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Was This Home Overimproved or Underimproved?

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Have you heard of a property being overimproved, or super adequate? How about underimproved? Unless you’re in the property valuation profession, you may not have. What do these things indicate?

The Appraisal of Real Estate, fifteenth edition on page 352, states that “…the relationship between land and improvements and the relationship between a property and its environment must be in balance for a property to achieve its optimum market value. For example, a residential property with a one-car garage in a market that expects similar homes to have a two-car garage (known as an underimprovement) or too many expensive amenities for its location (known as an overimprovement or superadequacy) is out of balance.”

Conversely, an underimproved property might be lacking in amenities that most buyers expect to see. The same publication has this to say regarding an underimproved property: “Under the principle of progression, the value of an underimproved property may increase toward the prevailing market standard.” The idea behind the principle of progression is that if a property is located in an area where most other properties are superior to it, it will tend to have a positive impact on the property that is less improved.

When talking about balance, the aforementioned publication goes on to say, “Appraisers must watch for imbalances in the market and within specific properties because those imbalances can cause the market to ascribe different prices to otherwise comparable properties…They can also be a key factor in determining which sales are the most comparable.”

Clearly, when valuing a property, appraisers must consider what the typical buyer expects a home to offer in terms of amenities and characteristics. That is not always a simple task.

AN EXAMPLE

Earlier in the year, I appraised a property that was originally built for buyers that do not require electricity. This property is located in an area where it is common for some buyers to require a home not to be electrified.

My client hired me to appraise the property to assist them in knowing how much to list the property for. Since the current owners purchased the home several years ago, they added electricity. However, the only heat source was a wood-burning fireplace.

Is a property that has not been electrified and that does not use conventional forms of heating considered to be underimproved or overimproved? It really depends on what the prospective buyers in that market are expecting. Buyers that expect a home to have electricity and more conventional forms of heating, would likely view a home such as this as being underimproved. However, to a buyer that does not require a home to be electrified, a home that has electricity would likely be considered an overimprovement.

In fact, when buyers who do not require a home to have electricity purchase a home that is electrified, it is not uncommon for the buyer to remove or drywall over the electrical outlets and switches and remove any electrical components from the home. That’s going to require time and money.

The Appraisal of Real Estate, the fifteenth edition indicated that these factors are going to determine which sales are most comparable. So, when appraising a home that is not electrified and that does not use conventional heating, appraisers are going to search for other similar properties. Therefore, a lot of research can be involved in locating comparable properties. From an exterior view, an electrified home vs. one that has not been electrified may look similar.

This Home Has Not Been Electrified
This Home Has Not Been Electrified Either

WHO WILL THE TYPICAL BUYER LIKELY BE?

Sometimes, this is a difficult question. Especially in a market like the one we’ve been in for several years, where we have had an extreme shortage of homes for sale. When it’s difficult to find a home to buy in a particular area, a buyer who requires electricity might consider a home that doesn’t offer it, because they can always add it. Of course, they are going to want a discount for the time and expense involved in electrifying a home and adding conventional heating.

On the other hand, if someone was looking for a home that does not have electricity, they might consider a home that has been electrified. However, they may also want a discount for the work required to remove the electrical components of the home. So one buyer may pay more for the same home than another.

Is there a market for homes without electricity and conventional heating? Are homes like this common in the area? Those are important questions to consider when determining how to value a home like this one. What about financing? Some banks are willing to lend on these types of properties, while others are not. Many times these homes are paid for in cash or are transferred to relatives in private transfers. Yet another reason why appraising homes of this kind can require a lot of research.

OTHER FEATURES COMMON TO NON-ELECTRIFIED HOMES

Interestingly, homes that are built for buyers that do not require electricity or conventional heating also typically have other characteristics that need to be considered. For instance, since these homes do not have electricity, the lighting is usually different than what is more conventional. These types of properties often feature propane or nature gas lighting, kerosene lamps, battery-powered lights, or skylights.

It is also common for homes of this kind to have hardwood or vinyl/linoleum flooring instead of wall-to-wall carpeting. Most non-electrified homes typically have large basements and two stories. These types of homes also often have bathrooms, but usually not more than one. It should be noted that some homeowners with homes that are not electrified sometimes use solar energy for certain uses.

Interestingly, the aforementioned, The Appraisal of Real Estate’s commentary on unimprovements, provided an example of a home with a one-car garage vs. a market in which two-car garages are common. Likewise, buyers who are looking for homes that are not electrified usually do not utilize more conventional forms of transportation such as automobiles. Most buyers interested in a home that has not been electrified also rely on horse and buggy as a common form of transportation. Therefore, having a stable and/or outbuilding might be more valuable than a more traditional garage to prospective buyers of properties that are not electrified.

So, going back to my question, was the home over or underimproved? It depends on who the primary market for that home is!

I hope you enjoyed this article! As you can see, a lot of things must be considered in every appraisal. And since appraisers appraise different types of properties, we must consider what the market participants expect in terms of property characteristics. That’s what makes being an appraiser so interesting!

This week I leave you with a little video from Mr. Doodle, who doodled his entire home. Would you call that an overimprovement or an underimprovement, or something else? Enjoy!

Have a great weekend!


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Here are some links to other articles I think you might also enjoy… 

Fishing For Housing Inventory – Housing Notes by Jonathan Miller

How Was The Housing Market in 2022? – Birmingham Appraisal Blog

Appraiser Scam – Be Careful! –  APPRAISAL TODAY

Are You Using Big Data in Appraisals? – George Dell’s Analogue Blog

How are appraisers handling concessions? – Sacramento Appraisal Blog

Winter Season – December Newsletter 2022 – DW Slater Company Blog

For my readers in the CLE area… here are some articles related to news in our local area that you may enjoy… 

12 Places to Play Pinball in Greater Cleveland – Cleveland Magazine

Could Veterans Memorial Bridge Become Cleveland’s ‘Low Line’? – Cleveland Scene

6 thoughts on “Was This Home Overimproved or Underimproved?”

  1. Interesting to read about Jamie. The photo of the house is much larger than what I imagined. I was thinking it would maybe be a tiny cabin. I’ve not appraised a home without electricity (on purpose anyway (not talking about an REO with gutted electricity or whatever)).

    1. Thanks Ryan! Yeah, these homes are usually around 2,000 plus sf. That’s why having only one bathroom would be less desirable for some buyers. However, buyers not interested in electrified homes usually only require one bathroom. These are definitely interesting homes to appraise. These are most common in the northeast part of the country.

  2. I didn’t understand what you meant by homes designed not to have electricity until the final photo showing the buggy. Interesting example that as Ryan said, we don’t have out here.

    So, did you determine an adjustment to de-electrify a house? 🙂

    1. Great question! Based upon my research, buyers who want a home that is not electrified, and who purchase a home that is, typically leave the electrical components behind the walls. They just remove out outlets and light switches and seal them. They often they drywall them. The only adjustment I could determine is a cost to accomplish this along with entrepreneurial incentive. This adjustment is considerably less than the adjustment to electrify a home. It’s tough because there is just not a lot of data out there for this type of market reaction.

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