Dear Monty: Five reasons your home can be tough to evaluate
By Richard Montgomery
Reader Question: We plan on selling our home in the spring. When appraisers or real estate agents make adjustments between features in our house and the comparable homes features, we understand that these feature adjustments are subjective. The modifications are made to the comparables to make individual features similar between our house and each chosen comparable. The exercise is to create an apples-to-apples comparison by netting out all the feature differences.
We have received three opinions, two from real estate agents and one from an appraiser. We expected each view would be different, but several of the feature differences are light-years apart. As an example, the difference in the lot value alone is forty-thousand dollars between the high adjustment and the low adjustment. How can this be possible?
Monty’s Answer: Your understanding of the purpose of feature adjustments is correct. Calculating and tabulating feature differences on each of the chosen comparables will often cause the preparer to eliminate a comparable and replace it with a property that was in the potential pool but not initially a finalist. Examining feature adjustments is an integral step in reaching a value conclusion that should not be taken lightly, as the choice of comparables in evaluating a home can affect the preparers opinion by thousands or tens of thousands of dollars. Upon further review, some comparables are not good comparables.
Features considered for adjustment in a home evaluation
Site and infrastructure improvements, Design, Style of Home, Location/View (Neutral, Adverse, or Beneficial), Quality of Construction, Age, Condition, Total Room Count, Bedroom Count, Half Bath Count, Full Bath Count, Gross Living Area, Basement, Central Air Conditioning, Fireplaces, Garages, Porch, Patios, Decks, Swimming Pools (in and above ground), Sheds, Fences, Barns, Pole Buildings, Landscaping, and Water features (Ponds, Creeks, etc).
Probable causes of wide disparity
- Lack of comparable sales data. If your home has an inground pool, and yours is one of the few in the community, there may be no sales with inground pools to compare.
- An error in judgment or calculation. Fewer comparables increase the chance error. Transposing mathematics increases the risk of calculation errors.
- Lack of preparer experience or education. Preparers may lack field experience or not well educated in the importance of quality work performing this exercise.
- Dishonesty or predisposition. An appraiser or a real estate agent can skew their opinion in either direction with their feature adjustments on comparable properties.
- Uncommon or distracting features. See the examples to follow.
Features more likely to encounter extensive differences
- Acreage or out-of-the-ordinary lot size. Acreage suggests rural property. Rural homes have fewer comparables to choose from and can incorporate distance, private sewer and water, fewer building restrictions, and extended dates of sale that can complicate reasoning.
- Homes with municipal sewer and water available, but not connected. Owner had choice and chose existing private well and septic
- Neighborhoods in early stages of transition. These are older neighborhoods where the city has grown past them. Identifying these areas is not difficult, but determining which way values are moving can be confusing.
- Busy streets are a challenge. In very popular street sections there may be a premium. In other parts of the same road, a variety of variables such as zoning, street access, and time-of-day volume can create feature adjustments.
- Poor construction or condition. Most sellers and real estate agent minimize the degree of poor condition on a data sheet. Making adjustments of this feature brings uncertainty.
- Over-investing. This feature adjustment can come in many varieties from additions to top-of-the-line appointments in a moderately valued home. It can be challenging to find a comparable sale to determine if and how severely the market punished the seller.
- Unusual Floor Plans. Homes are built and remodeled with unique floor plans for many reasons. The lack of comparable sales often requires a dependency upon reasoning over data.
- Adjacent Property. Many conditions in proximity to a home can have a direct effect on value, even when the condition is temporary. Sound, odors, visible intrusions and more can turn home buyers away. Prospective buyers can rightfully view vacant land as a threat. Some buyers will not perceive, notice, or care. Adjusting for conditions of this nature is difficult.
Ultimately, an agreement between the seller and the buyer determine the value of any given home. The unpredictability of the motives and conditions that sellers and buyers bring to the market is the one variable that can confound even the most skilled practitioners.
Richard Montgomery is the author of “House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Ask him questions at DearMonty.com.