The AI-GRS Designation: Review Theory – General Course in Hawaii

September 12, 2014

The Hawaii Chapter of the Appraisal Institute is hosting the Review Theory – General course in Honolulu in November 2014!  Register here: http://www.myappraisalinstitute.org/education/add2cart.aspx?id=32296

Diamond Head Hawaii

AI-GRS Designation

According to the AI website:

The AI-GRS membership designation is held by appraisers who are experienced in general appraisal review.

To become an AI-GRS member of the Appraisal Institute, an individual must:

  • Have good moral character;
  • Meet standards and ethics requirements;
  • Hold a bachelor’s degree or higher;
  • Meet special education requirements;
  • Pass a comprehensive examination; and
  • Possess experience in general appraisal review that meets specific standards.

These review appraisers possess special experience and knowledge that give them the tools to address the issues unique to general and commercial real property review appraisals. AI-GRS Designated members agree to adhere to the Appraisal Institute code of professional ethics and standards of professional appraisal practice, underscoring their commitment to sound and ethical professional practice.

These review appraisers must stay informed of developments pertaining to review of general and commercial real property appraisals, enabling them to provide review appraisals reflecting the latest in professional practice.

The Review Theory – General class is required coursework for the AI-GRS review designation and will be taught in Honolulu by Joseph C. Magdziarz, MAI, SRA (“Joe Magz”) on November 3, 2014 through November 7, 2014.  More information is here: http://www.myappraisalinstitute.org/education/more_info.aspx?id=32296

 

The following course description is taken from the AI website:

Review Theory—General is the fundamental review course that all reviewers should have in their education background. It is a required course for individuals pursuing the Appraisal Institute General Review Designation.  Participants embark on an in-depth journey of the seven steps that are outlined through the review process, which is at the core of this course. To be a reviewer, an appraiser must learn how to develop opinions of completeness, accuracy, adequacy, relevance, and reasonableness relative to the work under review. These opinions must be refined through tests of reasonableness in order to develop opinions of appropriateness and credibility. By taking this course, participants may gain invaluable confidence on the fundamentals of review.

Upon completion of the course, participants should be able to:

      • Define review.
      • Distinguish between appraisal and review.
      • Evaluate the necessary knowledge and skills required to complete reviews.
      • Distinguish between trivial and material errors.
      • Identify types of review assignments and the process employed in the reviewer’s scope of work.
      • Recognize regulatory compliance issues for review appraisers
      • Identify the steps necessary to effectively communicate the review.

The Review Theory – General course is required for individuals pursuing the Appraisal Institute General Review Designation (AI-GRS – Appraisal Institute General Review Specialist ). For more information regarding the requirements for the review designation, please click here.

If you are currently designated, click here for more information on the alternative path.

If you are currently a candidate for designation, or wish to become a candidate, click here for the specific designation requirements.

Please read my disclaimer.

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A New Study on Photovoltaic Home Premiums

January 25, 2014

A new academic study titled “Exploring California PV Home Premiums” has been prepared for the U.S. Department of Energy.

You can download it here:
http://emp.lbl.gov/news/new-emp-report-california-pv-home-premiums

California PV Home Premiums

The study uses a regression analysis to conclude that premiums are paid for PV homes at a rate of $5,911 per kW in size–larger systems command higher premiums.  They additionally find that premiums decrease by $2,411 for each year of system age–older systems provide smaller premiums.

According to the U.S. Energy Information Administration’s January 2014 report, the average retail price of electricity for residential customers in California was 16.4 cents per Kilowatthour in November 2013.  At the same time, Hawaii’s average residential rate was 37.0 cents per Kilowatthour.  More than double the rate!

While an appraiser would need to investigate the local Hawaii market to test sensitivity, it seems logical that the Hawaii market might command even higher premiums for its installed PV base.

Please read my disclaimer.

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Replacement Cost vs. Reproduction Cost: What’s the difference?

October 29, 2013

Even seasoned appraisers can sometimes confuse the terms “Replacement Cost” and “Reproduction Cost”.  What do these terms mean and why do they matter?

