From the Appraiser's Perspective Charlie W. Elliott Jr., MAI, SRAunique property appraisal, non-conforming, location, gross living area, site size, age and condition
The unique property appraisal
As an owner and of an appraisal company for 27 years, I have had
the opportunity to review thousands of appraisals. It has been my
observation that there are many qualified appraisers in our
industry, and that most do a conscientious job. Yes, we run into a
rotten apple once in a while, but for the most part this is the
exception, not the rule.
On occasions when we find appraisers who cannot or will not cut
the mustard, they usually can be spotted a mile away. We either
reject their work or submit it to more-than-normal scrutiny,
insisting upon the necessary corrections. With such
non-professionals, we usually take note not to subscribe to their
services once they have demonstrated less-than-satisfactory
results. Now that I have addressed this issue, it may come as a
surprise to some, however, that most appraisal problems that we
encounter do not involve unprofessional appraisers. Without
question, most of the challenges, which we are confronted with as
appraisal professionals, are that of the unique and non-conforming
property.
We use the term "non-conforming" because, as appraisers, we use
certain criteria for comparison purposes to establish a value for
subject properties. If the property is so unique that this criteria
is all over the board or is light years apart when the comparable
is compared to the subject, it is often of little value to the
appraiser in determining and/or demonstrating value.
What are some of the criteria that make a property unique or
non-conforming? Listed below are a few of the qualities possessed
by properties that we find most often causes them to be classified
as unique.
Location
One of the most-often confronted issues relative to the uniqueness
of a property has to do with location. In recent years, we are
finding that more and more homes are built in rural or mountainous
areas. This seems to be especially true of expensive second homes
that are, in many cases, owned by wealthy people. This is somewhat
of a contrast to the past, when such areas were associated with
less-expensive homes owned by less-affluent people. It can present
a problem when there are few, if any, upper-end properties in such
areas to compare the subject to for evaluation. An example would be
when a rich doctor buys a 30-acre mountaintop in a sparsely
populated area and builds a million-dollar home at its pinnacle. In
this case, there would be little to compare it to other than a
similar property 100 miles away or in another state. Comparables
such as these may or may not be indicative of the value of a
similar property a distance away.
Gross living area
Being able to locate comparable sales that favorably compare to the
subject in size is very often a challenge, especially when the
subject is a larger home. This issue frequently runs in tandem with
location, since there are literally millions of larger homes that
sell each year. However, a lot of the time these homes are not in
close proximity to each other. That makes them less comparable,
even though there may be plenty of sales where the gross living
area is similar. Comparable sales can be adjusted for size in order
to provide an indication of value, but large adjustments can result
in inaccurate value indications because adjustments are based upon
contributory value per square foot, rather than overall value per
square foot. For example, a property with 8,000 square feet sells
for $800,000, or $100 per square foot. A very similar property in
all other ways contains 12,000 square feet and sells for $960,000
or $80 per square foot. This gets especially dicey when we consider
that adding just a few square feet to a house by extending one side
of it a few feet usually adds much less cost than the overall cost
per square foot, since this extra footage does not always have
plumbing, electricity or other features that add cost to the house.
This additional space may cost 50 percent or less to build than the
overall cost.
Site size
This issue is prevalent mostly in rural areas where there is an
abundance of land at affordable prices. Today more than ever,
particularly in larger rural homes, we see homes located on acreage
ranging from two or three acres to 50 to 100 acres. In these cases,
we use comparable vacant-land sales for comparables. We make
adjustments based upon the sales price per acre of the vacant land.
This is not an exact science, because the existence of the homes
can affect the land values on a tract. Estimating the contributory
value of excess land, in some cases, can be a challenge to the
appraiser.
Age and condition
Just how much difference does, or can, age and condition make when
comparing newer properties to older ones? It can make a lot,
especially when the condition and/or age are substantial. In
situations where comparable sales are few and far between, this can
become a major issue. An example would be a new subject property
being compared to, say, a 15-year-old property, where the estimated
economic life is 60 years. Does this mean that the comparable sale
is 25 percent depreciated? Not always. This is especially true when
the land is an important part of the value.
When we consider that in some cases, at least two or three--or
perhaps all of the above--conditions can affect a subject property
when compared to sold properties, making allowances for differences
can be a major task. It is conceivable that the above conditions
could affect 50 or 60 percent of the value of the subject. Even
when using the most state-of-the-art appraisal techniques, much of
the adjustment process becomes an educated guess. Obtaining
accurate appraisals on unique properties carries a low-confidence
factor.
Does your appraiser offer a confidence factor in his appraisals?
A range of value can work also, in cases where unique properties
are difficult to appraise. It just may be possible that a property,
in some cases, does not conform to lending standards. All too
often, it seems as though there is a presumption that all
properties conform to lending standards. In such cases,
underwriters try to find fault with appraisals when the problem
lies in the property. I do not say that anything is necessarily
wrong with the property, but it may be so rare and unusual that a
lender may consider it a special risk.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company
Appraisers, a national appraisal company. He can be reached at
(800) 854-5889,
[email protected], or
through the company's Web site at www.appraisalsanywhere.com.
Previous columns he has written for The Mortgage Press can
be seen on the Elliott & Company Appraisers Web site.
