Can land be worthless, or worse?

Some of our readers from areas where a residential lot can sell for $100,000 will find this question unthinkable. Even in those areas, they may know of “brownfields,” or areas that have been contaminated. Sadly, from my desk, I’m within miles of two such sites, but that isn’t the subject of our topic today. Today I want to introduce you to the historic building in Oklahoma Borough just outside of Apollo Pennsylvania, the Belvedere Hotel (on the left in the postcard above).

Built in 1905, the Belvedere sat directly across from the West Apollo rail stop. For the last train of the day arriving at 12:45 am, this served as a wonderful service for those who didn’t want to make any more progress at night. Featuring a candy shop and ice cream parlor on the first floor, these were eventually converted over to a bar. The building eventually got its local nickname, “The Tin Hut”, for its beautiful tin ceilings.

However, as the rail stop was removed and the road widened to accommodate the increase in traffic, which subsequently took away the hotel’s parking, business became far more difficult. Despite plans for revitalizing the spot after the purchase in 1982 for $24,000, the hotel was condemned in 2017 as unsafe.

In 2018 bids were secured for the demolition of the structure, however, these quotes ranged from $200,000 to $500,000 (123-300% of the entire annual budget of the borough this property is in). However, an arsonist seems to have “reduced this cost***” in late 2019 to $48,700. It was in 2019 that the Borough of Oklahoma obtained ownership of this property.

So, how much is this 2.5-acre parcel worth? The owner sold the property to the borough for $1, after the borough and the county spent $48,700.

Let’s take a deeper look though:

1. The property is zoned commercial in an area where there is not a high demand for commercial property

2. The property is basically a cliff- within its width of approximately 300 feet, it drops nearly 200 feet

3. The property is located on a busy road at a busy intersection with no parking

4. The property is located directly across from a railroad crossing- you can see the guard rails that block traffic at the edge of the building in the one picture provided

5. The borough has terraced the land and planted grass, posting no trespassing signs… not for sale signs.

You would think that the borough would want to make some of their money back if they could, but in my opinion, I don’t think they can. In short, there is no market in the area for cliffs. The land is “surplus” with no other use than assemblage with an adjoining property. However, who would pay money to own a cliff and the tax and insurance liability that goes with it?

So if we assume that the land, as vacant is in fact worthless. How much was it worth after the fire? What about before the fire?

Sometimes taking a look at the edges of the spectrum can inform our opinions. Is land always worth something? No. Do structures always add value to a property? No. Sometimes an extreme over improvement (as opposed to the under improvement that we see here) could make a property unmarketable (imagine a multi-billion dollar home in an area of shacks, who would buy it?) Its also an important reminder that while “cost does not equal value,” it can be a useful starting point to extract data from.

***There are serious health and safety questions that have yet to be answered publicly. It was reported that the high cost was in part due to the asbestos in the building. The demolition after the fire was not contained (though, how that would be possible is a hard question), so, where did the asbestos go and how did that affect the surrounding environment?

While the author is an appraiser, this should not be construed as an appraisal. The author uses their experience in the field of property valuation to glean real estate principles for educational purposes.

What Makes a Room a Bedroom?

This question is one of the most common questions I get and there is much confusion as to what qualifies a room as a bedroom. While there is no official definition, there is only one requirement a room needs in order to legally qualify it as a bedroom- a window of adequate size so as to allow for ingress/egress.

Most think a bedroom requires a closet which is a misnomer. There are plenty of older homes I have been in where the bedrooms don’t have closets. Think about it… there was a day when most people only owned a few articles of clothing. During these times, when there weren’t closets, many owned an armoire which doubled as a closet and dresser.

So lets put to rest that a bedroom NEEDS a closet.

With that in mind, in todays markets, most expect closets so that they have a place to store their clothing, shoes, bags and whatever else people put in their closets. Here are some other things to consider when classifying a room as a bedroom:

1. Is it of adequate size? A bedroom should be large enough to accommodate a bed and provide some space for movement around the bed, room for dressers, et.. The minimum size for a bedroom may vary depending on local building codes or regulations.

2. Is there a door? A bedroom should have a door that can be closed to provide privacy. A door can also be an added safety feature. It is best to sleep with your door closed in the event of a fire.

3. Where is the room in proximity to a bathroom? A bedroom should be located within close proximity to a bathroom. If all your bedrooms are on the 2nd level of the home and the only bathroom is on the first level, this could be viewed as a functional obsolescence. No one wants to get up in the middle of the night to stumble in the dark through the rest of the house.

These are the basic features that make a room a bedroom. The only feature that is a requirement is a window. However, depending on local building codes, there may be other requirements that a room must meet to be legally considered a bedroom and typically, the market might be expecting more.

Neighborhood vs Market Area

One of the foundations that determines the value of a property is the well known mantra- location, location, location. But what does that really mean? Simply put, the value of a property is in direct relation to where it is located- both its neighborhood and the market area it is located within. An appraiser should be able to define the neighborhood along with the market area in order to research and accurately report those factors that affect the value of a property.

