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How Do We Deconstruct Home Values?

Market value. Replacement value. Reconstruction value. Assessed value. Appraised value. The real estate ecosystem is filled with hundreds of similar-sounding names, with similar-sounding purposes, and even seasoned professionals get them confused.

In this episode, Core Conversations host Maiclaire Bolton Smith chats with valuations expert Sherrie Clevenger to get to the bottom of this matter: what do all of these values mean? And how do we ensure they’re accurate?https://player.captivate.fm/episode/96b89869-f610-4c5a-82dc-6c5ab1e65782

MAICLAIRE BOLTON SMITH: Welcome back to Core Conversations, a CoreLogic podcast. I am your host, Maiclaire Bolton Smith, and I’m the senior leader of research and content strategy with CoreLogic.

In this podcast we’ll have conversations with industry experts about key topics, from housing affordability to the impacts of natural disasters on property. Shakespeare once said, “What’s in a name?” But when it comes to property, what’s in a value seems more appropriate.

If someone were to ask you what’s the value of your property, most people instinctively think of the market value. But a property has many different values, each with its own purpose. And in many cases, these values are not equivalent. So this can create some confusion, but rest assured all of these values are, well, valuable. Whether it be an appraised value, assessed value, insured value, reconstruction cost value, or market value, each has a distinctive role to play.

And that’s what we want break down today. So for our episode today, I’m joined by Sherrie Clevenger, a principal product manager with CoreLogic. Sherrie, welcome to Core Conversations.

SHERRIE CLEVENGER: Thank you so much for having me, Maiclaire, it’s so exciting to be a part of the Core Conversations.

MBS: Awesome. Okay, so to get us started today, can you tell our listeners about your background and your role here at CoreLogic?

SC: Absolutely. Well, my background, I spent a good portion of my career in personal property valuation, market values for classic cars, trucks, votes, RVs, motorcycles and then replacement cost values, specifically for manufactured homes.

It was my work with manufactured homes that led me to CoreLogic. I came on board with CoreLogic in about 2015 with the Marshall and Swift product line, specializing in replacement cost values for residential and commercial buildings.

Through these legs of my career, I focused very intensely on valuation and appraisal. I’ve even taught and participated in the creation of a number of continuing education appraisal courses. I very quickly with CoreLogic expanded my portfolio of knowledge, past valuation to include location intelligence products for energy, utility and communication service providers.

Since then, I have worked with our teams for the commercialization of new innovations within CoreLogic, such as CLIP, as well as our complete view of property. My current role has me focused on new markets specifically for CoreLogic and new market innovation. So I always enjoy the opportunity to get back to my roots in valuation, very excited for today’s conversation.

MBS: That is so great. And that’s why you’re here today, ’cause you have so much of a background on this. So let’s just dive right into this. So off the top, I mentioned a few different values. Can you just start at the beginning, and what do we actually mean by value to the various industries that you study? And why is it so important to define each of these different values?

SC: So when I’ve taught appraisal courses in the past, whether it was for state licensed real estate appraisers or certified personal property appraisers, I would always start with, the word value can only be defined by an adjective in front of it.

As you mentioned in the opening, most people, often are referring to market value when they talk about the word value. However, at CoreLogic, we really we dive into a value pretty deeply and we have replacement cost values, reconstruction cost values, appraised values, assessed values, and last but not least insurable value. And in some cases there could be big differences behind the valuation within each definition.

MBS: Okay, so I wanna dive into each of these now. So firstly you mentioned replacement costs and reconstruction cost. Those two words sound very similar. Are they the same or are they different and how are they used?

SC: It’s a great question. So, and it actually comes with a little bit of a tricky answer. So theoretically, no, they’re not the same, but practical application, yes. So when we look at replacement costs and the widely accepted definition, replacement costs new, is the cost to replace an existing structure with a substitution of like kind and equal utility using current construction standards. Reconstruction costs is more often associated with the insurance industry and kind of post loss, post damage, and the reconstruction, the cost of the reconstruction that needs to go into it.

MBS: Okay, so that’s really interesting, and I do wanna dive into that a little bit more in a minute, but let’s keep going with defining some of these other values. So, appraised value is another one you mentioned. Anyone who’s bought a home or has had done a refinance, they’ve had to have their home appraised. But isn’t this just the same as the market value?

SC: So, there are absolutely differences there too. Now, I’ll caveat this answer with, there is a formal definition for market value, and there’s the commonly accepted use of market value. So by definition, market value is the value a buyer is willing to pay for something in an arm’s length transaction.

The appraised value is the value determined by an appraiser, often for the mitigation of risk, whether that’s collateral risk, hazard risk, and the like. And the appraiser will perform the appraisal, which by definition is the opinion of value, the appraiser’s opinion of value, based on the scope of work outlined by the requesting client.

