Shaun Fitzgerald, Fitzgerald Appraisals

The market prefers new. That’s an expression I learned over twenty years ago when I first started appraising. It was told to me by a friend and a very accomplished appraiser who has been appraising since he got out of college in the 70’s. Every time I do an appraisal of new or newer construction I use that phrase. It was true then and it is true today. Lately, the phrase is manifesting itself in ways I didn’t expect.

The first way is the amount of flipping going on - the good kind of flipping. I am amazed how many people are doing it. And, I am amazed by how many people are making pretty good money doing it. Single family residences, condos, and small multifamily properties are being purchased, rehabilitated and sold pretty much like hotcakes. You gotta hand it to HGTV. It seems like they have reinforced the expression in every market possible. Whether the market is for $80,000 homes in Waco Texas or $800,000 homes in Southern California, the husband and wife teams never run out of projects. USPAP and all the regulatory agencies have been requiring documentation in appraisal reports of any “prior sales.” The objective of those guidelines has been to guard against the bad kind of flipping - where the second sales price is artificially inflated. But what we are seeing now is a flip where there has been a substantial amount of improvements and upgrades. And those improvements are certainly bringing higher prices.

The second way that the phrase is presenting itself is in the complete demolition of existing structures, particularly commercial and industrial properties. These are essentially land sales. Whether we look in a local assessors office, the Warren Group RETD, the county registry of deeds or subscription services like Loopnet or CoStar, when we go looking for sales transactions of vacant land, we just can’t find them. But recently, we have been looking for small or old properties that sold at outrageous dollars per s/f. Almost every time, it’s a land sale. The old small building that is probably totally obsolete is worth much more dead than it is alive. The sales transaction price plus the cost of demolition points to tremendous value when the land is put to a new use. So, when we need to appraise an older property that has been totally renovated, we might consider that the best comparables are land sales and the best way to employ them is in the cost approach.

It is no wonder that the market prefers new. Residential, commercial and industrial structures are far more beautiful, comfortable, efficient, economical and valuable than the buildings of the past. Improvements in structural design, energy efficiency, maintenance cost minimization and technology allow a new building to look nicer, work better and feel more comfortable.

So maybe there is another adage we should keep in mind - “its not that we are overbuilt; we are just under-demolished.”

Shaun Fitzgerald is the owner of Fitzgerald Appraisals, Easton, Mass.