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Contributory Market Value Riddle
By Tim Andersen, MAI
What do you do when the market indicates that an amenity may have no contributory market value- even if there was a substantial cost to install and maintain? You work harder.
Recently an appraiser called and presented just this conundrum on a refinance appraisal assignment. The subject property had no pool. A comparable sale, literally the same model home, built in the same year, just across the street, and sold only two-months ago, had a small pool, patio, screening, and so forth, as is common with pools. None of the other comps had pools. My first response was to drop this comp and use one without a pool so no adjustment would be necessary. However, this comp with the pool was essentially identical to the subject in every way, except for the pool. Typically, an appraiser does not abandon a comp like that.
First, we looked back in time to determine if that comp had traded before the pool was installed, and then traded again after it was installed. The difference would have been one indication of the market value of the pool. However, we found that the pool was a builder amenity that was there from day one so the developer’s premium for the pool was of no use. The house was 10 year’s old at the time.
Next, we estimated the cost new of the pool, et al, and deducted what we considered to be a market-oriented amount of physical depreciation. This is a reasonable step to solve such a problem and has some small market support due to the fact that the costing service is one of national repute. Be we all know that cost is not value- despite the use of the word “price” in the definition of market value, so we tabled that process to see if we could find a better way to extract a pool adjustment. Besides, our research showed this was really not the way to arrive at an adjustment.
We went to a nearby analogous neighborhood and looked at the sales prices of houses similar to the subject without a pool, versus those in that neighborhood with a pool. It was possible to extract an “adjustment” from this procedure, but there were problems. The comp’s neighborhood is a private, equity-type, gated community- the same as the subject’s, but the differences were great too-in amenities, cost of monthly maintenance and the equity-membership to join the club that anchored the community, and so forth. The two neighborhoods were so different in these ways that an “apples-to-apples” comparison between the subject neighborhood and the analogous neighborhood was essentially impossible. So we tabled that “adjustment” too.
We specifically avoided interviewing brokers who worked the subject neighborhood for the simple reason brokers get paid to sell real estate, not analyze it.
Finally, we went back to MLS. To have sufficient comparable data we started with sales as far back as 18-months prior to the appraisal’s effective date, and then limited the search criteria to sold SFRs (the development also has condos and zero lot-line residences with and without pools). These data criteria were too wide for that analysis to indicate a reasonable conclusion. So, we went back to the MLS and limited the search even further by limiting the sales to those of sold 3br/2ba 1-story residences with two car garages. The results were one sale with a pool and 12 without. We concluded this comparison was not accurate since there was only one sale with a pool.
Then we kept the same limiting criteria but changed one criterion from sales to listings. This analysis returned some data we could use. But this analysis returned some surprising data. Basically it told us that a pool had a value from between zero, for a “typically-sized” house/lot combination, to a maximum of $12,000 for one of the few larger properties- the original developer premium notwithstanding. The sizes of the sites in the subject’s part of the development top out at about 8,000 square feet, with the “typical” lot less than 7,000 square feet. Therefore the market was telling us that a pool despite, its cost new, is not all that valuable in this neighborhood. So the next step is to determine why this is so, if possible.
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We have resorted to broker interviews before in an attempt to answer questions like this. They were all pretty much in agreement that since the social and private golf club around which the development is constructed has an Olympic-size and -quality swimming pool, a kiddie wading pool, two hot-tubs, and a pool reserved for adults- all at the main clubhouse, a pool at a private residence in this community is not all that valuable. This is true since an owner in this development is already paying for a pool- the ones at the clubhouse. Plus, those community pools are far superior to one installed on a site.
To summarize, we had one depreciated cost estimate of a pool, etc., one indication of a pool’s value from an analogous, yet clearly different community, and one indication of a pool’s value from the subject community via a comparison of listings. These all show that a pool here is not all that valuable. So, what did we do?
First, we sat on the issue for 24-hours so we could cogitate on the matter to see if we had forgotten anything or made any other mistakes in our analyses. Yes, that upset the AMC but stuff happens and the AMC had to put up with it. We concluded, after our waiting period, we had not erred.
