Let’s Get Rigorous: Hard to Value Houses

Agents are not appraisers and that, generally speaking, is a very good thing. Knowing the degree of emotion that buyers and sellers invest in the real estate process, it would be a disaster for agents to communicate with them using the “nuts and bolts” vocabulary so common to the world of appraisals. However, there is one area that agents could use a little more rigor - maybe even to borrow a page from the appraiser’s playbook.

The Intangibles

This area is a group of property attributes that I call “the intangibles” and they are some of most subtle and elusive property features to assign market value to.  

Specifically the intangibles include:

  • Setting or Approach  - the drama of how a dwelling/building sits on its land
  • Position - the convenience, light or quiet a dwelling enjoys relative to its neighbors
  • Views - as seen from the dwelling
  • Subdivision or Investment Potential - the likelihood of reselling for more in the future

I don't know whether my labeling them as “the intangibles” is conventional or unconventional in the eyes of appraisers but it always works for me.  It makes for practical conversations in an otherwise grey area.

Ironically, agents are in a better position than any other party to put a value on the intangibles - much better than appraisers.  Agents have the experience of observing the immediate reactions of hundreds of prospective buyers to thousands of candidate properties - each at a unique price point.

Because agents have this real and rich feedback loop that no appraiser (nor any automated valuation model) does, the potential is there but to tap this potential agents must ask themselves questions that are systematic and specific. We will run through three cases that agents should consider when confronted with the tricky business of valuing the intangibles.

Let’s take it in pieces...

1. Isolate the Attribute & Consider the “All Else Being Equal” House

In the real world there is lots of noise surrounding any valuation. There are the questions of condition, quality of kitchen/baths, how well a house will show - all the usual considerations.  There can be nervous sellers, anxious buyers or expectant attorneys/accountants that are part of the process. (See Real Estate Physics post.)  Apart from all of those concerns, the first step is drill down on just one intangible at a time.   

In the example below the two condos are in the same building and should be of equal value when intangibles are not factored-in.  So the intangibles are key.  First, decide if your intangible adds value (like a lovely mountain view- See image) or detracts from value (like a position where the headlights of passing cars shine through living room windows - See image).

Views: Condos on the left enjoy mountain views

Position: Condos on the right deal with headlights.

Now think about an “all else being equal” unit, which is an OTHERWISE IDENTICAL condo without that attribute - no mountain views, no headlights. That “all else being equal” house may not exist, but it doesn’t matter!   

"appraisers have no such option in their tool kit!"

Now think about how much extra a real buyer would pay over the “all else equal” unit to own this view?  (Approximately +$15,000 in my area.) Or how much discount would a real buyer need off of the “all else equal” unit to accept our unit with its exposure to headlights?  (Approximately -$6,000 in my area.)  It helps to think of specific past clients and how they would respond if presented with these very real choices.  And revel in the fact that appraisers have no such option in their tool kit!

The valuation of the “all else equal” property is quite easy and now so are the adjustments for the discounts or premiums you isolated for the intangibles.  The mountain view unit should sell for approximately $21,000 more than the headlight unit.

2. Comparing Groupings of Intangibles

The Pond House: An approach worth buying?

The Pond House: An approach worth buying?

The Mountain House: A view you want to own?

The Mountain House: A view you want to own?

We know that prospective buyers are constantly “comparison shopping” the pool of available  houses.  Whether we are acting as seller agent or buyer agent, we need to be able to speak smartly about the value of a listing in comparison to current competitive listings.  

Dramatic Approach v. Dramatic View

A real world case is when a buyer or seller calls your attention to two listings that you might not consider competitive.  I might find it difficult to compare a colonial with a dramatic approach across manicured meadows with a pond to a mountain-top contemporary with top-of-the-world views but that doesn’t stop a client from asking the question!  Note two very different combinations of settings, approaches and views: 

Intangible: A Dramatic Manicured Approach

Intangible: A Dramatic Manicured Approach

Intangible: The View of a Mountain-top Kingdom

Intangible: The View of a Mountain-top Kingdom

Kitchen v. Kitchen

On the other hand, it’s relatively easy for me to strip away the intangibles (approach and view) and simply compare these two houses on a kitchen-to-kitchen and baths-to-baths basis.   Then I can use the idea from Case 1 to value each intangible and factor them in at the very end of a comparison. While these settings are very different, the property offerings and the value they represent can be compared.

Pond House Kitchen

Pond House Kitchen

Mountain House Kitchen

Mountain House Kitchen

It may not tell which house is better for any given buyer but at very least, this will tell you which house is at a more realistic asking price!

3. The 50% Value Rule

Pricing some intangibles is closer in nature to adding a garage onto a house than they are to the examples in Cases 1 and 2, above.  Think of it this way - if it costs $30,000 to add a garage to a house, it doesn’t meant that a house with a garage is automatically worth $30,000 more than a similar house without one.  I usually see that the garage will deliver a value of about 50-60% of its cost to build.  

"it bumps market value by only 50% of that net profit"

It’s roughly the same with things like subdivision potential or short-term investment potential.  

Take subdivision - there are costs for  surveyors, attorneys, zoning boards and perhaps actual excavation work.  If you think that investment could yield $75,000 after expenses - you will likely find that it bumps current market value by only 50% of that net profit - about $37,000 to 40,000.  because buyers will need to be rewarded to the risk and hassles of taking on the subdivision project.

In a similar example, let's think about a house in an area where values are rising quickly and there is a near-certainty that a buyer would realize a $60,000 clear profit by holding this house for 1 to 1.5 years.  Using "all else being equal" properties - from neighborhoods that aren't "red hot" - will give you the base value of the property  but it will not capture the investment potential intangible.  Like the subdivision example, there is a strong likelihood that the seller can capture only about $30,000 of the expected $60,000 gain as a bump in their current market value.

It’s a lot like pricing "good will" when buying a business!

Buyers will not reward sellers with the whole value of the intangible the seller is portraying for subdivision or short-term investment - much like a business would never pay dollar-for-dollar for the profit they expect to get out of a company they acquire.  

So there you have it.  Pricing the intangibles will never be perfect but bringing some rigor to the process is a whole lot better than free-wheeling it!