How appraisers make adjustments

How much is a pool worth? What about a shop building? How about fill in the blank? 

I get these types of questions frequently.  So, lets dive in and understand how appraisers make adjustments for these types of amenities in an appraisal.

First, an adjustment in an appraisal is a change made to the sale price of a comparable property to account for differences between it and the subject property.  Since no two properties are exactly alike, adjustments are necessary to account for differences in factors such as size, condition, location, amenities, or market conditions.  The purpose of adjustments is to estimate what a buyer would likely pay for those differences, aligning the comparable property more closely with the subject property and leading to a more accurate estimate of the subject property's value.

So how do we make an adjustment for that pool or shop building?

Analyze paired sales: Appraisers compare two very similar properties where only one feature is different (e.g., one has a garage, the other doesn’t). The price difference between these two properties provides insight into how much the market values that feature.

Review historical sales data: This involves looking at multiple sales in the area and identifying how the market reacts to different property characteristics.

Consult cost data: For certain adjustments, such as condition or improvements, appraisers may refer to cost guides or local contractor estimates to determine how much it would cost to add or replace that feature. However, adjustments based on cost should still align with how the market values those improvements.

Cost less depreciation: This method of determining the value of a specific property feature starts by calculating its replacement cost and then subtracting depreciation. This approach is commonly used for items that lose value over time, such as building components (e.g., roofs, HVAC systems), or for older properties in general.

Market participant interviews: Appraisers engage in interviews with various market participants, including real estate agents, brokers, buyers, sellers, and fellow appraisers. These individuals can provide a wealth of knowledge about local market conditions and trends. By drawing on their direct experience with recent transactions, appraisers can gain a deeper understanding of how specific amenities, such as pools, updated kitchens, or energy-efficient systems, affected the sale prices of comparable properties. This firsthand information helps appraisers make more informed adjustments and ensures their valuations are aligned with current market preferences.

So what is the conclusion?  My favorite answer as an appraiser is "it depends".  

The contributory value of a pool would vary greatly depending on factors such as market segment, size, quality of materials (e.g. fiberglass, gunite, vinyl, etc), and overall condition.  Say that market interviews and historical observations in the market segment indicate anywhere from $10,000 to $50,000 for the contributory value of a pool.  If the pool in question is new, high quality, etc, one might conclude its contributory value would be at the top end of the range.  If the pool in question is old and in poor condition, one might conclude its contributory value is at the low end of the range or that it has no value.

It would be similar for a shop building.  Its contributory value would vary greatly depending on factors such as market segment, size, quality of materials and finish out (framing, insulation, side wall heights, plumbing and electrical fixtures, foundation, etc), and overall condition.  Say that market interviews and  historical observations in the market segment indicate anywhere from $10 to $60 per square foot for the contributory value of a shop.  If the shop in question is new, high quality, etc, one might conclude its contributory value would be at the top end of the range.  If the shop in question is old and in poor condition, one might conclude its contributory value is at the low end of the range or that it has no value.

Conclusion:  Adjustments should reflect market-based differences between the subject and comparables, supported by data rather than arbitrary numbers.  Properly applied adjustments lead to a well-supported, credible opinion of value.

As always, I’m here to help clarify any questions you may have. Feel free to reach out for further discussion.

-Brady