For luxury homes, the variables can be daunting. The more complex the property features and amenities, the fewer the number of acceptable comps. To complicate matters, most lenders require at least three sales (comps), not older than six months, be included in the report, but that’s sometimes easier said than done. What about a luxury home that’s 20,000 square feet, or the subject property is a condo unit on the top floor of a L.A. high rise, or the home is six stories tall, or the property is overlooking downtown Phoenix?
Once the appraiser has inspected the property, drawn the floor plan, calculated the square footage and established condition, the next step is finding comps. Based on experience and having completed hundreds or thousands of appraisals, the appraiser can identify the highest valued features of the property. Views, pools, decks, home theatres, energy efficiency, location, proximity to shopping are all important components, but appraisers must also look at construction quality, the quality of appliances and all the interior features that will influence value. Then there’s the perception of value placed on features homeowners ask the appraiser to include with the valuation, features the appraiser may or may not want to include.
Once the list of features is assembled, the difficult task of finding comps begins. Generally speaking, appraisers try to stay within the “not older than six months” rule, but that’s not always possible. When comps are sparse, the next best option is the Cost Approach.
Using tools like the Marshall and Swift Residential Cost Handbook or the National Building Cost Manual, appraisers can use various on-line data tools to determine the replacement cost of the improvements and all the features/amenities. The problem is that the Cost Approach might not work well to estimate the value of a large custom luxury home since most construction cost manuals focus on “replacement cost”, not “reproduction cost”, which produce two very different valuations. Lenders rely on the experience and knowledge of the appraiser to provide the best possible value estimate, but appraisers also look to the market knowledge of the listing and selling agents, who can provide keen insights that impact the final value estimate, especially agents that specialize in these markets.
In the end, appraisers must weigh each of the three approaches to estimate value. This comes from years of experience and appraising thousands of homes. The appraisal process is both a science and an art, and there’s a reason the conclusion is stated as a “Final Value Estimate”. On any given day, an appraiser might have so much information that she can remain very scientific with her final valuation. The very next day, comparables might be sparse, driving the appraiser to rely more heavily on the Income and/or Cost Approach to value.