Moana Pacific Under Construction

Moana Pacific Under Construction

replacement cost
The estimated cost to construct, at current prices as of the effective appraisal date, a substitute for the building being appraised, using modern materials and current standards, design, and layout.

Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).

reproduction cost
The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replica of the building being appraised, using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, superadequacies, and obsolescence of the subject building.

Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).

The key difference is the type of improvement being considered.  Are we looking at a new building with modern materials, or an exact replica?

The main idea is to use one or the other consistently throughout the analysis.

Questions or comments?  Please leave them in the comment  box below, I would be happy to clarify and/or expand.

Aloha, Chris

Please read my disclaimer.

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Maui Million Dollar Home Sales ($1.0M+) – Day 3 of 10 – “How Big Are They?”

September 20, 2013

From January 1, 2012 through September 16, 2013, a total of 231 “million dollar plus” homes sold in Maui County, generating total volume in excess of $525 million.

There are many ways that Hawaii real estate appraisers analyze sales statistics for luxury homes.  Because a proper market study for this segment would run many pages, I am posting one article per day for ten days.

Day 3 of 10 – Maui Million Dollar ($1.0M+) Single Family Homes By Living Area

Consider the following graph and chart:

Maui Million Dollar Sales By Living Area

Maui Million Dollar Sales By Living Area

Maui Million Dollar Single Family Homes By Living Area
Sold From 1/1/2012 through 9/16/2013
Living Area in SF # of Sales % of Total
0-999 5 2.2%
1000-1999 32 13.9%
2000-2999 68 29.4%
3000-3999 75 32.5%
4000-4999 28 12.1%
5000-5999 17 7.4%
6000-6999 2 0.9%
7000-7999 2 0.9%
8000-8999 1 0.4%
9000-10000 1 0.4%
Total 231 100.0%

Luxury homes having between 2,000 and 4,000 square feet of living area represent the “sweet spot” of the Maui luxury market, comprising more than 60 percent of the Valley Isle’s million dollar home sales since the beginning of 2012.

Bottom Line: Bigger Isn’t Necessarily Better

97.4 percent of all “million dollar plus” single family homes sold on Maui since 2012 have 6,000 square feet of living area or less.  While it is certainly possible to build larger residences, and some very wealthy individuals have, if you’re building much larger than 5,000 square feet, you might be going beyond what the market prefers.

Questions or comments?  Please leave them in the comment  box below, I would be happy to clarify and/or expand.

Aloha, Chris

Bonus  – Superadequacy

The data above suggests that building much larger than 5,000 square feet may not be consistent with market preferences.  If true, real estate appraisers refer to this phenomena as a “superadequacy”, which is defined below:

superadequacy

An excess in the capacity or quality of a structure or structural component; determined by market standards.

Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010

Filed under Appraisal Theory, Hawaii Oceanfront Real Estate, Hawaii Real Estate Data and Analysis, Hawaii Resort Real Estate, Statistics Tagged with , , , , , , , , ,

Superior Comps, Downward Adjustments

August 30, 2013

When real estate appraisers are using the sales comparison approach to value property, adjustments are made to account for differences in relevant property characteristics.

Over the past week I got a couple of emails about adjustments, specifically: “why are downward adjustments made to superior comparables?”

This video sorts our the concept that at first might be counter-intuitive by looking at two residential features that are common in Hawaii: Swimming Pools and Ocean Views.

Questions?  Please ask in the comment box below.

Aloha, Chris

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Sales Comparison, Adjustments, and Paired Sales

August 23, 2013

This video looks at the sales comparison approach that appraisers use as the primary method to value real estate.

A few appraisal terms that are used in the video are:

Sales Comparison Approach
A comparative approach to value that considers the sales of similar or substitute properties and related market data and establishes a value estimate by processes involving comparison. In general, a property being valued (a subject property) is compared with sales of similar properties that have been transacted in the open market. Listings and offerings may also be considered. A general way of estimating a value indication for personal property or an ownership interest in personal property, using one or more methods that compare the subject to similar properties or to ownership interests in similar properties. This approach to the valuation of personal property is dependent upon the Valuer’s market knowledge and experience as well as recorded data on comparable items.

