin condos. MLS A10138284 is a new listing at $795k . per unit.
View attachment 30216
That's a good point-around here, most people refer to zero-lot line residences as duplexes. I've always thought of that as an erroneous term, but am a minority. Could it be that they are planning to construct a two-unit and subdivide for zero-lot line/ condominiums?
 
Status
Not open for further replies.
Find a Real Estate Appraiser - Enter Zip Code

Copyright © 2000-, AppraisersForum.com, All Rights Reserved
AppraisersForum.com is proudly hosted by the folks at
AppraiserSites.com
Top

AdBlock Detected

We get it, advertisements are annoying!

Sure, ad-blocking software does a great job at blocking ads, but it also blocks useful features of our website. For the best site experience please disable your AdBlocker.

I've Disabled AdBlock
No Thanks