Appraise This!
Home systems are adding value to new residential construction, but appraisals are still catching up.
Source: DIGITAL HOME Online
Publication date: 2008-12-08
By Dan Daley Peter Fulmer runs his own real estate appraisal company in Edmond, Okla. Until fairly recently, the features and amenities in most of the homes he appraised were relatively familiar-pools, outbuildings, marble countertops, and pea gravel driveways. This made comparative analysis a fairly straightforward proposition. However, over the last few years he's been confronted by subtle yet significant challenges in accurately determining a home's worth. They center on home technology.
A recent appraisal Fulmer handled underscores this new wrinkle. Here's the scenario:
A 5,000-square-foot home going up in a neighborhood with similarly sized homes has structured wiring, a dedicated home theater with in-wall speakers, a whole-house audio system and Internet-connected home automation. The nearby homes that he'll use as comps to compare values based on recent sales have standard twisted-pair copper wiring and perhaps some retrofitted home theaters. The challenge: How much more do the integrated technology systems add to the appraised value of the new home? Or do they even add any at all?
As digital homes rise in popularity, many builders and new home buyers trust in their minds that technology amenities add value. But ultimately it's appraiser like Fulmer who have a lot to say about that. And even they don't always know the answers.
"It's hard to know, and there are few or no standards in the market to help us make those determinations easily," says Fulmer, a tech-savvy 30-something. "I understand the costs associated with putting the technology into the house because I'm familiar with the technologies being used. But that's not enough - you have to try to determine the actual value of the overall house to someone for whom these technological amenities may not mean much. This is an issue that's going to become bigger and bigger as technology gets used more and more to differentiate homes."
Increased Scrutiny
In the wake of a decade of easy-money lending practices and drive-by mortgage appraisals, lenders' underwriters-who may or may not know what whole-house audio is-are intensifying the scrutiny to which they subject valuations. That makes it difficult for the appraiser who report to them validate and defend valuations of home features that may have few reference points in a given neighborhood.
Fulmer says the protocol has been to review invoices and other cost proofs provided by the builder, then compare similar houses with and without similar technology complements, which can be a cumbersome process. "But at least it gives us a starting place," he says.
IRR-Residential is a national home appraisal franchiser based in Chicago, with 47 franchises in 23 states. Thomas Munizzo, chief appraiser and compliance officer for the company, says his polling finds that builders are assigning average values of between $35,000 and $50,000 to home theaters in new homes priced at $1 million-plus.
However, <i>appraisers</i> are assessing the technologies' added value at between $15,000 and $20,000, in part because of the faster depreciation cycle of consumer electronics.
"But we're also finding that homes that have those technology features are selling faster than homes that don't," he says, and that builders can generally count on getting at least the appraised value of the technology back from the sale price. "At that price level, you have to have the technology to sell the house, but appraisers do recognize its value."
But there's more to it than simple number crunching.
"Appraisals have to reflect the attitudes and preferences of the buyers in the area," explains Tony Iaccio, a certified appraiser and a partner in the appraisal firm Blake &Iaccio LLC in New York City, who describes an interesting phenomenon.
"Appraisers are constantly checking their markets to see what buyers want in a home. If no one is mentioning structured wiring or whole-house audio, it's going to be off the appraisers' radar, too," Iaccio says. "So even if a new house has a lot of new technologies, they may be worth less than their costs if the local buyers don't recognize them as valuable in their lives."
On the other hand, if the appraiser's research indicates that builders of comparable new homes in an area are getting their investments back from the integrated home systems, the trend can be reversed and the technology can enhance the valuation of a house.
The Builder and the Appraiser
Often, there is a disconnect between builder and appraiser over home technology. Builders who have been successful using technology to differentiate and sell houses can be frustrated with appraisals that don't fully take into account long-term benefits, such as LEED certification through systems like smart meters and photo-sensitive automatic shades.
"Some builders may have a lot of success putting in systems like these, but at the end of the day the proof [of their value] has to come from the marketplace," says Sara Schwartzentraub, a certified appraiser and co-owner of Interstate Appraisal Service in La Mesa, Calif., who notes that builders will sometimes pressure appraisers to make estimates reflect the valuation of the systems based solely on their costs.