Adjustments
Mathematical changes made to basic data to facilitate comparison or understanding. When dollar adjustments are used, individual differences between comparables and the subject property are expressed in terms of plus or minus dollar amounts; with percentage adjustments, individual differences are reflected in plus or minus percentage differentials.

Paired Data Analysis
A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties is analyzed to isolate and estimate a single characteristic’s effect on value or rent. Often referred to as paired sales analysis.

Adjustment Grid
A table used to display comparable data and facilitate adjustment of differences in elements of comparison.

Comparables
A shortened term for similar property sales, rentals, or operating expenses used for comparison in the valuation process. In best usage, the thing being compared should be specified, e.g., comparable sales, comparable properties, comparable rents.

All Definitions Sourced From: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).

If you have any questions or comments, please leave them in the comments box below.

Aloha, Chris

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Is that thing a “fixer upper” or a “tear down”?

August 15, 2013 3 Comments

Today a friend asked me how real estate appraisers value properties that are in “below average” condition.  He wanted to know if we valued them in their “as is” condition, and whether or not repair costs were factored in.

In essence, how do you know if a property is a “fixer upper” or a “tear down”?

In a nutshell:

  1. If a property is in poor condition, an appraiser considers whether or not the value of the real estate, in its “as is” condition, exceeds the value of the underlying land.
  2. An appraiser determines this by analyzing the cost to repair the building to typical/average condition, and comparing the net value against the value of the underlying land, less demolition costs.

In detail:

It’s a relatively simple process, the appraisal buzzwords associated with this valuation method are “highest and best use” and “cost to cure”.

To demonstrate the analysis, I went on the Honolulu MLS and found a commercial property built in 1959, the same year Hawaii became a State.

Here, in all of its glory, is the poor condition (according to MLS)  office / retail property known as “1339 North School Street”:

1339 North School Street

1339 North School Street, Honolulu, Hawaii

A bunch of appraiser math/mumbo-jumbo below, skip to the chart at the end to see the answer.

For our purposes, the asking price is irrelevant, especially because the listing includes additional land parcels.  The figures used below are part of a simplistic appraisal demonstration only.

Let’s assume an appraiser determines that vacant land in the subject neighborhood is worth $100 per square foot.  Similarly, let’s assume average/typical commercial buildings are selling for $300 per square foot of building area.  The values would compare as shown below.

HYPOTHETICAL APPRAISED VALUES – 1339 N. School St.
Item Area in Square Feet Value Per Square Foot Total Value
Vacant Land 20,000 $100 $2,000,000
Less: Demolition Costs     -$100,000
Equals: Property Value   $1,900,000
       
Average Condition Building 7,500 $300 $2,250,000
    Difference $350,000

Since the value of an average condition building “as improved” is worth more than the property “assuming demolition”, we proceed to the next step: determining the value of the building in poor condition (its “as is” condition).

HYPOTHETICAL APPRAISED PROPERTY VALUE – COST TO CURE
Item Building Area
in Square Feet		 Building Value
Per Square Foot		 Total Value
Average Condition Building 7,500 $300 $2,250,000
Less: Cost to repair to average condition   -$500,000
Equals: Poor Condition Property Value   $1,750,000

Let’s assume a reputable contractor estimated the construction/repair cost necessary to renovate the subject building to “average” condition to be $500,000.  This amount is deducted from the “if in average condition” building value to arrive at the value of the overall property in poor condition of $1.75 million.

So, where are we at?

How does land value (assuming demolition) compare to property value (assuming renovation)?

HYPOTHETICAL APPRAISED VALUES – HIGHEST AND BEST USE
Item Total Value
Land Value Assuming Demolition $1,900,000
   
Poor Condition Property Value $1,750,000
Yep, it's a tear down.

Yep, it’s a tear down.

In this hypothetical scenario, the value of the underlying land, even after deducting demolition costs, exceeds the value of the poor condition property “as is”.  Therefore, the highest and best use of the property is demolition of the built-in-1959 (54 year old) improvements to make way for new development.

