On a daily basis, that isn’t really that big of a deal. When it comes down to selling a home or getting a loan to purchase or refinance a property, however, it can be a substantial concern. That’s especially true in today’s market, where limited sales have further reduced the number of comparable sales, making air-tight appraisals difficult and loans even more problematic.
“In this market, it has created problems because there really is not a foundation for higher-end property appraisals,” said George Berg, managing partner in the Boulder law firm Berg, Hill Greenleaf & Ruscitti. His firm often represents clients in multi-million-dollar real-estate transactions, including homes worth $4 million and up.
Finding similar comparable sales always is challenging for the extremely high end of the home market, but the market situation of the past five years has made it even more difficult, Berg said. While at least a few of these properties would come onto the market each year through normal attrition, nearly everyone who can hold onto a property has done so, hoping the value would rebound.
“Of course, you want to get the loan-to-value ratio less than 75 percent to where you can get the best interest rates,” Berg said. “If I’m helping someone close a big real-estate deal, I’m working to substantiate that value in any fashion I can.”
Using the Multiple Listing Service, expanding sales comparisons both in geography and value is one of the ways to substantiate a real-estate value without a very direct comparison, Berg said – but so is figuring replacement costs, essentially estimating what it would take to build a similar home today.
For Boulder-based Johnson Appraisals Inc. owner Joe Johnson, a 42-year veteran of the appraisal business, it is all part of a complicated process that is necessitated by any home worth in excess of $3 million or $4 million. However, Johnson said, these high-end properties always have been a challenge, regardless of the market conditions.
“Once you get to homes worth in excess of $5 (million) to $7 million, you have to realize that you really aren’t going to have any direct comps (comparisons),” Johnson said. Normally, an appraiser has to start with nearby home sales of substantially less – say, in the $2 million to $4 million range – but that will only be the beginning of a very tedious process in establishing a good loan value, including looking far and wide for sales of homes of comparable price.
Depending upon the loan company, an appraisal document for a home worth more than $4 million will start at 20 pages and may even run to 70 or 80 pages, depending on the appraiser and the loan company to be appeased. The process can take several weeks, Johnson said, and can get quite pricey.
“The real problem is these multi-million-dollar houses are so unique, and each of those faucets that make it unique has to be examined,” Johnson said. “For instance, one home might have a super-large pool, or another might have more square footage, but that’s just where it begins.
“Everything about the finishes in these homes is going to be unique, because that’s what their owner wants – to stand out,” Johnson said. “The real test of a good appraiser is to know which of those finishes really adds to the value of the home.”
Finishes are a huge part of the value of these homes, such as marble countertops and expensively tiled floors. However, Johnson said those finishes, even when they are extremely expensive, may be the first thing to go when the new homeowner remodels.
“They all are going to extensively remodel that home, to the extent where they may be ripping out that Italian marble,” he said. “Most of these homeowners are going to spend about $400,000 to $500,000 remodeling that home to fit their own idea about what it should be.”
Berg said the public record also can be a likely place to establish the value of a high-end property, essentially taking the last purchase price and adding the value of finishes and remodeling. Building-permit fees are based on the cost of the work, so that can be a starting point, but those costs may have gone up considerably since the remodel was completed.
In both the city and county of Boulder, for instance, creating a home with a large square footage would entail greater work in energy efficiency and offsets today, compared with four of five years ago. But Berg said that looking at a wider spectrum of higher-priced homes and looking at what remodels did to the sales prices of those homes is an often-overlooked tactic.
To get those numbers, he said, appraisals have to take into account what the building permit fees were for the additions or remodels.
“You have to be creative about what the public record represents,” Berg said. “You really need someone who knows their way around the courthouse.”