When we reach a certain age, many begin thinking more about our blood pressure and heart rate. We may regularly check our vitals to ensure we are healthy.
When it comes to these types of measurements, we have to know what our baseline is. What’s a baseline?
I’m no doctor, nor do I play on one TV, but I do know that a baseline is what a person’s normal blood pressure should be. Age, activity level, health, and other physical aspects may change a little.
Statistics also use a baseline. It’s a reference point used to compare changes or variations in data. So, what does this have to do with appraising real property?
Occasionally, someone will ask me how much a bathroom or a garage adds to a property’s value. The answer is always going to be, “It depends.” Why?
When analyzing data to determine how much a home’s feature will contribute to its market value, appraisers adjust the sales prices of comparable sales to make the sales they are comparing to the property they are appraising more similar. This helps shed some light on what the subject would likely sell for.
Size, quality, condition (or depreciation), age, and other factors are considered when adjustments are made for differences in a home’s physical attributes, such as site size, finished square footage, bedroom and bathroom count, garage size, and so on…
I use the depreciated cost method when appraising properties other than condominiums. Let me illustrate how this idea of the subject being the baseline for the adjustments in the depreciated cost method works.
In the first example, we have a new home built in Brecksville. It’s a 2,400 sq. ft. colonial-style home with an average quality of construction and a remaining economic life of sixty years. In this example, there is no depreciation because the property is new, and there are no negative external influences. Here are the adjustments using Craftsman’s replacement cost data, which Solomon’s Adjustment Calculator uses. Notice that it breaks down the contributory value of different property components, not just one lump sump price per square foot. And the land value is not included because we are trying to determine the adjustments for the improvements, not the land here.
Now, let’s take the same home, but let’s say it’s seventy years old and has been updated. It reflects a good overall condition. Let’s also say that comparable homes of the same age that have been updated are selling for around $495-$500K.
Using the age/life method for estimating the depreciation, let’s say that this home now has an effective age of fifteen. I know what you might be thinking…”Slow down there, partner! How did you figure that out?” Let me explain…
Let’s say that comparable homes in the neighborhood are selling for around $495,000. Based on my research, the estimated site value of the property is $125,000. The site improvements are $8,000. The cost to rebuild the improvements is $482,001. The difference between the depreciated cost of the improvements on the land and the replacement cost is the amount the property has depreciated.
In this case, the home’s improvements have depreciated 25% over the past seventy years, leaving it with a remaining economic life of forty-five years. Now, what would the adjustment be for the same house?
Notice that the more the condition deteriorates or depreciates, the lower the adjustments go. As you can see, the adjustments depend on the property being appraised and what other comparable homes are selling for. It’s never one size fits all! The adjustments would be even less if the property had not been updated and had a lesser market value.
And that’s why the appraised property sets the baseline for our developing adjustments from the market. By the way, these adjustments were taken from the market. How? Because the depreciation is based on what buyers are purchasing comparable homes for and what they are paying for comparable land.
A lot goes into these calculations. We have to develop a supportable opinion of the site value. Then, we need to see what comparable homes are selling for. Appraisers also need reliable replacement cost data sources. In addition to Craftsman used in the examples above, I also use Marshall & Swift’s Residential Cost Handbook and DwellingCost.com. We also need support for the economic life expectancy of the improvements.
As you can see, we must examine things more closely to determine how much the market is paying for certain features, and it’s not easy sometimes. I hope that you found this post to be helpful and interesting! There really is a lot more to appraising than some realize. Contrary to what some may believe, we don’t have a cheat sheet with adjustment rates. We must extract these adjustments from the market on each appraisal performed.
Speaking of looking closer, check out this cool artwork, which has a lot more to it when we look closer.
And now, enjoy a little trip to Cleveland’s past with this cool post! (Click on the post to watch the video.)
Have you ever wondered how appraisers measure second floors with sloped ceilings and dormers? My colleague and fellow Home Measurement Specialist Hamp Thomas explains in this video…
Now, to some housing data!
GETTING TRENDY (Geauga County Housing Tends)
Here are some fresh stats for single-family homes in Geauga County. I’ve been appraising in this County for 26 years. Here are the key points from the data below:
- Median Sales Prices in May Up 6% year over year.
- May had 2.01 months of inventory, slightly more than a year ago when there were 1.51 months of inventory.
- Median List Prices in May were Up 3.5% year over year.
- On average, selling a home in May took 23 days, eight days longer than a year ago.
- On average, homes sell at 100% of their listing price, which was the case a year ago.
- In May, there were 137 total active listings, which is approx. 33% more than last year in May.
HOME HACKS
Here’s a cool hack for keeping our pets hydrated and cooler in the crazy heat we’re experiencing!
Have a great week!
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For my readers in the CLE area… here are some articles related to news in our local area that you may enjoy…
Beach Please – Lakefront Beaches for Miles – Cleveland.com
Mapleside Farms concert series shaping up to be spectacular – Cleveland.com
If you enjoyed this blog, please check out some awesome blogs by my fellow appraisers…
Real estate math gone wild – Sacramento Appraisal Blog
How Confidential is Your Appraisal? – Birmingham Appraisal Blog
Factory-Built Houses: Types, Benefits, and Tips for Appraisers – Appraisal Today
Model or Algorithm? – George Dell’s Analogue Blog
Nobody Is Coming To Save You! – Real Value Podcast
USPAP and Written Reports – The Appraiser’s Advocate Podcast
If you enjoy listening to podcasts, check out mine. I hope you enjoy it! You can find me on Apple Podcast, iHeart Radio, Spotify, Google Play Music, SoundCloud, Radio.com, RadioPublic, Deezer, Breaker, Stitcher, and other feeds.
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Great info Jamie. Stay cool
Thanks Joe! I appreciate you! Stay cool also! Easier said than done right now!😊