Building Component Analysis: Impact on Value

Chapter: Building Component Analysis: Impact on Value

Introduction

Real estate valuation hinges significantly on a thorough understanding of building components and their impact on overall property value. This chapter explores the scientific principles underlying building component analysis, demonstrating how an appraiser’s assessment of these elements directly informs valuation conclusions. While property inspectors identify defects, appraisers must connect those defects and components to market value.

1. Building Component Inventory and Description

• 1.1 Identification and Classification: The first step involves creating a comprehensive inventory of all building components. This includes:
  • Structural components (foundation, framing, roof)
  • Exterior elements (siding, windows, doors)
  • Interior finishes (walls, flooring, ceilings)
  • Mechanical systems (HVAC, plumbing, electrical)
  • Special features (solar panels, energy-efficient upgrades)
• 1.2 Detailed Description: For each component, a detailed description is required, encompassing:
  • Material: Type of material used (e.g., concrete, wood, steel, asphalt shingles).
  • Dimensions: Physical size and quantity of the component.
  • Condition: A rating of the component’s physical state (e.g., excellent, good, fair, poor).
  • Age: Estimated or known age of the component.
  • Performance: How well the component is functioning according to its design specifications.
  • Energy Efficiency: Energy Star ratings (if applicable), insulation R-values, window U-factors and SHGC (Solar Heat Gain Coefficient) ratings.
• 1.3 Use Classification: The type of use influences building component analysis.
  • Residential
  • Office
  • Retail
  • Industrial
  • Mixed use
  • Agricultural
  • Other specialized uses
    Each of these groups can be broken down into increasingly specific subgroups.

2. Scientific Principles Governing Building Component Performance

• 2.1 Structural Integrity:
  • Stress and Strain: Building components are subject to various stresses (force per unit area) and strains (deformation due to stress). Understanding material properties like Young’s Modulus (E), which relates stress (σ) to strain (ε) by the equation σ = Eε, is crucial for assessing structural integrity.
    • Example: A steel beam with a high Young’s Modulus will deflect less under the same load than a wooden beam with a lower Young’s Modulus.
  • Load-Bearing Capacity: The ability of a component to withstand applied loads without failure. This depends on material strength, geometry, and connection details.
    • Formula: For a simple beam, the maximum bending stress (σ_max) is given by σ_max = (Mc)/I, where M is the bending moment, c is the distance from the neutral axis to the outermost fiber, and I* is the area moment of inertia.
    • Experiment: Non-destructive testing (NDT) methods like ultrasonic testing or impact-echo testing can assess the internal condition of concrete structures.
  • Material Degradation: Chemical processes like corrosion, decay (in wood), and concrete carbonation can weaken structural components over time.
    • Example: Steel corrosion rates depend on environmental factors like humidity, salt content, and pH levels.
• 2.2 Thermal Performance:
  • Heat Transfer: Heat can transfer through building components via conduction, convection, and radiation.
    • Fourier’s Law of Conduction: Q = -kA(dT/dx), where Q is the heat transfer rate, k is the thermal conductivity of the material, A is the area, and dT/dx is the temperature gradient.
    • Example: Higher R-value insulation reduces heat transfer through walls, resulting in lower heating and cooling costs.
  • Thermal Resistance (R-value): A measure of a material’s resistance to heat flow. Higher R-values indicate better insulation.
    • Formula: R = thickness / k, where thickness is the material’s thickness and k is its thermal conductivity.
  • Thermal Bridging: Occurs when a highly conductive material (e.g., metal studs) creates a path for heat to easily flow through an insulated wall.
  • Air Infiltration: Uncontrolled airflow through gaps and cracks in the building envelope, leading to energy loss.
    • Experiment: Blower door tests measure air infiltration rates and identify areas of leakage.
• 2.3 Moisture Management:
  • Water Vapor Diffusion: Water vapor moves through building materials from areas of high vapor pressure to low vapor pressure.
    • Fick’s First Law of Diffusion: J = -D(dC/dx), where J is the diffusion flux, D is the diffusion coefficient, and dC/dx* is the concentration gradient.
  • Capillary Action: The ability of porous materials to draw water upwards against gravity.
  • Condensation: Occurs when warm, moist air cools and releases water vapor. Condensation within walls can lead to mold growth and material decay.
    • Example: Proper ventilation and vapor barriers help prevent condensation problems.
  • Hydrostatic Pressure: Pressure exerted by a fluid at rest, increasing with depth. Can cause water intrusion in basements and foundations.
• 2.4 Mechanical Systems:
  • HVAC (Heating, Ventilation, and Air Conditioning): Based on thermodynamic principles like the Carnot cycle and heat pump cycles. Efficiency is measured by SEER (Seasonal Energy Efficiency Ratio) for cooling and AFUE (Annual Fuel Utilization Efficiency) for heating.
  • Plumbing: Relies on principles of fluid mechanics, including Bernoulli’s principle (relating pressure, velocity, and height of a fluid) and the Hazen-Williams equation (for calculating friction losses in pipes).
  • Electrical: Governed by Ohm’s Law (V = IR, where V is voltage, I is current, and R* is resistance) and Kirchhoff’s Laws (for current and voltage in circuits).

