Appraisers are often asked to develop their opinion with regard to the value of a home, or piece of property that has some feature, characteristic or location that is atypical or even adverse. When this occurs they knee-jerk reaction of many of my colleagues is to show the physical, functional or external obsolescence and adjust for the difference in the market grid with a sentence or two added to the addendum.
For example, swimming pools. An in-ground swimming pool can cost between $35,000 and $50,000 installed. Of course there are pools that can range upwards to $150,000 with islands, waterfalls and the like. But for the purposes of this blog, I am speaking generally of a common pool that is kidney-shaped, generally a concrete prefabricated item that when installed is expensive to say the least. Nonetheless, buy a home install a swimming pool for $45,000, wait 3 months and try to sell that home for its purchase price plus $45,000. This academic discussion assumes the market has remained completely stable with no changes up or down. The market will not accept this other wise $200,000 home and simply add the cost of the pool. This loss in value is what appraisers refer to as obsolescence. This is a well-known fact in the industry, but how many actually take the time to prove their point. Pools of course are an easy example, because the appraiser can simply provide comparable sales of similar age, size, location, with a pool to demonstrate the market reaction to the pool. But, what if the development that the property is located in does not have any sales with swimming pools. Then if the appraiser proceeds to a neighboring development to find homes with swimming pools, have they completed a subdivision analysis to demonstrate there is no location adjustment between developments? Generally speaking this is often not the case.
With the advent of technology the ability to import MLS data into a spreadsheet for analysis there really is no longer an excuse in the majority of appraisals not to have tabular analysis of items like: location, swimming pools, garage count, bedroom or bathroom count. These adjustments have been made for the last several generations by appraisers using a “rule of thumb” based upon bench market pairings when, the appraisal should have been based upon the development of paired sales for each individual assignment.
My challenge to appraisers is to sharpen up and utilize the tools in front of you. My challenge to underwriters and/or reviewers is to develop market pairs as appraisers provide them, or to ask appraisers for the paired analysis that was used to develop their adjustments. Condition adjustments will be a topic of a future post and is not germane to this particular discussion.
See you around the water cooler!