So when you buy a home, as an example, the bank will request an appraisal. The appraiser will set out about the investigation of the property, pull comparable sales, do the market and neighborhood analysis and incorporate other components that help them determine the appraised value based on that date of inspection.

So the appraised value in this case will be used to mitigate the collateral risk that an approval of a loan would pose to the lending institution. So you might’ve seen in some of the markets where inventory is low and the market is highly competitive that a buyer may have to bring additional cash to their down payment to make up that difference in the appraised value and the agreed upon sales price.

MBS: Yeah, I actually know that incredibly well! When we bought our home, we were in a situation of it just being a really hot market. And there was one home that we put a bid in and it was ridiculous. I think we bid about $150,000 over the asking price. And we were outbid by about $100,000, and I remember them saying that they were pretty sure that the home would not be appraised at the value that we were bidding on it and therefore we would need to bring more money to it.

So, I think that’s something that a lot of people are not necessarily aware of. So I’d imagine that probably happens more often these days, with the crazy home buying prices and bidding wars, and I’m sure the example that we experienced is just one of many that people are hearing about these days and experiencing themselves.

SC: Oh, absolutely. I could only imagine, with what the market is doing today, and I would imagine too it catches a lot of consumers off guard.

MBS: Definitely, yeah. It was something I personally didn’t understand when we were in this specific situation. Okay, what about assessed value? What’s the difference between appraised and assessed values?

SC: So the assessed value is similar to the appraised value definition. I’m not saying the two values are similar, I’m saying the definition of the two is similar. In that the value placed on the property is done by the local tax assessor. And often the tax assessor has an appraisal background or comes from the appraisal industry.

But in the scope of work, this scope is different. So the tax assessor’s scope in this case, is specifically for the real property tax assessment. There is opportunity for the assessor in some cases to do personal property tax assessment well, but I know that’s not the purpose of our podcast today. So we’ll stick with the real property assessment.

So the tax assessor will be utilizing computer assisted mass assessment technology, also called CAMA systems, with the assessed value as of a given date, for the purpose specifically of tax collection. So again, that goes back to the appraiser, the appraisal, and the scope of work. And the assessors are charged with a fair and equitable evaluation of a property.

So should the homeowner disagree with their property evaluation, they do have the opportunity to appeal. And while most jurisdictions offer several methods of evaluation for the appeal process, a common method is the physical inspection and appraisal of the property. So bringing a kind of full circle with going back to the appraisal is really dependent on the scope of work given to the person that’s doing the appraisal.

MBS: Great, okay. Well, thank you for all of that. I think it’s really important to define all of these values that people likely hear about, but may not fully understand what each of them is for. So, if we let’s just focus now on replacement cost value for a moment, like in the context of a home buyer. So what does this mean for a mortgage, and what does it mean for an insurance company?

SC: So I often think of it from starting from scratch versus starting from something. Replacement cost new is looking at the construction of a whole structure, foundation, plumbing, building, framing, roof, all of that from the ground up. When the replacement cost is utilized it’s often utilized for loan origination or a refile appraisal for an existing structure. And then that replacement costs new will be depreciated to reflect the effective age of the property.

So then conversely, if we look at the wave in an insurance carrier or an insurance company might use it, we’re all failing looking at it from that reconstruction cost perspective. Similar to what we just discussed, but there’s components that may not need to be replaced. There’ll be debris that needs to be removed or demolition efforts that need to be taken into consideration, but you’re starting from something, as opposed to starting from scratch.

MBS: Okay, so we say replacement costs new, ’cause it’s essentially replacing a brand new structure from the ground up. Is there such a thing as replacement cost old, or it would only be to replace just a new structure?

SC: So when you are building that structure it’s new, the appraisal and the methodology used to consider the effective age of a property will be to make adjustments to that replacement cost new. And then through usually a percentage or various component costs, you will depreciate that new cost to reflect the effective age of the component or of the structure as a whole.

MBS: Okay, so if we circle back to now reconstruction cost, this is one that we talk about frequently when we’re looking at the impact of natural hazards. Can you talk about how replacement that you just talked about and re reconstruction costs are calculated, or for lack of better word, how they’re constructed?

SC: Oh, sure. So if we go back to that, starting from scratch versus starting from something existing, you can kind of visualize it by thinking of a raw piece of land. So replacement costs, you have a piece of land that you need to connect to your county sewer systems with your plumbing. You need to connect to the neighborhood central utility systems. You have to pour a foundation or dig a basement and you build up from there.