3. Impact of Building Component Condition on Value

• 3.1 Depreciation: Deterioration of building components leads to physical depreciation, which reduces property value.
  • Straight-Line Depreciation: Assumes a constant rate of depreciation over the component’s useful life.
    • Formula: Annual Depreciation = (Cost - Salvage Value) / Useful Life
  • Accelerated Depreciation: Methods (e.g., double-declining balance) that depreciate assets more rapidly in the early years.
  • Obsolescence: Functional obsolescence (e.g., outdated design) and external obsolescence (e.g., negative neighborhood influences) can also impact value.
• 3.2 Cost to Cure: The cost to repair or replace deteriorated building components. This directly impacts the market value, as a buyer will factor in these costs.
• 3.3 Remaining Useful Life (RUL): An estimate of how long a component will continue to function adequately. Shorter RULs contribute to lower property values.
• 3.4 Market Perceptions: How buyers and sellers in the specific market perceive the condition and quality of building components. For example, energy-efficient upgrades are often highly valued in certain markets. The “green” certification of a building is evidence of energy efficiency.
• 3.5 Building Codes and Ordinances: Building codes establish one form of standard, but the ordinances enacted for their application often vary from the codes themselves or place special terms or conditions on how the codes will be applied in a given jurisdiction. Note that national building codes do not always translate into local ordinances. Buildings built to a Benchmarking green standard should exceed the local building code and should have a paper trail to provide the details of the building standard.
• 3.6 Size: The methods and techniques used to calculate building size vary regionally, differ among property types, and may reflect biases that significantly affect opinions of value.

4. Building Codes and Regulations

• 4.1 Zoning Regulations: Establish the permitted uses of real estate. Existing and potential land uses must be checked against zoning regulations to determine if they are conforming or nonconforming uses. When the present use does not conform to current zoning regulations, an appraiser should consider how this fact might affect property value.
• 4.2 Municipal Building Codes: Establish requirements for the construction and occupancy of buildings and may contain specifications for building materials, methods of construction, and mechanical systems. These codes also establish standards of performance and address considerations such as structural strength, fire resistance, energy and water usage, and adequate light and ventilation. Many newer building codes are incorporating green and high-performance features, particularly relating to energy and water use, as well as resilience features to better prepare buildings to withstand natural disasters including hurricanes, floods, and wildfires.

5. Practical Applications and Valuation Adjustments

• 5.1 Sales Comparison Approach: Adjustments are made to comparable sales based on differences in building component quality, condition, and features.
  • Example: If the subject property has a new roof, while a comparable sale has an old roof nearing the end of its useful life, a positive adjustment is made to the comparable sale.
• 5.2 Cost Approach: The cost approach relies heavily on accurate building component analysis. The appraiser estimates the cost to replace the improvements new, then deducts accrued depreciation based on the condition of the existing components.
• 5.3 Income Capitalization Approach: Building component condition can impact operating expenses (e.g., higher maintenance costs for aging systems). Energy-efficient upgrades can reduce operating expenses and increase net operating income (NOI).
  • Formula: Value = NOI / Capitalization Rate

6. Green and High-Performance Buildings

• 6.1 Unique Features: Offer lower energy and water costs, differing operating costs, and improved marketability. There may also be special tax advantages or incentives that offset the gross cost of these features.
• 6.2 Benchmarking: Benchmarking is the practice of comparing the measured performance of a device, process, facility, or organization to itself, its peers, or established norms, with the goal of informing and motivating performance improvement.
• 6.3 Market Perceptions of Green Features: According to an April 2019 Realtors and Sustainability Report, nearly 70% of residential and commercial realtors indicated that the listing of energy-efficient building components was somewhat or very valuable. A majority of home buyers were reported to be interested in sustainability, and 36% said solar panels increased the perceived value of homes.

7. Conclusion

Building component analysis is a critical skill for real estate appraisers. By understanding the scientific principles governing building performance and accurately assessing the condition of building components, appraisers can develop credible and well-supported valuation conclusions. A thorough site inspection and detailed inventory of building components are essential for accurate valuation.