"But if the systems cost $50,000 to put in, but area comps show that they're only getting $25,000 out of them, then you have to go with the marketplace," Schwartzentraub says. "The real problem comes when it's the first house in an area to have a lot of technology built into it and you have little to compare it to."
Schwartzentraub and other appraisers say that builders can help them by providing documentation that goes beyond initial product and installation costs, for instance projections of how green technologies not only reduce direct energy costs but also decrease long-term operating costs and mortgage payments (since these systems are rolled into the mortgage).
"If you can show how it improves the efficiency of a home in dollars, or how it improves long-term marketability [retention of future resale value] of the house, and how it improves the safety of the residents of the home, that all contributes to explaining the real value of the systems for the purpose of appraising the house," says Iaccio. Another tack is to show graphically that homes without certain technological amenities will be at a <i>disadvantage</i> for resale in the future.
"There was a point a hundred or so years ago when builders had the choice of running wires indoors to bring electricity into the house," he says. "The buyers of those builders that opted not to had to run wire into the house after it was built."
Builder Jeff Click, who owns Jeff Click Homes in North Oklahoma City, learned long ago that he had to be assertive in educating appraisers about the technology that he routinely installs in his mid-range custom homes, such as the HAI Omni Pro automation systems he uses.
"One of the problems with technology is that it tends to be hidden in the house," he explains-speakers are flush-mounted in walls, electronics are centralized in tech closets in basements and structured cabling is completely invisible. "If it was more prominent in the home, it might be easier to give it its rightful level valuation," he says.
"In fact, the stuff you see the least, like projectors, is often the most expensive stuff," says Click. "But that was the same problem faced when builders started putting improved insulation in between the walls, and for HVAC systems and whole-house vacuums, which are also not intended to be seen."
Home technology has one other issue that sets it apart from other home systems. While the depreciation of certain mechanical systems, such as furnaces and central AC, is largely predictable and measurable in years if not decades, the life cycle of many electronics products and systems is clocked in months. Digital electronics have an implicitly planned obsolescence, but one that's critical in the face of relentless downward pricing pressure: if products keep costing less, CE manufacturers need to sell more of them more often to maintain revenues.
High-end automation systems from companies like Crestron and AMX are designed to be kept updated via software upgrades, but many components in the systems, such as DVD players and servers, are subject to Moore's inexorable Law. Appraisers say they are beginning to take that phenomenon into account. "We're seeing a three-to-five year replacement cycle for a lot of home electronics, and we're adjusting for that even in new homes," says Schwartzentraub.
Software Solutions
Standardization of the value of home technology systems lies at the heart of accurate appraisals of the homes that include them. Appraisal calculation software like A La Mode's WinTOTAL, Bradford Technologies' ClickFORMS, ACI's Appraiser's Choice, and Day One's One Day Estimator, are formatted to work with lender Fannie Mae's Form 1004 for appraisals to generate a Universal Residential Appraisal Report (URAR). Both the software and the form have provisions at the end for non-standard home features, which is where just about every product under the home automation rubric ends up.
TechHome, a referral and awareness program operated by the Consumer Electronics Association (CEA), has a rating system [PDF] designed to measure the value-add that home systems bring in six categories: home entertainment, communications, computer networking and Internet sharing, home security, home comfort, convenience and energy management, and structured wiring systems. But the system isn't designed to interface with any of the standard appraisal software systems in the field. Thus, estimating the value of integrated home systems remains an imprecise science.
But it will be one whose accuracy and predictability will improve incrementally as the number of technology-enabled homes continues to grow, a process already underway, from the top down.
Anson Fogel, CEO of systems integration company ESC in Aspen, and who is also a builder of homes averaging $10 million and up, sees appraisers in luxury markets acknowledging the implicit value of technology systems.
"The builders have already educated them and the buyers have already shown they'll pay for the systems," he says. "As with many amenities in housing over the years, this will trickle down and you'll find many more appraisers becoming aware of the real value of these systems."
<i>Dan Daley is a frequent contributor to Hanley Wood's DIGITAL HOME Online.</i>
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