Now let’s say there’s a natural hazard, and I’m gonna use Northern California wildfires as an example, that renders a home as a total loss. So, the homes in California are often constructed on a full slab foundation. So when you think of the reconstruction after a wildfire, you will remove the structure from the top down, down to the foundation. The plumbing connection to the sewage is often not harmed, utility connections to the street junctions, often not harmed, that infrastructure already exists. And the foundation will often not need to be replaced, so you have something to start from, and you’ve built, you have, I almost view it as a, not a crane, but one of the big carriers that kind of scoop something off. So backhoe, is that what it is? A backhoe, where you just kind of, you come down over the top of it. So starting from scratch, you’re building up. With reconstruction, you’re coming down from the top of the home pulling the debris away.

MBS: Okay, so it really is that difference of building from the ground up, versus tearing down and rebuilding on the parts that need to be rebuilt. And I’m glad you mentioned the California wildfires as an example, ’cause this is one where the insurance perspective became really important, because there were instances of properties not being valued accordingly from the reconstruction cost value. So it really has highlighted the importance of having accurate reconstruction cost values for the purpose of insurance, simply to be able to rebuild if something catastrophic does happen.

So, thank you for all of that, Sherrie. I guess that all sounds really data intensive. And I have to assume, as we’re talking about how critical the valuation is, is there like a certain type of data that goes into these models? Is it just like the old saying, garbage in garbage out? Like where does the data come from and how do they do this?

SC: Oh my goodness, yes. So that is one of my favorite old adages, garbage in garbage out. Data quality is so important to the creation of any type of, name your adjective value, similar to a building. And, hey, we’re talking about construction costs, right? So similar to a building, if the foundation is flawed, the structure sitting on top of it is at risk.

So I know we’re probably running out of time for today’s session, but I’ll leave everybody with kind of this thought about data and data quality. When you are pondering data for your daily business decisions, how accurate is your data? How current is your data? How complete is your data? And does your data have the requisite coverage? Meaning the breadth and scope across a given geography?

So if we put it back into the terms of the appraised value, if the appraiser doesn’t have access to the critical data points that they need, their opinion of value could differ significantly from another appraiser. So, when you think about the quality of data that goes into any of these, any of the valuation or the value types, it is absolutely critical.

MBS: Okay, so we’ve now talked about all of these different values. How do they come up with all of these different values and are there governing bodies in place that put standards in place to oversee the valuation process? And can you talk a little bit about, like, how does this all work?

SC: Absolutely. So there are definitely there are governing bodies that oversee the appraisal industry. The Appraisal Foundation is the primary governing body, and then each state has its own individual licensing board. So while the principles of appraisal, the approaches to value have been around for a long time, The Appraisal Foundation as a committee was founded in 1987 to implement USPAP as a standard for appraisals in the US. So USPAP for those who aren’t familiar with it, is the Uniform Standards of Professional Appraisal Practice. Try and say that one, three times fast.

And the foundation is overseen by The Appraisal Subcommittee, which is a subcommittee of the Federal Financial Institutions Examination Council or FFIEEC. So that is the kind of the de facto standard. Anybody who is doing an appraisal, particularly if they’re a licensed appraiser, will follow use USPAP standards for any appraisal done.

MBS: Got it, okay. Well, to finish off today, can you talk a little bit about, how we tie all of this together and maybe is there one important takeaway that you want our listeners to think about, with respect to the values of their own property?

SC: Oh goodness. So we really have covered a lot. So I think I would tie it up by recommending that anybody who’s listening to our conversation today, the next time you have a conversation about value, ask the question, how are you defining value?

You know, if you aren’t using a common definition, you could be mixing apples and oranges, and then tying this back into kind of the touch on data quality, data-driven decisions based on dissimilar evaluation types could really lead to catastrophic business results.

MBS: Wow, that’s so important, Sherrie, and I like that. And I like to say when you mix different things, so if we’re mixing different valuations it’s like comparing pineapples to pomegranates. So make sure we know which one we’ve got and what the use is, but that’s a great bit of advice for people to think about, what is this value? How is it constructed, and what is it used for?

So thank you so much for joining us today, this has been so great. This topic of value, it’s honestly one of our most read topics on our Insights blog over the years. So I’m thrilled that you were able to be here today to really dig into this. So thank you for joining me today on Core Conversations, a CoreLogic podcast.

SC: Thank you so much. It’s been my pleasure to be a part of Core Conversations and I look forward to the exciting topics you have coming the rest of the year.

MBS: Awesome. So for more information on the property market and the housing economy, please visit us at corelogic.com/insights. Thanks for listening, I hope you’ve enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts, and subscribe wherever you get your podcasts to be notified when new episodes are released.

And thanks to the team for helping bring this podcast to life. Producer Rhea Turakhia, editor and sound engineer Romie Aromin, and social media guru Mike Wojcik.

Tune in next time for another Core Conversation.

©2021 CoreLogic, Inc., All rights reserved.

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