Why no value adjustment is sometimes the best adjustment

It has to add value, right? It’s tempting in real estate to make upward adjustments in our valuations whenever we see a feature that is remotely positive. Our thinking is that buyers have to be willing to pay something for that special feature, so we should give it a little value boost. But sometimes making no adjustment is the best thing to do. Let’s look at three quick examples.

no value adjustment given - sacramento appraisal blog

Three examples where no adjustment could be the best move:

  1. Duplex with Large Lot Size: We get used to giving value premiums for larger lot sizes for single family homes, but a larger lot size for a duplex is often not a positive gain for the property. Assuming the lot cannot be built on or divided, the extra space really costs more for the owner to manage, and that can actually diminish cash flow for the property. Imagine a duplex on 0.75 acres, while every other similar duplex is on a postage stamp lot. If there is no difference in the rent between all the duplexes, and the larger lot is not useful for building, there probably isn’t a value premium for that extra lot size. In fact, the larger lot may be a nuisance because of the cost of extra landscaping maintenance or even illegal dumping.
  2. Location Across from a Park: It’s always worth more to be located across from a park, right? Not necessarily. While a park location might feel like an asset, if it’s also located on a busy street, the negative of the busy location might balance out any positive gain for the park location. Or if a park is known for loitering or criminal activity, it might not be desirable at all to live across the street from it. This is why it is telling to hear home owners talk about their park location. At times they love it and wouldn’t trade it for the world, but other times it’s a clear negative. Of course market value is not just about one owner’s perception, but the entire market. How would most buyers respond to the location? This is where we have to look at neighborhood sales over time to see if there is any price difference between park sales and non-park sales.
  3. Condo with a View of a Lake: Imagine a condo with a view of a lake. We would all assume the lake view is worth more than a non-lake view, but what do the neighborhood sales and listings tell us? Is there any price difference at all? If the vast bulk of properties in the condo development are all rentals, and there is no difference in the rental value for the lake view vs. the non-lake view, then the lake view is not an asset. This real life scenario came from a conversation with a mentor recently.

The Point: Sometimes it’s tempting to give a positive value adjustment because we feel there simply has to be one. But there actually might not be one. Maybe the market doesn’t behave the way we think it should, or maybe the market in one subdivision trends differently than a nearby subdivision. This underscores the need to watch neighborhood sales and listings closely to try to let the data speak to us rather than let our assumptions trump the data.

Marketing to Millennials Event: Locals, I wanted to invite you to an event I’m moderating at the Sacramento Association of Realtors on May 6 at 12pm. It’s called Marketing to Millennials, and it’s all about how to connect with Millennials in your real estate business. This generation too often gets a bad wrap from so many sources, but how can you connect with them and serve them best in business? There will be a guest speaker and four panelists. Make sure to say “hi” if you can make it. Read more here (pdf) or sign up here.

Question: What other examples can you think of where a positive value adjustment wasn’t needed (even though it seemed like one should be given)?

If you liked this post, subscribe by email (or RSS). Thanks for being here.

Comments

  1. says

    I was always taught to question every single adjustment, and that there’s never a time when adjustments should be automatic. For example, in certain rural markets the difference between a 3rd and 4th, or 4th and 5th bedroom is negligible. The same goes for large outbuildings… the difference in contributory value between a 3,000 SF pole shed and a 5,000 SF pole shed may be $0. Thanks Ryan, good info as always!

    • says

      Well said, Paul. Thanks so much. It’s easy to always give a certain adjustment for a bedroom (say $5,000 or $10,000), but sometimes it’s just not legit. I have found something similar with 3 and 4 bedroom homes in first-time buyer neighborhoods. When a house has 4 bedrooms with a tiny Living Room, sometimes buyers will pay the same amount for a 3-bedroom house with a larger Living Room. Thus there really isn’t an adjustment to give. Great example on the shed. It’s maybe similar with acreage too. Sometimes we might not see much of an impact for an extra land.

  2. says

    Attached vs detached garage, in temperate climate areas, I have been unable to discern a market differential. Tile vs comp roof, is tricky depends on neighborhood. Sloped vs flat lots depend on site utility. I have found more and more utility of a particular item is the most critical. For example, cold winter areas an in ground pool may not be a benefit because of winter maintenance issues, etc.

    • says

      Well said, Mark. Great examples. I really appreciate you sharing. I echo attached vs. detached too. I don’t know that I have ever made an adjustment for the difference. As long as owners can access the house easily and get groceries inside without a hassle, it’s probably no big deal (in terms of a value difference). I could see in a senior community though how a detached garage might be a turn-off (I have never seen that though to date).

  3. says

    Often there are adjustments that I cannot quantify. Rather than trying to hang myself on an adjustment amount, I will make no adjustment and just weight my reconciliation in one direction or the other and narrate. I know lenders do not like this, but I don’t do lender work.

    • says

      That’s a great methodology Gary. Well said. Lenders do freak out when there are not adjustments. Why did you not adjustment for the extra 1/2 bathroom on Comp 2? The lot size is 1000 sq ft larger, so why did you not make an adjustment? Common lender questions.

    • says

      I do the same thing at times Gary. Sometimes it’s not possible to come up with an accurate adjustment, however it can be reconciled at the end.

  4. says

    Thanks for this post Ryan! That’s why we analyze the market and each market really is different. When there is no marketable differences then an adjustment is really hard to support.

  5. says

    In my area we have a lot of golf course communities with some homes being on the gold course and others not. When the development was started the golf course lots were sold with a premium but years later I’m not so sure they do provide a premium. Paul makes a great comment about questioning every adjustment because there may not be a good reason for it if the market does not support it.

    • says

      Buyers are very often of two minds about golf course lots. Great views = A big plus. If the house gets hit by golf balls it will make the backyard unusable during daylight hours for most people = A huge demerit. And a few doors down, it’s no problem at all.

      Some people don’t like having the golf cart path right behind the house (privacy) but if it’s further away, they don’t mind. Some people don’t like the lawnmowers early every morning.

      • says

        Well said, John. Perfect example. I agree. This reinforces the reality that there will not always be one adjustment we can give for a golf course location. Any premium will depend on where it is located on the course. I know when I inspect golf course lots I always look for balls in the yard (or in the pool).

  6. says

    I think your full of BS and should be turned into the state for investigation.
    I see issues of stated value, misleading advise, renduring value without even a USPAP compliant report just to name a few. Yikes..I just hope you are getting a few bones thrown your way for all this BS advise you are expoliating out of your pours…

    • says

      JoeDApprsr, Ryan Lundquist has the support of his peers. If you have some specific problem with what is written, then just be specific and talk about it so that there can be an open discussion. Ryan is always humble and open to discussion about correct appraisal practice.

    • says

      Hey JoeDApprsr. Thanks for checking in. Wow. I’m surprised at your words. What’s going on? I’m not appraising a specific property here, but only speaking in generalities. This is an important conversation to have. If you have a problem with what is written, let’s talk about it either here or you are welcome to send me an email or call me (see the “contact” tab for my details). I will send you an email too with the email address you provided. I hope we can have some constructive conversation, and I definitely want to know what is behind a comment like this.

    • says

      JoeDApprsr, Ryan is all about open discussion here, even if it’s different than his own, but its a two way street. If you disagree it’s a good idea to give your reasoning so everyone can see where you’re coming from but please leave the troll comments at home.

Trackbacks

Leave a Reply

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


*