Posted by Jonathan J. Miller -Wednesday, December 22, 2010, 9:49 AM
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Guest Columnist:
Todd Huttunen
Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Matrix readers tongue-in-groove insight on appraisal and housing issues. View his earlier handiwork on my first blog, Soapbox
At first glance, to the uninitiated, his insights appear to the far right of wonkiness but in reality they apply to all real estate professionals so read carefully my friends. I’m glad to have his contributions on Matrix.
The Adjustment for One Full Bath Versus Two
December 21, 2010
When valuing a residential property, an appraiser is faced with completing a form, most of which is already populated with a series of “canned comments” that do not change from one report to the next. Where the rubber meets the road is on the sales comparison grid – this is where adjustments are made to the comparable sales in order to arrive at a value estimate for the subject. Most every unit of comparison for which an appraiser makes an adjustment involves some degree of subjectivity. From a property’s location and size, to its curb appeal, to whether or not it has a fireplace or a pool or a finished basement – all these attributes will affect different people differently – save one.
There is one thing – and only one thing – in a house that is used by everyone, multiple times, every day for a variety of vitally important functions. Although we take it for granted, life as we know it would not be possible without the bathroom. The motivation for this article was to try to discover, once and for all, the value difference between a house with only one full bathroom versus one with two. And the reason for this is that when it comes to houses in my area (Westchester County) the market has spoken clearly and unambiguously. A three bedroom house with fewer than two full bathrooms near those bedrooms is considered functionally obsolete in this regard. Whether or not the functional obsolescence is “curable” in every case is an open question. In my opinion, more often than not, it isn’t. Thankfully, we have the grid to help us reconcile differences between the subject and the comparable sales. Unfortunately, in the appraisals I’m seeing, the adjustments most appraisers are making (usually $10,000 to $15,000 per full bath) between houses with one or one-and-a-half bathrooms and those with two or two-and-a-half bathrooms are wholly inadequate. In an effort to find out the appropriate adjustment for one versus two full bathrooms, I did what appraisers have been trained to do. I looked to the market for the answer.
More after the jump…
Posted by Jonathan Miller -Tuesday, April 27, 2010, 8:39 PM
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Guest Columnist:
Todd Huttunen
Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Matrix readers tongue-in-groove insight on appraisal and housing issues. View his earlier handiwork on my first blog, Soapbox
Jonathan Miller
Seasonality Should be Considered in Comp Selection
April 26, 2010
The Westchester numbers for the first quarter just came out today. Even with the turbulence we’ve seen in the last couple of years, there remains a consistent trend in the median selling prices as relates to “seasonality”.
Not unlike Metro-North or Hamptons rentals, there is a “peak” and an “off peak”.
Whether the overall market is trending up or down, houses that close in the second or third quarters sell for considerably more than those that close in quarters four or one.
Appraisals done “in season” (assuming 60 days from contract to closing, these would be valuation dates in the six months between February 1 and July 31) should rely, if possible, on sales that closed in the second and third quarters, if not from the year of the appraisal then on the prior year. Conversely, appraisals made between August 1 and January 31, or “off season”, should focus on sales from quarters four and one.
Adjustments are required for the difference in market conditions between “in season” and “off season” for single family houses in the New York metropolitan area. What those adjustments should be can be fairly easily calculated by looking at the historical data for median prices. Remarkably, in Westchester at least, the differences are pretty consistent either in upward of downward trending markets.
Check out that serpentine line on the Median Price chart – just for fun, print it out and draw a line connecting only quarters two and three to each other over the years. Then do the same to quarters four and one and watch how quickly that serpentine line straightens out into two lines with much more of a consistent trend to them.
I really don’t understand why appraisers are so stuck on this idea that only sales taking place within six months of valuation date should be used. Six month old sales can be the most misleading ones of all, insofar as market conditions are concerned.
p.s. I know I addressed this issue in a prior post but it bears repeating since it seems almost no one is paying any attention.
Posted by Jonathan Miller -Tuesday, April 6, 2010, 7:39 AM
4 Comments
Guest Columnist:
Todd Huttunen
Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Matrix readers tongue-in-groove insight on appraisal and housing issues. View his earlier handiwork on my first blog, Soapbox
Jonathan Miller
In estimating the value of a house, appraisers are concerned with answering two fundamental questions.
1 – What is the value of the land, as vacant?
2 – What contribution, if any, does the existing improvement make to the underlying value of the land?
A recent study (pdf) conducted by the Lincoln Institute of Land Policy suggests that in the higher priced regions of the country, the land-to-value ratios range from 50% to 75%. In areas where “teardowns” are common, land values can actually exceed 100%, since the buyer looking to construct a new house has to add the cost of demolition to the price paid for the existing house before she can build the new one.
Although this is the reality in many parts of the New York metropolitan area, Boston, Southern California, and other regions, for a long time now banks and the appraisers who work for them have pretended otherwise. For some reason banks want to believe that the mortgages they make are on properties where the land represents between 25% and 35% of the market value and that the improvement represents the bulk of the value, 65% to 75%. Even as far back as 1985 when I started appraising and the land-to-value ratios were not as high as they are today, we were required to add a comment to our reports stating that “land values in excess of 30% of market value are common in this area,” whenever we estimated land value above that “magic number”.
Appraisers I’ve spoken to say the reason they estimate land values at say, 30 – 35% of overall value, irrespective of the fact that it may be much greater, is that they are under pressure from lenders and underwriters who won’t approve loans on properties whose land-to-value ratio is more than roughly one-third. Conventional wisdom says banks don’t want to make loans on land, so they instruct their appraisers to say the land is 30 – 35% of market value (the fact that it may really be 80 – 90% doesn’t seem to bother them, as long as the appraiser says otherwise). The reality however, based on this Land to Value Ratios study from the Lincoln Institute of Land Policy, is that in many of the country’s higher priced locations, it is the land which comprises 50% to 75% or more of the value of the property.
This is important for a couple of reasons, one of which is the fact that appraisal forms are geared toward the notion that most of the value is in the improvement, and not the land. The adjustment grid, wherein the appraiser compares the subject property to the comparable sales, gives short shrift to factors relating to the land value and focuses instead on the improvements such as square footage of the house, number of bedrooms and baths, condition, and on the amenities such as fireplaces, patios and pools. Most of the dollar adjustments appraisers make are for differences in the improvements and amenities. But if 75% of the value is in the land, then why are we bothering to make an adjustment for the fact that one property has a fireplace and the other does not? Shouldn’t the focus be on factors relating to the land instead? These would include site size, shape, views, elevations, topography, frontage, etc.
Appraisers have been subject to scrutiny in recent years, given their role in the mortgage lending process, and some have been implicated for their unethical participation in the sub-prime debacle. I believe most appraisers are ethical, professional, and serious about the work they do. But I do think it’s time to recognize reality when it comes to the allocation of value between land and improvements. If the land value represents 50% or 75% or 100% of the value of the property, as it does in many parts of the country, then appraisers have an obligation to their clients to say so in their reports. And if that means the appraisal form itself needs to be redesigned to reflect the market as it is now, and not as it was in 1930, so be it.
Editor’s note: I find it amazing how so few consumers realize that changes in value during a period like we just went through is in the land, not the building (improvements) – jjm.
