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A client asked me recently about the propriety of building a much larger, custom home on the site of his flooded home in St. Bernard Parish. Will it be an over improvement for the area?

A really interesting question and I think to some extent the jury is still out on this one.

Many marketing areas, like all of the neighborhoods in St. Bernard Parish and many in New Orleans East flooded badly after the hurricane. As a result many subdivision homes were demolished. As the population returns, owners of now vacant land are rebuilding and often they are rebuilding more custom homes with contemporary features commonly sought by the buying public. Often times, the new homes are completely out of scale with the existing neighborhood; for example a large raised Acadian home in an area of older medium sized brick ranch type homes. Are these homes an over improvement?

I think the jury is still out on this question. Prior to the hurricane the answer would have been “yes” because this phenomenon was rare. Now however many subdivisions have a substantial number of new and different homes, often more expensive and out of character with the existing subdivision. The big problem for the appraiser is locating comparables. If the new house is not comparable to those around it problems arise in the appraisal process. In addition, the question arises, is this “over-improvement” for the area? An obvious example of an over-improvement is building a castle in a neighborhood of small bungalows.

In order for the appraiser to develop an opinion of value, he or she must have something to compare the subject property to. Sometimes, if there are comparables in an adjacent and competing subdivision the appraiser can argue that these homes, although out of the immediate marketing are viable comparable properties. However, in order for this to happen, there must be listed sales of these properties for use as comparables.

The problem I’m finding is the lack of comparables. To be a comparable, the property must be listed and then sold. Often, these new homes were never listed sales because they were built by the owners on land the owners already owned. No “sale” was involved. Recently I was asked to appraise a proposed construction loan for a custom home that was one third higher per square foot than any available neighboring comparable sale within miles. It didn’t work. The bottom line is that the proposed construction was an over-improvement because there was nothing to compare it to. This question is starting to arise more as many owners are refinancing. Again, if there is nothing to compare it to it will be hard to convince any underwriter that the home is not an over-improvement. Where I have been able to argue otherwise it is always because there is at least one home within a three mile radius similar to the subject.

So, I think it’s certainly best to keep this in mind when considering where and what to rebuild.