A discussion among Portland appraisers occurred recently. The debate centered on whether one of those large
and exclusive infill Portland homes constructed among older and smaller homes, should
be considered as an over improvement. This
stems from the appraisal principle
of conformity which holds that value is maximized when
I hold that (speaking in general without regard to a specific
house), “It might not be an over-improvement, just because the home is larger
and does not conform.” Another appraiser
posits, “If there are no other homes that large, then it is an over-improvement
period.” I said, “Maybe it is, but maybe
not. What if the large home is the first
of a new trend in buyer demands? A new
trend is much more difficult to prove, but appraisers cannot just rule it out
based on it being the first big house in an area.”
An over-improvement (otherwise known as a superadequacy), is
obsolescence or loss in value as a result of being larger or having more
amenities than the ideal improvement. An
ideal improvement is a home (or other legal structure) at its “highest
and best use” that maximizes the value returned to the
land. In other words, the ideal
improvement is the house or building that would be most profitable to build if
the land was vacant.
My thinking is that when older homes are replaced or
infilled with newer larger homes, often it is because the ideal improvement (or
highest and best use) has shifted to meet the demand of the times. This is particularly true if the big new home
is a speculation home (spec home) and not a custom build. Click
for a blog post that explains how spec home builders and developers are
particularly in tune to which home will bring the most profit.
Today, buyers of close-in Portland homes can afford and are
willing to pay for much larger homes than when many of the original early 1900s
homes of those neighborhoods were first built.
I concede that sometimes (particularly with custom builds) the home
built is in fact an over improvement. But
if the house is being built to sell after construction, builders and developers
have usually done their homework and are trying to maximize profits for the lot
they are developing.
Here are some ways an appraiser might be able to determine
if the subject is an over improvement when a big new home is the first of its
this property is an arm’s length new purchase, the appraiser could subtract the
estimated replacement cost from the contract price to see if the remainder is
equal to or greater than the estimated land value, plus site improvements. If so, then the current contract suggests
that for at least one buyer, the subject is not an over improvement. One pending offer does not represent an
entire market; it is just evidence.
Therefore, the appraiser’s job of supporting a conclusion would not be finished.
appraiser could look to other similar neighborhoods to see if there are sales
of other similar large homes starting to infill, then do the math to see if
those homes are over improvements or not.
If there is sufficient evidence to show that trends in one neighborhood
connect to the subject neighborhood, then that would provide additional
evidence for the appraiser’s conclusion.
appraiser could interview developers and ask about trends. If experts are saying that trends are headed
toward larger homes, then that could be used by the appraiser as anecdotal evidence
of the conclusion.
4. The appraiser
could study the trends in relationship between land values and home value of
newer homes within similar market areas (or neighborhoods) to see where the
subject falls on the spectrum. If the
subject is outside the typical ratio of new homes, then this could be evidence
of an issue with over improvement.
5. If the
property would likely be used for income, the appraiser could compare its value
from estimated rent income with its estimated replacement cost and land value. If rental income supports the construction
costs, that would be evidence that the subject is not an over improvement.
My point is that things in appraisal are not always as simple
as they seem. High stakes are riding on
appraiser opinions, therefore appraisers need to perform due diligence and
always test their own perceptions or gut feelings with actual data. We owe it to our clients.
Did I leave anything out or do you want to join in the
conversation? Let me know in the
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