Industries provide more information to assess their products than potential home buyers have at their disposal. It is crazy if you think that most people’s largest investment is their house. It’s not just the mortgage system that needs help, but the appraisals that mortgages are based on that need fixing. If we had a better system of assessing the value of a house and the property it sits on independent of one another, the real estate bubbles we witnessed would not be so inflated. Our current system needs better metrics to define value.
The Appraisal System
An appraisal system that separates land and house would allow the fluctuations of neighborhood appreciation (or decay) while keeping the value of the structure on it comparable to like structures. Three houses of same design built in three different neighborhoods should be the same value. However, the neighborhood location should be the variable of the assessed value. The house assessment should be tied to quality of construction, energy performance, and intangibles; my term for luxury or custom designed items such as upgraded aluminum clad windows, interior finishes, pools, additional living spaces, etc.
Appraisals for Green Homes
The building code is a minimum standard of construction quality. It sets basic metrics that are reviewed and revised every three years. All spec houses would qualify, but they would have to do more to increase their value. We already have regional and national standards in place for Green or Energy Efficient Design to be recognized for additional credit beyond the basis. If a house has been certified for meeting a green standard, it should receive additional credit based on the accreditation level it received.
Appraisals for Custom Homes
Custom or luxury homes will require another basis since they are usually larger, but not always. Appraisals should take into account the investment of fit and finish. It should allow for “intangibles”, added investments such as pools, wine cellars, home theaters, masonry fireplaces, home automated systems, etc. Currently, these items do not recieve much if any credit. Perhaps, credit would be given for being custom designed. If a LEED project is given credit for having a LEED AP, is it so wrong to give credit for a home designed by a registered professional?
The goal is to put in place real metrics, like exceeding code compliance and being certified energy efficient as performance criteria, while acknowledging other intangibles like “luxury” and “custom” home classifications as additional upgrades for assessment. This is no different than how the automotive industry has established the value of their products.
The Automobile Industry
There are different size automobiles based on occupancy, but after that the evaluation is based on performance and luxury. A family sedan can be a Mercedes C class, a Toyota Prius, a Ford Taurus or a Honda Accord; each has 4 tires, 4 doors, seats 4 and gets you there, but the prices vary. However, a 4 bedroom family home could be a code compliant spec house, a green certified house, a semi-custom spec house with finish upgrades, or a custom designed home. Yet, if all were built on the same street, their respective costs would not reflect in their respective assessed values under the current situation. This needs to change, otherwise we are doomed to repeat the current situation.
If a revised system was put in place, the value of energy efficient and well designed homes would increase. Thus, it would promote better built and designed homes. The metrics needed for comparison exist and would not take much effort to incorporate into a fair appraisal system. The current system is controlled by a financial industry with little, if any, education in the field of architecture and construction. Why not look to those industries to revise the system? Not only should the appraisal system be revised, but the education of the appraisers and the bankers should follow. But that’s another story.