Then we looked at the quantity and quality of data, as well as the reliability of those data. This latter step convinced us using the cost approach to model the pool’s contributory value was the wrong step since, as indicted, cost is not value. We then rejected the value indication from the analogous community since, despite its physical proximity to the subject community and so forth, the two neighborhoods were, at their fundamentals, just too different to make the adjustment work. So we went with the sales and listing data solely from the subject’s neighborhood.
You might rightly ask if we explained all of this in the report’s addendum. Yes we did. In fact, this article uses the appraisal report’s explanation as its model. In fact, in the report, we had XL charts showing all of these comparisons (they aren’t here since I do not have the other appraiser’s permission to use them). We showed a picture (from both MLS and GoogleEarth) showing the comp’s pool is small, as well as an aerial photo of the clubhouse and its larger and more numerous pools (from GoogleEarth). We also included a summary of the interviews with the brokers.
In the end, we used an adjustment greater than zero but less than $12,000 for the pool to account, in part, for the fact that much of the comparable data came from listings, and sales prices are typically less than listing prices. Basically this means the market views a pool in this subdivision as a functional obsolescence- and as a super adequacy, and is essentially fully depreciated (as the market data indicated) since the market really does not want pools here, given the quality of the pools at the clubhouse. The fact that so few homes comparable to the subject have pools also supports the market’s lack of acceptance toward such amenities.
The AMC and the underwriter accepted the report (after we corrected some spelling and grammar mistakes), but made only a passing remark on the pool adjustment.
Yes, getting to the bottom of this problem took more time than made the AMC happy. Yes, the other appraiser and I put a lot of time and effort into one adjustment for one sale. But the appraiser now has the knowledge and practical experience to handle this problem on his/her own in the future. The AMC and the lender have an appraisal report with its adjustments taken from the market rather than from the pages of a cost manual or some other occult place polite people don’t mention- other than to their physicians. And I got the seed for this article.
So, the take-away here is that (a) there is more than one way to support an adjustment; (b) just because a residence has an amenity does not mean that amenity has a value in-line with its depreciated cost (or any value at all, frankly); (c) there is market-support for most any adjustment if you’re willing to take the time and make the effort to beat it out of the market; and (d) in hindsight, we should just have used an older comp without a pool.
Author Tim Andersen, MAI is also author of Working RE’s Expert’s Guide to a Defensible Workfile.
Part 2 is Next Thursday! (Watch Part 1 now)
Part 1: Available Now
Part 2: November 17th
Appraiser Adjustments: Solving Common Problems
By: Richard Hagar, SRA
Failure to provide proof and analysis to support your adjustments means a rough road from now on out. In this upcoming two-part webinar, Richard Hagar, SRA shares the most common methods that can be used for determining adjustments and shows examples of how it applies to numerous components throughout an appraisal. Hagar will work through many examples, explaining how to calculate adjustments in the “real world.” Learn to apply regression analysis within different neighborhoods as well as how to use the right adjustment method on duplexes, multifamily, condos, and waterfront property. Sign Up Now!
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• Fannie Mae and Q&C Ratings – Richard Hagar, SRA (Oct. 2 parts)
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• How to Create a Proper Reconciliation – Tim Andersen, MAI (available now)
• Claims, Complaints, and E&O Insurance – David Brauner (available now)
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About the Author
Timothy C. Andersen, MAI is the author of the Expert’s Guide to a Defensible Workfile and has been in real estate and consulting since 1975. He is a commercial real estate appraiser, AQB-certified USPAP instructor, USPAP consultant, Special Magistrate for the Palm Beach County Value Adjustment Board, author, instructor and expert witness. As a USPAP consultant, he works nationwide as an expert with appraisers whom the state has charged with license law violations. He is an instructor with the Appraisal Institute and has worked all over the U.S. with various proprietary schools, as well as a community college. The University of St. Thomas in Minneapolis, MN recently awarded him a Master of Science degree in Real Estate Appraisal. Tim’s e-mail address is email@example.com.