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: