THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Saturday, December 31, 1994 TAG: 9412290289
SECTION: REAL ESTATE WEEKLY PAGE: 10 EDITION: FINAL
COLUMN: What It's Worth?
SOURCE: Thomas Tye
LENGTH: Medium: 83 lines
I will never move again and am going to build a house large enough for my entire family to stay overnight during the holidays.
I have been advised to be careful not to overbuild. How do I know if I am overbuilding?
You gave no indication of the price range or the area where you plan to build, so the answer will be general in nature rather than specific.
You obviously do not want to spend $500,000 on a house where the typical house sells for about $100,000. This would be a gross over-improvement and would likely allow you, or your estate, to collect only a fraction of the cost when the house is eventually sold.
If you build within the general price range for the neighborhood you will be safe, and not overbuilt. This is a good rule to follow: When determining the general range of prices, eliminate any extremes, such as houses which represent major over- or under-improvements for the subdivision.
If, however, you are building an expensive custom home, and can afford a waterfront location, you can look solely at the other waterfront properties to determine the general price range.
There are several subdivisions in Virginia Beach that have $1 million-plus homes directly across from $350,000 properties. Neither represent an over- or under-improvement since there is a major difference in land values and both properties are equally accepted by buyers.
If you are not in the position to build in one of these exclusive areas, you must stay within the general price patterns for the subdivision or you will risk having an over improvement.
You should also consider having a professional look at your plans. Adding a large number of bedrooms, dormitory style, will not appeal to many buyers even if you are within the range of prices for the immediate area.
The house should be well balanced, and not built solely for the few days each year when the bedrooms will be occupied. Appraisal nitty-gritty
How will the value of my home be determined when it is appraised?
The appraisal process for single-family houses typically involves two approaches or methods. The cost approach to value and the market approach to value.
The cost approach adds the components of the property, including the land and the construction costs, and takes into consideration the age and condition of the house with a deduction for depreciation. This is a relatively simple process but it does not address the major issue, what people are paying for similar properties in the area.
The market approach to value is the primary tool used to appraise single-family residences. In the market approach the appraiser will examine the subdivision and find those properties which are the most similar to yours which have sold recently. An assumption is made that if your property was offered for sale you would likely obtain a price comparable to your neighbor's house.
The reason for using sales, rather than listings, is that actual closed sales indicate what a willing buyer would pay a willing seller for a similar property. The actual sales price can, at times, be very different from the possible wishful thinking represented by a sellers asking price.
Through a series of adjustments which must be made for major differences between your property and the ones that sold recently, the appraiser can find a range of possible values for your house. Once a general range is established, a reconciliation process takes place which results in a single point value for your home.
The reconciliation process weighs the reliability of the sales and usually considers the most reliable sales to be those which are the most similar to the property being valued.
This is called a supported estimate of market value. It is supported because there are sales which show that similar houses have in fact sold for these prices. It is, however, an estimate in that the value is not a fact to be found but rather someone's opinion based on the data. This will be the primary process which will be used when valuing your home. MEMO: Thomas Tye is a Member of the Appraisal Institute and is a Senior
Residential Appraiser. He has evaluated commercial and residential
property in Hampton Roads for more than 15 years. Send comments and
questions to him at Real Estate Weekly, 150 W. Brambleton Ave., Norfolk,
Va. 23510. by CNB