I spent $25,000, and my pool is worth how much!?

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Sometime back a Realtor acquaintance called to ask how much to adjust for a swimming pool. The question implied that we appraisers have access to some kind of secret “book” in which we maintain the dollar amounts of our various adjustments. Would that this were true! I explained to the Realtor© we had to extract our adjustments from market data. The parting comment was something along the lines of, “Well, that would take too long!” And our conversation ended. So, let’s talk about that.

It’s not particularly difficult to calculate a swimming pool adjustment. This can be done by paired-sales analysis or by regression analysis. While I prefer regression analysis, both produce perfectly acceptable results. The results are acceptable not because one or the other is “right” or “correct”. Rather, they are acceptable because the adjustment comes from the market, which must be the source of all of an appraiser’s adjustments. So let’s consider a hypothetical paired-sales analysis to extract a swimming pool adjustment from the market.

Take 10 sales more-or-less comparable with the subject that have swimming pools, and then compare those with 10 sales more-or-less comparable with the subject that do not have swimming pools. You’ll probably end up with 10 indications of the contributory value of a swimming pool. Next, arrange the differences from low to high. Take a look at this range. If there are one or two numbers that are obviously outliers, delete them. Now consider this range to determine if there is a central tendency. For example, is there a contributory value indication that repeats itself? This would be a modal value. Is there a range of contributory values that repeats itself? If so, somewhere within this range is the likely contributory value of the swimming pool.

Look at the average and median differences as well. Frankly, you probably want to avoid the average contributory value because of the inherent differences there are in swimming pools. An average weights all of the numbers in the array the same. Since the market likely does not do this, it’s best to avoid it. The median value represents the absolute middle of the range, but is not affected by extremes or outliers.

You started out with a rather wide range of contributory values, but via the above analyses you have likely narrowed it. This narrowing process is exactly what you’re looking for from paired-sales analysis.

Suppose that your analyses indicated a reasonable range from $10,000-$15,000. Out of this range you are going to choose your adjustment (even though a range is far more indicative of the market’s thinking). Also suppose that the swimming pool at your subject is relatively “plain vanilla”. For this reason, you would probably go with the low end of the range, say $10,000. On the other hand, were your subject swimming pool rather ornate, large, and/or came with an overly large patio and pool deck area, you would probably go with the higher end of the range (although, that would be your judgment call).

The point here is that you did not “guess” at the contributory value of that pool, etc. You did not try to cost out a pool as if new and then apply a depreciation factor. You did not apply a “rule-of-thumb” to determine your adjustment. Rather, you went to the market and, via analyses of the available sales within a market comparable to that of the subject, teased out of it a reasonable approximation of the contributory value of the swimming pool.

Please understand that the best you can do is approximate the contributory value of the swimming pool. This is because individual buyers and sellers react to such an amenity differently. As a result, your adjustment of, say, $10,000 does not mean the market sees the contributory value of a pool to be merely $10,000. Via your analyses, you demonstrated that the market sees a range of contributory values. From that range you, the appraisal expert, concluded that an adjustment of $10,000 approximated the contributory value of the swimming pool at your subject.

In other words, you supported your conclusion. This is all a client can ask for. Your client may not agree with your conclusion. However, your client must agree that your adjustment is based on logic, reasoning, and market evidence. That’s really the best you can do.

So, the point here is, while you may not be able to prove exactly how much a swimming pool contributes to the market value of a specific property, you can show the range of that value. Then, from it, you choose an individual number, even though that range makes more sense in the market. It’s your opinion that the swimming pool at the subject contributed $10,000 to overall value. You base your opinion on market data, therefore your opinion is well-formed. As such, you have formed an independent, impartial, objective, and credible opinion of the contributory value of that particular amenity. That’s what appraisers do.

Appraising Diamonds on a Brass Rings

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In the context of a real estate appraisal, what is an overimprovement (or superadequacy)? Per the 14th edition of The Appraisal of Real Estate (p. 624) it is a “…type of functional obsolescence caused by something in the subject property that exceeds market requirements but does not contribute to value an amount equal to its cost…” (ibid; emphasis added).

A swimming pool is a prime example of an overimprovement. What a swimming pool contributes to value is likely far less than its cost new (even after deduction of age-life depreciation). Despite this relationship, it is rare to see a residential appraisal report in which there is a deduction for functional obsolescence because of the presence of a swimming pool.

Consider the issue of size. A 5,000 square foot house in a neighborhood of 2,500 square foot houses is likely a superadequacy. This superadequacy stems from the fact that the extra 2,500 square feet likely do not contribute to value at the same rate as the “necessary” 2,500 square feet.

The appraiser needs to explain any superadequate features of a property in sufficient breadth and depth so the client cannot accuse him/her of conducting a misleading appraisal, and then writing a misleading appraisal report.

The Client Accommodation Trap

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Appraisers try to accommodate their client’s interests. There is nothing wrong with this per se.  Appraisers commonly write, “at the client’s instruction…” or “per the client’s request…”, then the appraiser describes what the client instructed or what the client requested, as well as what the appraiser did to comply with the instruction or request.

This language, however, implies the appraiser is trying to do the appraisal, or write the appraisal report, in a manner that pleases the client, a potential USPAP violation. By definition, a real estate appraiser must be independent, impartial, and objective. Such accommodating language not only calls into question whether the appraiser has complied with these three qualifications but also smacks of advocacy.

Omit the offending language.  For example, appraisers commonly omit the analyses of the Cost approach. However, certain clients may request the inclusion of these analyses as part of the appraiser’s value conclusion. Instead of saying, “at the client’s request, the appraiser has included the protocols of the cost approach…”, please consider saying, “the appraiser included the protocols of the cost approach as both applicable and necessary to the formation of a credible value conclusion”, never mentioning the client’s request.

Complexities

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Complexities in appraisal work come up periodically, depending on the market you work in and the types of properties that are common to the area. I office in Colorado and have had the opportunity to appraise in rural and extremely remote areas. In the case of one particular market area, the trip one-way takes over two hours and is over 1,500 square miles; in this particular market, you’re lucky to have 30 sales over any two-year period – and that’s counting all residential properties, whether on a lot in town or a large-acreage parcel, a 90-year-old small house or a custom log house. You can bet there are complex assignments in this area. However, it doesn’t take a remote area to result in complex appraisal assignments.

Typically, complexities originate from two sources:

  1. Physical or locational characteristics of the subject property itself, and/or
  2. Limited sales or uniqueness in the area.

Complexities are a double-edged sword. If you only have two dozen sales in the entire area over a multi-year search period for selecting comps, and your subject is not located in a subdivision, you have to decide whether the glass is half-full or half-empty. Likely, there is no “model match” to your subject; however, you don’t have too many sales to sift through to choose which will give the best perspective in evaluating the subject’s value.

An appraiser doesn’t need to cover rural markets to experience similar dilemmas. All it might take is that 3,000 square foot GLA over-improved house in a subdivision of 1,500 square foot GLA houses, or the house with an indoor pool in the area with only starter houses, to appreciate that complex assignments area a test of our appraisal abilities.

But complexities are not an automatic reason to decline an assignment. Let’s be sure we’re prepared!