Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal issues. In this week’s column, he makes the case that we should all get adjusted, when it comes to our land. …Jonathan Miller
The Uniform Residential Appraisal Report, Fannie Mae Form 1004, was revised less than two years ago, yet when it comes to the Sales Comparison Approach (the grid) it is still a relic of the 1930’s and completely inappropriate for use in significant parts of the country, specifically, locations whose demographics are similar to those of Westchester County, a high priced suburb just north of New York City. The grid was designed for a time when the “typical” land to value ratio was in the range of 15 to 20%, which it was, for much of the first half of the twentieth century.
Please keep in mind that I am talking about fully built up areas near thriving, vibrant cities, where there is little or no vacant land available for development. This would include much of the northeast and parts of the west coast, not the entire country.
The grid provides for value adjustments in nineteen labeled categories. Three pertain to sales concessions, market conditions, and form of ownership. Of the remaining sixteen, three (19%) pertain to the land and thirteen (81%) to the improvements. This division between land and improvements would seem to suggest that those things which have the most effect on the value of real property are those related to its improvements, not the land. No doubt this was true in 1939 and perhaps it was still true in 1960. It is not true today.
Builders tell me that when it comes to land, the rule of thumb is they will pay for the site one third of what they expect to get for the new house they build. My own research of “paired sales” (sales of teardowns followed by sales of new houses on those sites) indicates a higher land to value ratio, ranging from 40% to as high as 50%. But let’s assume, for the sake of argument, that the “typical” land to value ratio for a new house is only 35%. That’s for a new house with no physical, functional, or external obsolescence.
At the other end of the spectrum is the teardown, whose land value is more than 100% of the total value (deduct the cost of demolition from the sale price). We now have a land to value ratio which ranges from 35% for new houses to 100%+ for teardowns. Within that range, what’s typical? Well, of course this will depend on the specific property being appraised. But if it’s a fifty year old house which has not been updated, is it not reasonable to conclude that the “typical” land value may range from 60% to 70% of the total value?
If the “typical” land to value ratio is 65% then shouldn’t the value adjustment categories on the grid be revised to reflect that fact? Why are 81% of the adjustments being made to the improvements, where they may constitute just 35% of the value? The grid needs to be revamped to address the reality that most of the value today is in the land, and not the improvements.