RE Value Blog

Price per Square Foot of Livable Area
September 13th, 2016 6:57 PM

Arriving At Price Per Square Foot Adjustments 

How does an Appraiser arrive at the Price Per Square Foot of Livable Area to be utilized in adjustments made in a real estate appraisal report? Good question. First of all, there is no predetermined formula that can be broadly applied. The value is extracted from the market based on similar sales. When preparing an appraisal report, the price per square foot for each individual sale is available based on the sales price divided by the gross living area. The gross living area does not include basements, including walkout basements, garage space, enclosed porches, pool houses or other sources of square footage which do not fit the definition of livable area. No areas of the dwelling below grade, or not contiguous to the main area of the dwelling, are included. 

ANSI standards state Gross Living Area to be β€œan enclosed area in a house suitable for year-round use, embodying walls, floors, and ceilings that are similar to the rest of the house.” 

Upon selection of the comparable sales determined to be recent and the most similar to that of the subject, the numbers derived could be reflected in the following data;

The price per square foot reflected in the data above includes the land/site and all improvements. The improvements would be comprised of the livable area, the basement, garage and, any other amenities which could contribute to value, for example, deck, porch, patio, pool, fireplace or central air conditioning. 

The next step in the process is to determine the valuation of the land, which is done either based on similar vacant land sales, sales of properties whereby the improvements have been destroyed to make way for new construction less the cost of removal, or via extraction, based on other sources of site valuation including but not limited to tax assessors records. It is important to note that site valuation can be based on various factors, including price per front foot or depth, price per square foot, price per acre, with time proven methods of determination applied, such as the Hoffman-Davies Rule or the 4-3-2-1 Rule. Site values are influenced by externalities, beneficial or adverse, for example, busy street, dead end street, desirable or undesirable adjacencies, views etc.. These must also be considered if applicable with regards to site valuation.  

As a result of the extraction of the site values and their being applied to the comparable sales selected, a Net Value for ALL improvements can be arrived at. 

Based on a market analysis of more than just the three comparable sales utilized, it was determined that for similar sales, after site improvement cost, depreciation of improvements, contributory value of basement (finished,part finished,unfinished) and amenities typical to the subject market area for similar homes, 72% of the improvement value was determined based on average, with 68% based on median, to be Attributable to the Livable Area. As a result of the analysis, 70% of the gross value of the improvements was determined to be the percentage utilized to determine the supportable price per square foot for adjustments of livable area. 

The result of the Overall Improvement Value X the Percentage of Improvements Attributed to the Livable Area  resulted  in a Price Per Square Foot of $ 90  (rounded).
This value is supportable and not randomly selected. While the determination can be time consuming, it is the responsibility of those determining Market Valuations to adhere to this method, or a similar valid method of extraction, to arrive at supportable adjusted sales prices for comparable sales utilized in an appraisal report.

While the range of value of the comparable sales utilized was found to be 12%, with the range of livable area of those sales utilized being 18%, the applicable percentage adjustment, based on valuation of livable area based on market extraction was found to be an average of 2.12% with a median of 2.14%. This is an indication that the comparable sales utilized were truly similar. These adjustments would be considered line adjustments, included in the net and gross adjustments for each comparable sale utilized. The Lower the Net and Gross adjustments, resulting from the application of market extracted adjustments on a per factor basis, result in the most supportable Conclusion of Value determined in a Real Estate Appraisal. 




Posted in:General
Posted by Joseph J Randazzo, SCRREA on September 13th, 2016 6:57 PMPost a Comment

Subscribe to this blog