- The Washington Times - Wednesday, November 17, 2004

When you own the Victorian mansion in a neighborhood of ramblers, how do you determine the value of your home? Or if you want to buy that charming Cape Cod cottage in a community filled with imposing brick Colonial-style homes, how do you decide if the owner is asking the right price?

The most common method of determining the value of a home is to look at three to five homes of similar size and condition in the same neighborhood, then raise or lower the value based on the home’s particular quality.

Appraisers and Realtors have struggled with appropriately valuing properties throughout their careers, and the fast-paced Washington-area real estate market of recent years has only exacerbated the problem.

When cookie-cutter homes placed in standard subdivisions have wildly different sales prices — even if they have been sold only a few months apart — the job of appraisers to accurately set a value on an unusual home becomes as difficult as speculating on a horse race.

“Appraisal is more of an art than a science,” says Lewis Watson, owner of Lewis Watson and Associates in Falls Church. “It’s probably even more difficult in this market, when there are so many irrational buyers. It makes it difficult for everyone when the values don’t line up the way they should. The secret to determining the value of a home is just to use more and more comparables.”

For many homes, particularly in the city and in close-in suburbs where homes have been renovated and expanded or even torn down and replaced, it can be nearly impossible to find a nearby home with similar characteristics.

“It happens all the time that I get a listing with no apparent comparables,” says Realtor Nancy Taylor Bubes with Coldwell Banker in Washington. “If there are no good comps, I just call it from my gut. I often visualize the potential buyer first and think about where else they might be looking for a home, then cross into that neighborhood to estimate the value of a house in another part of town.”

“You can figure out the listing price based on other homes in other neighborhoods, then weigh out whether the price should be higher or lower because of the location,” she says.

Mrs. Taylor Bubes likes to call these unusual homes “orphans” because they don’t seem related to any other homes in their neighborhood.

“Sometimes a really great house is sitting around really pedestrian homes, so I will visualize what this home would list for in another neighborhood, then maybe discount that price a little because of the location,” Mrs. Taylor Bubes says.

“Custom homes can be a double-edged sword,” she says. “Unless they are very neutral and not too decorated or overfinished, it can be hard to know where to begin to set the list price. Sometimes people cannot recapture the money they have spent on a house for remodeling and decorating, but they want to take that spending into consideration when deciding on a listing price.”

Realtors and appraisers communicate with each other about how they value a home, and often, Realtors are asked to explain to an appraiser why they priced a home at a certain level, pointing to the different comparables they chose for their estimation of a sales price.

“When you are dealing with a home that has been sold, you can ask the Realtor how they arrived at their price for the house,” Mr. Watson says. “But the problem is that a lot of the time, houses are selling for over the list price.”

“How you weigh the actual list price and the sold price depends a lot on your experience with a particular area,” he says. “You can never have too much information to help you make a decision on what a property is worth.”

The time-honored real estate mantra “location, location, location” does have a great deal of influence for appraisers as a place to begin determining property value.

“Location means a lot when you are looking at the value of a home,” says Anthony Forte, owner and president of Forte Appraisal Service in Herndon.

“We try to stay within the same market area when we are looking at homes because they share the same proximity to things like commuter routes, shopping and health care facilities,” he says.

“But when you look at neighborhoods like Falls Church or Arlington, where improvements have changed a lot of the homes dramatically, it can be really difficult to find good comparables,” he says.

Appraisers start with the basics, attempting to compare homes with a similar number of bedrooms and baths, about the same amount of finished square feet and about the same age.

“When you have a neighborhood with a wide variety of styles, such as Colonial, Cape Cod and Victorian, it’s best to match up the most important factors first,” Mr. Forte says. “Location is the most important variable, and then the number of bedrooms and baths, and then the size.”

“We’ll sacrifice finding a similar style to meet these other needs first,” he says.

Mr. Forte explains that the Federal Home Loan Mortgage Corp. (Freddie Mac) and Fannie Mae set standards for appraisers, but when an unusual home needs to be valued, the standards are expanded.

“We can search for up to a mile for comparable homes which have sold within the past year for a unique home, when usually, we have to stick with only six months of sales,” Mr. Forte says.

“Under certain circumstances, Freddie Mac and Fannie Mae will allow more time and a larger area, but we will look at other neighborhoods only after exhausting the neighborhood where the home is located,” he says.

“We use the principal of substitution, so that if you saw a home in one area you can look for the next best thing in another area, which represents a similar level of improvement,” Mr. Forte says.

When Mr. Watson must appraise an unusual home, he opts for using a high number of properties as comparables.

“I just use more and more comparables; for instance, first comparing a small house versus a small house to make the location adjustment, then a large house to a large house to make the house adjustment,” Mr. Watson says. “It’s not impossible to come up with a realistic value for a home, just more and more complicated.”

Mr. Watson recommends using more comparables when there is some doubt about the value of a home, but he warns that you can go too far out of the neighborhood.

“For instance, if you are appraising a home in the city of Falls Church, you really cannot look at homes outside of the city limits because there are certain benefits to being in that location that you won’t find in other areas,” Mr. Watson says. “The schools and the local government services are different within the city than in nearby communities.”

In addition to the comparables approach to property appraisal, there are two alternate methods available to appraisers. Neither, however, provides much accuracy when valuing older homes.

“The cost approach works very well with new-home construction, because you know the recent cost of the site and the improvement to the site,” Mr. Forte says. “You don’t need to look at the depreciation of the property because there isn’t any depreciation yet.

“With an older home,” he says, “you need to estimate the depreciation of the house based on a visual inspection of the property, which is really a judgment call by the appraiser. It can be very subjective, especially for homes which are 25 or more years old.”

Mr. Watson says: “If you’re attempting to use the cost approach, you start with the current value of a buildable lot in that community, which in the city of Falls Church right now would be about $350,000 to $700,000. An average-size lot in Falls Church would probably run about $400,000.

“But this doesn’t help a lot with deciding on the value of an older house, because some buyers will be looking to replace the house completely,” he says. “It makes more sense to go outside the neighborhood for comparables and then make a location adjustment.”

The income approach to appraisals, primarily used in commercial real estate, depends on evaluating the potential rental income of a property. Because the majority of homes are owner-occupied, it is rare to find enough data for comparisons, Mr. Forte says.

“The only time the income approach can be used for residential appraisals is when there is an area with a lot of absentee owners or investors, such as a condominium, so that a lot of comparison data would be available,” Mr. Forte says.

In a twist on the conventional wisdom that warns “buyer beware,” Mrs. Taylor Bubes suggests that “sellers beware.”

“If you’re selling a house today, you need to look at it through the eyes of a buyer,” she says. “You can almost just ask a buyer who’s been looking for a home for six months to determine the price of the house.

“Sometimes I choose to pre-show a place to a few buyers to sort of float the idea of a price and get their ideas about what the house is worth,” she says. “Sometimes these educated buyers are better at pricing the home than other Realtors.”

Determining the value of a home in today’s volatile real estate market can be challenging for the experts, so sellers and buyers should probably leave the estimation of property worth to appraisers and Realtors with plenty of experience.

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