Questions, comments?  Please leave them in the comment box, I would be happy to clarify and/or expand.

Aloha, Chris

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Hawaii Four Seasons Hotels – A resort real estate appraiser’s friend when data is tough.

August 13, 2013 1 Comment

Imagine you’re an appraiser in Hawaii, and you’re given the enviable task of appraising an oceanfront homesite in the Manele Resort on Larry Ellison’s island of Lanai.

There are only eleven oceanfront lots currently developed in the resort (as shown roughly in the aerial below) and only one lot has sold in the last decade (Lot 130, for $3,612,500 in May 2011):

Lanai Oceanfront with Parcel Shapes

Manele Resort – Eleven Oceanfront Homesites
Photo Source: Bing Maps

The sale of Lot 130 is a godsend, but other than that, what is an appraiser to do for comps?

We can’t very well do a one comparable appraisal: We’ve got to go off island.

Two resort areas of the State of Hawaii that are similar to Manele Bay in terms of climate and resort appeal are Wailea (Maui) and Hualalai (Big Island).  All three neighborhoods have oceanfront homesites that could potentially provide sale comparables, and all three master planned communities are home to a prestigious Four Seasons resort!

Four Seasons Manele Bay

Four Seasons Manele Bay

Four Seasons Hualalai

Four Seasons Hualalai

Four Seasons Wailea

Four Seasons Wailea

What gives? Being (arguably I’m sure) the most prestigious hotel operator (“flag”) in the State of Hawaii, Four Seasons resort properties must meet certain strict criteria in order to qualify as a potential member of the brand.  Each of the three resorts on Lanai (Manele), Maui (Wailea), and the Big Island (Hualalai) are world class hotels that were constructed between 1989 and 1996, and have been well maintained in the interim.   As such, the physical plant of each resort should have reasonably similar cost/value attributes. (The Hualalai resort is a newer “bungalow-style” design that likely has more market appeal)

Under the assumption that each of the three properties benefit from first class or better improvements, differences in room rates likely capture a good portion of the market’s preference for a specific location/resort.  For an appraiser starved for data in a highly-unique sub-market like Manele Bay/Lanai, hotel room rates can provide much needed market support for potential location adjustments.

Consider the following:

FOUR SEASONS – HAWAII OCEANFRONT RESORTS 
Best Available Room Rate – August 19, 2013
Island Resort Hotel Name Year Built Room Rate
Big Island Hualalai Four Seasons Resort
Hualalai at Historic Kaupulehu		 1996 $920
Maui Wailea Four Seasons Resort
Maui at Wailea		 1989 $595
Lanai Manele Four Seasons Resort
Lana’i at Manele Bay		 1989 $459

That’s right, the best available room rate at the Four Seasons Hualalai is DOUBLE the same at Manele Bay!

The following chart shows the relationship of each hotel to its Manele cousin, and the indicated adjustment to equate each room rate to Manele:

Downward appraisal adjustments of 23 percent (Wailea) are serious business, never mind 50 percent allowances (Hualalai).  But for the appraiser who is digging deep for market support for a location adjustment, comparative hotel room rates are an interesting value indicator to consider.  In a future article I’ll examine the three neighbor island resorts in greater detail and see if these price relationships hold.

Questions, comments?  Please leave them in the comment box, I would be honored to clarify and/or expand.

Aloha, Chris

Filed under Appraisal Theory, Hawaii Real Estate Data and Analysis, Hawaii Resort Real Estate Tagged with , , , , , , , , , , , , ,

Correlation, Schmorrelation!

August 9, 2013

WARNING: We’re going DEEP into real estate appraiser-geek-land!

A couple of articles ago, I looked at the relationship between housing affordability in Hawaii and The Aloha State’s median prices for single family homes and condominiums.

You might recall this chart, which compares Hawaii trends from 1987 through 2011:

Hawaii Home Affordability vs Median Prices

The purpose of this article is to dig deeper into explaining how the affordable price trend, while obviously headed in the same general direction as Hawaii median price trends, does not necessarily correlate with them mathematically on a year to year basis.