What defines a subject’s neighborhood? A neighborhood is a group of complementary land uses, a congruous grouping of inhabitants, buildings or business enterprises. It focuses on four sets of considerations that influence value: social, economic, governmental and environmental factors. Sometimes, a neighborhood is well defined- consider some housing plans and subdivisions or even small towns. In more rural areas, the neighborhood is less easily defined and could encompass an entire municipality.

So then, how is the neighborhood different from the market area? A market area is the geographic or locational delineation of the market for a specific category of real estate. It is an area in which alternative similar properties effectively compete with the subject in the minds of potential purchasers, often referred to as the buyer pool. A market area is often much larger than a neighborhood. A property located in a subdivision could have a market area that includes additional alternative subdivisions that would have a similar appeal based on the location, school district, access to local amenities, median price range, etc.

Within any given market analysis is a term referred to as market segmentation. This is the process by which submarkets within a larger market are defined. Specifically, it is taking a look at the market data and determining segmented portions such as retirement communities, condominiums, investment properties, etc.

One example would be a sub-market for condominiums in Murrysville. Condominiums in this market area make up less than 10% of the overall real estate but there is a well defined buyer pool for these types of properties. In order to analyze the impact of value on a condominium in Murrysville, you would need to first analyze the plan it is located in (the neighborhood), then analyze Murrysville as a whole (the market area) and then further extract that data to analyze other similar condominiums in Murrysville (segmented market area).

As you can see, the location of any given property can be directly influenced by its direct neighborhood, the larger market area and the segment of the market that it is classified as.

In the near future, I’d like to take a very real but hypothetical look at an example property and how knowing both your neighborhood and market area has a direct impact on the data needed to be analyzed and the comparables chosen.

Appraisal Racial Bias (part 2)

As mentioned in part 1 of this series, Federal Fair Housing Laws states in clear terms that when it comes to real estate, an individual cannot discriminate based on protected factors. These protected classes include race, color, national origin, religion, sex, gender identity, sexual orientation, familial status, or disability.

As of this writing, the current edition of USPAP is even more detailed when it pertains to the profession of appraising and it states “An appraiser must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value.”

USPAP is a document that is continually being revised. This task is accomplished by members of the Appraisal Standards Board which is an independent board of The Appraisal Foundation. They have been arduously addressing the matter of bias and as part of the current revisions being proposed, are conducting a comprehensive look into the Ethics Rule. As part of their process, they even consulted with antidiscrimination experts in July 2022.

Currently, the proposed changes to USPAP is in its 4th exposure and while I am not going to disclose the contents of these proposed revisions, it seems very apparent that the goal of the current board is to make it abundantly clear within USPAP that unethical and illegal discrimination is explicitly prohibited. If you are interested in reading the draft, you can find it on The Appraisal Foundation website of click on this link: https://appraisalfoundation.sharefile.com/share/view/s80c9bc7163694f5a809cb401316d53cf

Even though USPAP has for a long time always required appraisers to be unbiased, I am proud to be included in a profession that has chosen to continue taking this matter seriously and clearly spell out where we stand. The public needs to be assured that our profession has not, does not and will not tolerate unethical and illegal discrimination.

Appraisal Racial Bias.... Pardon our Interruption

Part 2 has been written and was ready to drop today except for the necessity to provide you important information regarding fast approaching upcoming hearings. Earlier this year, the CFPB’s (Consumer Financial Protection Bureau) Fair Lending Director, Patrice Alexander Ficklin, stated that they were going to prioritize resources to focus on the role of racial bias in home appraisals

The CFPB has announced that they will be holding a hearing with the ASC (Appraisal Subcommittee) specifically to discuss this issue. This hearing is open to the public but it requires an RSVP.

For information regarding this hearing and to RSVP, visit the CFPB’s website or click on the image below to follow the link:

How will increasing mortgage rates affect you and your investment?

You would have to be living under a rock to not know that interest rates have been steadily rising and are currently at levels we have not see in many years.

According to the latest article as of this writing dated 10/21/2022, the 30 year fixed rate mortgage remains just shy of 7%. This is having a direct impact that is negatively impacting the housing market.

https://www.cnn.com/2022/10/20/homes/mortgage-rates-october-20

Image taken from bankrate.com

In the past month, I have started to see increasing supply that will soon be balanced and in my opinion, if the current environment remains the same or rates continue to rise, we will see the balance at best or the oversupply at worst we are used to seeing.

What happens when you have decreasing demand and higher supply?

This negatively impacts sales prices. In turn, this causes values to decline.

Unfortunately, this is not good news. It is difficult to know how far this decline will go or how long it will last. According to the CNN article I referred to, home sales have been falling month over month and we are in the longest housing sales slump since October 2007. They also state that applications for home purchases are down 38% and those for refinances have fallen off of a cliff.

This might not be the case for home appraisals and the home sales in our market area, but as is historically accurate in the past, we tend to be on the back end of the national curve. If what they say is true, then we are in the very beginning of this same slump and need to be prepared for the ride.

If you are in the market to purchase a home, refinance or require a home valuation for other purposes such as estates and divorces, you need to be prepared for the value of the property to possibly show a decline from the past 2 years.