If you specialize in luxury home appraisals or even hired to appraise a newly renovated or updated property, you may have to factor in whether the amenities or improvements are excessive for the property or location. Because this can be a particularly complicated issue, we’re breaking down the definition and illustrating examples of how to go about accounting for superadequacy in your appraisal report.
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What is superadequacy?
Per 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’s a type of functional obsolescence in which the structure or one of its components is overly improved to a capacity or quality than a prudent buyer or owner would build or pay. While we provide more detailed illustrations below, a simple example would be 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, the luxury homeowner adds an improvement for their own enjoyment or in an effort to add uniqueness to the home, and they do not consider the principle of contribution. The principle of contribution 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. An improvement that is added or modified should improve the property’s market value (possibly through extending the economic life).
Appraisers may need to explain this principle to the client when a costly improvement such as a swimming pool is given minimal or no contributory value in the appraisal.
The presence of a superadequacy
The presence of a superadequacy should not alone preclude an appraiser from developing the reproduction…