When Is It Time for the House to Come Down?

This is Diana, with ABC-The Appraiser’s Business Companion.  You see on occasion the discuss of “houses being razed”.  Interesting that its called “razed” and not “raised”.  When you plug in the online dictionaries similar definitions are communicated, “Razed or also rased or razing” means to erase or scrape down, shave off.  The origin is “Middle English” when using the word “razed” and Old French when using the word “rased” (notice the “i” in raised is missing).  That and fifty cents won’t buy you a cup of coffee, even at McDonalds, but it does give insight into what is happening.  Why would a house be razed?  When should a building be razed?

It’s not always a physical condition worn out that prompts the razing.  A friend of mine, Bryan Reynolds” with “Appraiser eLearning”, said many years ago, “Houses are torn down more often than they are worn down”.  His statement was made to assist a class understanding of the characteristics of a market reaction to the house in a specific location.  The economic process of gentrification drives the demand to purchase a property which represented a desire for the land and not necessarily the improvements to the land.  So how does the appraiser know when and how do they document that moment?

It begins with the Highest and Best Use.  When sales are occurring, and the comments are “purchased for the land” there’s a big tip off.  Often the subtle transaction isn’t discovered until you recognize a price that “per sq. ft.” seems low for the market.  Researching the sales through those with “first hand” knowledge can confirm the motivation of the parties.  Driving through the neighborhood and observing new construction on previously improved sites can take the appraiser into records that lead to other signs of affirmation the neighborhood is undergoing a change.  In most cases the area is considered “built-up”, therefore new housing on lots with mature lawns indicates the market is shifting.  Now comes the hard part.  What would the property sell for with the improvements in their current condition versus “as vacant”?  If the conclusion is the land is worth more “as if vacant” than an improved there needs to be clear support.  A near “break-even” is an indicator of what is to come but the time has yet proven to be worth more as vacant versus as improved.

Look for sales of vacant land versus sales where there is strong evidence of a price representing the demand for the land and not the improvements.  When collectively you have both sales of vacant land and sales where the cost of the improvements being removed gives an indicator of the land as vacant there should be a close agreement.  In my experience, often the land as vacant will prove to be a bit higher than the sale with improvements and the cost of razing the improvements.  My experience with this environment indicated that time was a factor as the land could not be realistically improved immediately after the close of the sale.  The inconvenience of “demo day” was a factor.

Don’t forget, if the improvements have a salvage value on any of the components that also needs to go into the final tally of the land “as if vacant”.  To reiterate the answer to “why” should a house be razed, the answer is because the market says so.  Are there cases when the land isn’t being used as it should be?  Absolutely, often in the rural farmland market farmers may continue to farm even though the land is worth more as land for development.  That truism is a classic example of “value in use”.  Family land owned for multiple generations places a great burden on the owner-occupant to recognize it’s time to sell.  Regardless of the owner-occupant’s ability to recognize its time to sell, you the appraiser are obligated to study the market and prove what brings the highest net to the land.  What does your conclusion of maximum productivity show?  If the type of value is a market value, then detail in the report your highest and best use analysis indicating the support for your findings.  In those instances, its also a good idea to write a cover letter explaining the complexities of the assignment and a summary of what your analyses findings lead you to conclude.  Direct the client to your report where the communication of the appraisal process also leads those with competency in similar assignments through your reasoning.

This is Diana Jacob and you’ve just had a tip from ABC-The Appraiser’s Business Companion.