Which Shall I Build?, A Basement or A Barn? Maybe Both?

As you already know, SR1-3(a)(v) and its Comment make it clear that we appraisers must “…identify and analyze the effect on [the subject’s] use and value of…market area trends…and…an appraiser must avoid making an unsupported assumption or premise about market area trends, effective age, and remaining life”.  So what does that have to do with basements and barns?  Read on.

Since we have an ethical responsibility not to make up stuff about market area trends, as well as the same responsibility to recognize those trends and how they impact the subject, how do we do that?  How do we keep abreast of market area trends?  MLS does not have a special section called “Market Area Trends”.  I’ve never seen anything like that on a broker’s website.  Some appraisers, on their websites, publish market trend data.  But those are specific to where the appraiser lives and works, so they have little or nothing to do with any of the markets someone else works in.  OK, what’s the secret to understanding market area trends?

Actually, there is no secret to keeping up with and understanding market trends.  As with so much of real estate appraisal, these are  entirely a matter of the exercise of sufficient due diligence.  For example, one of the steps we can take relative to keeping up with market trends is to visit new model homes and even the houses under construction.  At those, you can visit with the builders, usually one-on-one, and simply ask, “What is popular now in new homes that was not popular as recently as one year ago?” It’s likely the builder will answer the question candidly since, in so doing, s/he gets to “sell” the house and all of its features.  It is OK to ask for cost or upgrade sheets on this, since usually the builders will hand them out to prospective buyers.  Then, you can check these prices with costing services to see how much the mark-up will be.  And remember, the reason you phrased the question that way was also to learn what is not popular any more.  

Since you are being duly diligent, you know the costs on these sheets are not your adjustments.  They are research into what a developer/builder thinks “the market” will pay for the upgrades and amenities on the sheet. A developer will gladly show you his/her costs for these items.  But, again, since you are being duly diligent, you will determine how much, if anything at all, they contribute to the market value of the house.

And what about barns and basements?  The property owner will gladly tell you that “shop” in the basement cost nearly $15,000 to build and install.  Since a single-family residence typically does not need a “shop” such as this one to ascend to its highest and best use then, all other things being equal, that $15,000 added nothing to the value of the remainder of the real property.  It was the owner’s choice to spend that money.  But if the market does not want it, it adds nothing to market value.

Or the barn?  Yes, maybe the property owner wanted a place to put a horse or two, or even to store equipment.  A barn fit that bill.  But unless this property is part of an agricultural or equestrian community, a barn is a personal indulgence, not a necessity the market demands.  Therefore it has little or  no contributory value.

So go visit a builder’s open house or sales models as part of your due diligence of keeping up with market trends.  You’ll find out what’s popular.  You’ll also find out what is not popular any more.  And if it’s not popular any more, how much can it contribute to market value?

For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: 

6 Comments on “Which Shall I Build?, A Basement or A Barn? Maybe Both?”

  1. Pingback: Which Shall I Build?, A Basement or A Barn? Maybe Both? - Appraisal Buzz

  2. I appraise in an area with an equestrian influence and barns are sometimes nicer than the homes accompanying the same site. In this area a proper barn (stalls, tack room, wash room, trainer housing) realize a large value premium as do other equestrian related improvements (riding ring, arena, fencing/cross fencing, established pastures). I converse with the prominent equestrian related Real Estate Brokers regularly to help me support adjustments for equestrian related infrastructure. Never has an underwriter questioned adjustments made when I include the comment that “Equestrian related adjustments were discussed, confirmed as reasonable and supported by conversations with local and knowledgeable equestrian related Real Estate Brokers”. Just make certain you have regular documentation of these discussions. So to answer the question in this article – in my area, build a horse barn.

  3. Excellent ideas. Thanks Dustin. I once asked a publisher of cost data where they got their numbers. Builder surveys were a part of that. In my market, walkout basements are worth more to buyers. It usually shows up in a lot premium which I learned from a builder sales agent. Same with site improvements. How much is the typical driveway, lawn and one skinny tree worth? Builder said $16,000 in one case.

  4. These issues are, of course, very location specific. As appraisers, we must keep in mind the specific location and trends in that area. Even to the level of “sub-neighborhoods” within a larger neighborhood area. Using the examples above, a large shop on a residential lot may not add significant value, but on a small acreage tract just 1 mile away it may add significant value. There is a town in my area that has a single subdivision with an unusual number of houses, all on standard residential lots, with an attached RV garage. These properties sell at a premium that is almost as much as the cost new of that garage area. In at least one analysis I did, the number actually came out to be higher than the cost to build! The data was very clear. My market area is one that has a growing number of houses with solar panels, but we have yet to find any evidence whatsoever that they add significant value to the property. I have spoken to listing agents that state it has actually been a hinderance in selling the property. In at least two cases I’ve been involved in, properties with leased solar panels sold for less than similar houses with no solar panels – the market reacted negatively to the hassle of removal and/or cost of the lease. There are likely hundreds of examples of items or features that may influence value (or not have any impact) and it is our job to understand all of them. Yay

  5. I’m having a hard time with this sentence, “Since a single-family residence typically does not need a “shop” such as this one to ascend to its highest and best use then, all other things being equal, that $15,000 added nothing to the value of the remainder of the real property.” If buyer are not demanding a shop or another feature to meet the highest and best use it could be worth nothing, but it is much more likely it is worth something, just something less than the cost to construct. If it was worth as much or more than the cost to construct, then everyone would be doing it.

  6. Pingback: Which Shall I Build?, A Basement or A Barn? Maybe Both? - Appraisal Buzz

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.