Atypical Improvements - will the Buyer Pay for Them?

Will a buyer pay for atypical improvements?  It's a question that you have to ask yourself if you are an appraiser working on a residential or a commercial appraisal assignment and you are considering the contributory value of features that are out of the ordinary.  Improvements like luxury office build-out in an industrial building or a massive heated swimming pool with a power cover, a waterfall and a spa.  Owners often provide extensive cost evidence when an appraiser starts an assignment on atypical improvements they usually expect to get compensated for them and they expect the appraiser to add value for the feature or features.   

The list of upgrades to some new homes can appear endless, but is $ 5,000 for brick veneer really going to mean anything to the average buyer in a subdivision in which no other property has a brick veneer?  Is a large wet-bar with a marble top and woodwork imported from Ireland going to be the type of improvement that the average buyer of an industrial property is going to be willing to pay for when the building is sold?

Appraisers have to put themselves in the shoes of a fictional but typical buyer and conclude how much more they would be willing to pay, if anything, for each significant typical or atypical feature or amenity.  If the improvements are "super adequate" then based on the appraisal definition they add no value.  The most probable buyer may however be willing to pay for all or part of some improvements.  It’s for the appraiser to decide how the market will react, negative, positive or neutral.

Appraisers must consider whether the "most probable price" of a property will be increased, decreased or not changed because a feature exists.  The standard for appraisers shouldn't be to ask themselves if there is one buyer in the market who will pay for a feature, that's not reasonable, the feature has to add value for most buyers or the most probable buyer.

So how do appraisers "imagine" what a buyer would pay for a feature?  How do they correctly adjust for any specific feature like a covered patio or a swimming pool?  Appraisers work with cost data, some on a daily basis, and many know without having to access a cost manual what an improvement like a covered patio, landscaping, a garage or a pool costs on a per square foot basis.  In most cases a feature or amenity is not adjusted for by a buyer on a dollar for dollar basis.  A buyer realizes that other buyers are willing to pay a premium for a pool, and some will even listen to cost evidence, but their offers don't often fully compensate an owner for the full cost of a feature.  They will usually pay only a portion of the cost to add an improvement.

There are paired sales programs available today that analyze sales information and conclude how much each amenity adds to value.  For example a swimming pool feature may on average cost $ 35,000 to install but it may be found via statistical analysis to contribute only $ 25,000 to a home’s market value.  What happened to the other $ 10,000 you may ask.  It's gone because it evaporated since there is an incurable functional loss associated with the improvement.

That's why most individuals don't run out and pay a lot of money to improve their homes just before they put them on the market.  Sure there are some affordable things that owners can do to make a property more appealing, like painting it or staging it for sale, but generally putting in a swimming pool or adding a bedroom is a bad idea unless you want to lose money.

Paired sales analyses can give appraisers a statistical basis for their adjustments but the say $ 25,000 adjustment indicated for an in ground swimming pool that may be concluded via a paired sales analysis, doesn't work for every pool adjustment that an appraiser makes.  When an appraiser runs across a heated pool with a motorized cover, a spa, slides and a waterfall he or she has to consider what portion of what was paid for the additional / atypical improvements will reasonably be recoverable.  Paired sales provide can provide a range or an indication of the appropriate adjustment for a feature but an appraiser must make the final decision regarding what is appropriate especially when custom improvements have been made.

So it's my opinion that there is no standard percentage of cost or percentage of value that can be applied to a feature or amenity.  Pools may be pools but if you have seen many of them you realize that there is a range, some pools are basic and add little value to a home while others are large and constructed with mosaic tiles, spas, waterfalls and heaters.  There will be some improvements that are super adequate and thus add no value while others will return some percentage of their costs and in some situations a feature or amenity that is sought after may even add more to a property's value than its cost. 

For more appraisal information contact Glenn Rigdon, MA, MRICS, ASA a Las Vegas / Henderson Nevada appraiser via email at grigdon@cox.net or via his business website Horizon Village Appraisal (http://www.horizonvillageappraisal.com), or you can also click on “Contact Us” on the home page of this website.

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