As I said in my earlier post:

The red and green trendlines track single family and condominium prices in the study period–as shown, condos and single family home prices track pretty well.

How about affordability (the purple trendline) based on interest rates ?

The long term trend is clearly positive for all variables, with affordable price, condo price, and single family price all being about 3x higher in 2011 than they were in 1987.

But that’s not the question most folks are asking.  The market participants I talk to are generally trying to answer the question “If interest rates go up (this year, or next year), will prices go down (this year, or next year)?”  Is it a causal relationship?

What do you think?  Personally, beyond long term growth, I don’t see a strong relationship in the data, and neither is a solid correlation revealed in geeky statistical analyses.

The people want to know: If interest rates go up (which means affordability goes down), does that mean prices go down?

I warned you, Hawaii real estate appraiser geek stuff:

Let’s just get this out of the way before I get a bunch of emails from anal appraisers: Correlation does not prove Causation.  For a quick explanation of the difference, please consult one of my idols, Sal Khan.

Now that we all agree that correlation does not prove causation (just because healthy people eat breakfast doesn’t mean eating breakfast makes you healthy), let’s move on to the question of whether interest rate changes correlate with movement in Hawaii single family and condominium median prices.

Correlations, positive or negative, can be weak or strong.

Positive correlations are assigned a score between 0.00  and 1.00.   A  zero score (0.00) means there is no correlation (the weakest measure). A score of 1.00 is a perfect positive correlation (the strongest measure).  As the correlation gets closer to 1.00, it is getting stronger. So, a correlation of 0.75 is stronger than 0.55, and a 0.35 is weaker than a 0.45.

Let’s look at the raw numbers first:

State of Hawaii Median Prices versus Affordability

CORREL - Hawaii Home Affordability vs Median Prices

 

As shown in the table and graph, affordability numbers, over the long haul, have a pretty good correlation with long term trends (highlighted in blue), scoring a 0.85 against condominium median prices and a 0.89 against single family median prices.

Pretty impressive!  But easily trumped by the 0.98 score logged by condos against single family prices! (highlighted in green)

In this analysis, over the long term, affordability is absolutely heading in the same direction, and in a “kinda-sorta” similar magnitude, as median residential prices.

“But that’s not the question most folks are asking.”

How about my earlier idea, that what market participants really want to know is: “If interest rates go up (this year, or next year), will prices go down (this year, or next year)?”  Is it a causal relationship?

The way to test this question is shown below.  How does the “year over year” percent change in affordability track with the same year’s percent change for residential product?

State of Hawaii Median Prices versus Affordability Percent Change

The blue lines don’t match so well with the red and green.

CORREL - Hawaii Affordability Change vs Median Change

Take another look at the affordable versus condo/single family correlations.  Not Pretty.

How about condo versus single family?  Still going strong!

Conclusion?

There is absolutely no doubt that interest rates and overall home affordability head in the same “long term” direction as median prices.  But if you are a real estate appraiser and are asked to opine on the idea of whether or not interest rates/affordability track with median prices, think carefully before knee-jerking your response.  I say “not so much”, at least in Hawaii.

Questions, comments?  Please leave them in the comment box below, I would be honored to clarify and/or expand.

Aloha, Chris

Filed under Appraisal Theory, Statistics

Kapahulu – Diamond Head: Unscathed by the Great Recession?

July 27, 2013

I was at lunch with a friend this week, and he suggested the idea that home prices in his neighborhood (near Diamond Head) may have escaped the Great Recession altogether and, in fact, appreciated a bit along the way.

While it is common knowledge that the worldwide financial crisis did great damage to real estate prices in much of the United States, Hawaii was impacted less, and it is certainly possible that a desirable sub-market (like the Diamond Head area) could have emerged unscathed.

I decided to check it out.

MLS Local Market Statistics – Kapahulu – Diamond Head

The graph and data table below shows MLS sales statistics for the Kapahulu – Diamond Head area from 2002 through June 2013:

Source: Honolulu Board of REALTORS® and Chris Ponsar, MAI

Source: Honolulu Board of REALTORS® and Chris Ponsar, MAI

The graph clearly shows the amazing run up in prices experienced in the subprime era (pre-2008), with median price peaking at over $800,000 in 2007 (number of sales topped out at 319 in 2004).

