Living Area At $20 A Sq Ft ?!

I am constantly amazed when reviewing appraisals, that some appraisers still go by "old school" rules of adjusting for square footage!  I probably spend most of my time writing commentary to the lender about why the value is over the market (or sometimes under the market) - specifically because the original appraiser employed very low square footage adjustments.

As a community of Realtors - what sells a home?   When one looks at the price per square foot in a sales price, what does that comprise?   
You know - land, home, amenities, etc.    And as Realtors - you list a home accordingly....per square foot in some cases, right?

Yet poorly trained appraisers are still running around Central Florida (and likely many other states) - adjusting comparable sales at $15, $20, $30 a square foot simply because, "that's what my mentor did and that's how they trained me!"

Yeah, I was one of those guys about 13 years ago.  I first got my experience under an appraiser who was licensed before education and testing were in place (he was "grandfathered in" so to say).  He taught me, "if it's really nice use $20/sf ; pretty good $15; just average $10 and really fair condition then $5".   

Yet luckily, a wonderful woman came into my life and reviewed one of my reports.  She is an SRA with the Appraisal Institute and has been in the business for more than 20 years.  She called me up one day, almost screaming at me for being an idiot!   And rather than bristle at her seemingly negative comments, I simply asked, "ok....how should I have adjusted this?"    I think she was caught off guard that someone actually WANTED to listen - and she began to instruct me in better methodolgy and the sheer logic of adjustments!   I am forever grateful to her and still to this day, covet her wisdome and experience! So perhaps I can pay it forward for appraisers out there who may run across this blog and still be using out dated methods of adjusting.   Let me give you an example.

I took a look at a community in Clermont, Florida called "Oak Valley".  It is a nice community of medium sized homes - generally ranch in style.  The lots are of average size for a planned unit subdivision, and most homes do not have views or extra features like lake or golf course frontage.  I took a slice of homes which sold throughout 2007 and I'd like to show specifically the impact of gross living area on a sale. First, let's look at 1,600 to 1,800 sf homes which sold in 2007.  None had pools, none had views, and all had fairly similar lots.  The only major exception to price here would be upgrades and appeal:

One thing I notice here, is that the average price per square foot is relatively close to one another for both market categories.  Within $1.86 per square foot to be exact.  So when a buyer is looking at the difference between a 1,600 sf home and an 1,800 sf home - are they willing to pay more for the larger home?  Absolutely as indicated above!  So the real question is.....how much does gross living area contribute to the sales price per square foot?   

While the answer to that question may be a matter of variation in different markets, here is one thing I can tell you.  Using a $20 per square foot adjustment against comparables in this neighborhood, is akin to saying that the gross living area contributes only 15-16% of the sales price.  Does that make sense? 

This trend is even more apparent in condominium projects where the sales price/sf represents no land - but rather a share common interest in the project.  In this case - when comparing to similar units, one has no adjustment for land and a great majority of the sales price per sq foot reflects the unit iteself...specifically gross living area.

Appraising is certainly an art as much as it is a science.  But the science part should follow some logical patterns!