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How to Account for a Superadequacy in Luxury Home Appraisals

CEO Khai Intela
Appraiser using a calculator to account for a superadequacy in a new luxury home If you specialize in luxury home appraisals or have been hired to appraise a newly renovated or updated property, you may...

Appraiser using a calculator to account for a superadequacy in a new luxury home Appraiser using a calculator to account for a superadequacy in a new luxury home

If you specialize in luxury home appraisals or have been hired to appraise a newly renovated or updated property, you may have to consider whether the amenities or improvements are excessive for the property or location. Accounting for a superadequacy can be a complex task, but we're here to break it down for you and provide examples on how to include it in your appraisal report.

What is Superadequacy?

According to The Dictionary of Real Estate Appraisal, 6th Ed., superadequacy is defined as "an excess in the capacity or quality of a structure or structural component; determined by market standards." It refers to a type of functional obsolescence where the structure or one of its components is overly improved compared to what a prudent buyer or owner would build or pay for. To understand better, let's consider a simple example: a 5,000 square foot luxury home built in a neighborhood comprised of two and three-bedroom mid-century ranch homes.

The Principle of Contribution

Often, luxury homeowners add improvements for their own enjoyment or to make their homes unique, without considering the principle of contribution. This principle states that the worth of an improvement is what it adds (or contributes) to the market value of the entire property, regardless of the actual cost of the improvement. For example, an improvement like a swimming pool may have minimal or no contributory value in the appraisal if the principle of contribution is not taken into account. As an appraiser, it might be necessary to explain this principle to clients.

The Presence of a Superadequacy

The presence of a superadequacy should not prevent appraisers from developing the reproduction cost, especially when completing the cost approach for proposed construction. In fact, by incorporating the superadequacy as functional depreciation in the appraisal report, it adds transparency and clarity to the overall assessment.

Accounting for a Superadequacy

Let's dive into two examples to better understand how to account for a superadequacy in your appraisal reports.

Example #1: Superadequate Custom Fireplace

Imagine you come across the prints and specifications of a proposed residential home construction. The plan includes adding a two-story masonry fireplace to the office, with an estimated cost of $42,000 for materials and installation. The home will also feature a towering and custom stone fireplace in the great room.

Based on market research, you determine that the second custom fireplace is superadequate for luxury homes in the subject's competitive market area. In your appraisal report, you note the presence of two fireplaces but deduct functional depreciation (superadequacy) from the reproduction cost of the improvements in the cost approach. You make no adjustment from comparable sales that have only one fireplace compared to the subject property's two fireplaces in the sales comparison approach. You explicitly state that the second custom fireplace is superadequate and does not contribute to the subject's market value.

Example #2: Superadequate 12-Car Garage

Let's say a luxury homeowner, who happens to be a car enthusiast, builds a 12-car garage to accommodate their hobby. However, in this market, the majority of luxury homes have only a 3-car or 4-car garage. Therefore, the additional 8 car bays may offer no additional contributory value.

To calculate the cost estimate for the garage, you use a cost manual that states the cost per square foot of a 4-car garage of good quality is $38.25, while the cost per square foot of a 12-car garage is $33.75 due to economies of scale. Since the additional 8-car garage space is considered superadequate in the subject's market, you calculate the depreciated reproduction cost new of the garage by deducting functional depreciation (superadequacy).

By considering the superadequacy, you gain a more transparent understanding of how this factor directly impacts the cost approach to value.

Diversify Your Appraisal Business: Become a Certified Luxury Home Appraiser

If you're looking to diversify your business, stand out from other appraisers, and take on more challenging properties, consider enrolling in our Certified Luxury Home Appraiser program. This program is included for free if you're part of our Unlimited Learning Membership.

Become a Certified Luxury Home Appraiser Become a Certified Luxury Home Appraiser

Remember, accounting for a superadequacy is crucial when appraising luxury homes. By following the principles and examples provided, you can ensure accurate and comprehensive appraisal reports for your clients.

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