A closer look reveals the supply/demand relationship: As the median price continued to climb after 2004, fewer and fewer buyers were pulling the trigger.  Conversely, when median prices bottomed out in 2009, demand began to increase.

The following table analyzes the data a little differently:

Kapahulu - Diamond Head - Year over Year

From the peak of the market in 2007, the Kapahulu – Diamond Head submarket declined four and nine percent in 2008 and 2009, respectively, and about 13 percent overall, before recovering a bit in 2010.

Considering these figures, it looks like my friend’s neighborhood took a moderate price hit after the collapse of Lehman Brothers….but our work isn’t done.

Wait a minute.  Kapahulu – Diamond Head, that’s kind of a mixed bag, isn’t it?

It is.  And as it turns out, much more mixed than I originally thought.

The Honolulu Board of REALTORS®  defines the Kapahulu – Diamond Head Local Market Area as including sections (1) 3-1 through (1) 3-4.  The map below approximates the boundaries of this area.

Sources: Bing Maps, City and County of Honolulu DPP, and Chris Ponsar, MAI

Sources: Bing Maps, City and County of Honolulu DPP, and Chris Ponsar, MAI

As you can see, the following neighborhoods are included in this statistical area:

  • Kapahulu
  • Diamond Head
  • Kaimuki
  • Wilhelmina Rise
  • St. Louis Heights
  • Palolo

If you’re familiar with Honolulu, you’ll quickly realize that is quite a diverse spread of neighborhoods!  Great aloha to be had everywhere, but buyers looking to purchase around Diamond Head might not consider the other areas to be substitutable options.

Could my friend be right?  Is it possible that his neighborhood (Diamond Head) is a micro-market that survived the Great Recession better than the other areas in his MLS Local Market?  It makes logical sense that a desireable location like Diamond Head could have bucked the trend–let’s dig deeper.

Time to bring out the big guns – Paired Sales Analysis

My friend lives in Section (1) 3-1, which is shown on the maps below:

City and County of Honolulu, Department of Planning & Permitting

City and County of Honolulu, Department of Planning & Permitting

City and County of Honolulu Tax Map - First Division, Zone 3, Section 1

City and County of Honolulu Tax Map – First Division, Zone 3, Section 1

Commonly referred to as “Paired Sales” in Hawaii appraisal circles, “Paired Data Analysis” is defined as:

paired data analysis

A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties is analyzed to isolate and estimate a single characteristic’s effect on value or rent. Often referred to as paired sales analysis.

Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010).

In order to accomplish this, I researched sales activity in Section (1) 3-1 (my friend’s general neighborhood) from 2004 through 2010, focusing on sales of single family homes that were listed by the selling agent as being in “average” or better condition.

My research found 22 “pairings”, single family homes in (1) 3-1 that sold in late 2004, 2005, 2006, or 2007 (the peak of the market), and later resold from September 15, 2008 (Lehman Brothers)  through the end of 2010.  Of these 22 pairings, 10 were substantially remodeled in the interim, and thus not considered.

(1) 3-1 Paired Sales Pie Chart

After the 10 remodeled pairings were removed, 12 “pure” pairings remained–resales of homes that were substantially similar in the time frame being studied.  These 12 sales are analyzed in the chart below:

Diamond Head Paired Sales

Click To Enlarge

As you can see, 10 of the 12 paired sales show price declines in the study period, ranging from negative 0.6 percent to negative 25.6 percent.  The two positive indicators showed upward figures of 1.4 and 0.6 percent.  The overall average price change for the 12 “pure” pairings (not remodeled) in Section (1) 3-1 was negative 8.3 percent.

Conclusion: Still looks like a price drop after Lehman Brothers, but not a huge one.

In the end, even though the Kapahulu-Diamond Head MLS statistical zone includes a diverse range of neighborhoods, it appears that the immediate Diamond Head area, like much of the United States, did indeed suffer a setback (negative 8.3 percent according to this analysis) in the early portion of the worldwide financial crisis.

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