Valuation Approaches: Cost, Sales Comparison, and Income

4. list the three basic activity zones of a house and describe their relationships to each other;
5. describe the characteristics that affect functional utility in the various rooms of a
   house,
6. identify the characteristics of various building components that can affect value, and
7. understand the technical terminology used to describe residential construction.
   I. Classification of Houses
   Houses are generally classified on the basis of four characteristics: the number of units, whether the building is attached or detached, the number of stories and the architectural style.
   The NUMBER OF UNITS refers to the number of separate households that the building is designed to accommodate. Although usage may vary in different areas, the term “house” is most often used to refer to a SINGLE-FAMILY RESIDENCE. If a building has multiple units that share a common access and other common areas, it is usually referred to as an APARTMENT BUILDING.
   A DETACHED HOUSE is one that is not connected to any other property. ATTACHED HOUSES share one or more walls, called “party walls,” that are jointly owned by the two adjoining properties. ROW HOUSES, common in many urban areas, are an example of attached dwellings. Ownership of an attached dwelling often involves a PARTY WALL AGREEMENT, which assigns responsibility for maintenance and repair of the party wall(s) (see Figure 7-1).
   A. TYPES OF HOUSES
   The “type of house” refers to the number of stories or levels in the house, and their relationship to each other.
   Although modern construction methods allow for all sorts of variations, the vast majority of houses fall into five basic “type” categories (see Figure 7-2):
8. one-story,
9. one and one-half story,
10. two-story,
11. split-level, and
12. bi-level (also known as split-entry or raised ranch).
    215
    Chapter 7
    Figure 7-1
    Attached Houses
    Multiples (Apartments)
    Town House
    Duplexes Row House
    Illustrations courtesy of Marshall & Swift
    Figure 7-2
    Types of Houses
    One Story
    Bi-Level
    One and One-Half Story
    Two Story
    Illustrations courtesy of Marshall & Swift
    Split Level
13. One-Story House
    A ONE-STORY HOUSE, often called a “ranch” or “rambler,” has its entire living area on the ground floor. It may or may not have a BASEMENT, which is a room of full story height located below the first floor, at least partially below ground level, and primarily not used for living accommodations.
    216
    Residential Construction
    The advantages of one-story houses include: ease of exterior maintenance, flexibility of floor plan design and the fact that there are no stairs to climb.
    On the down side, this type of house is relatively expensive to build; by comparison, a two-story house with the same exterior dimensions has twice the living area, with essentially no extra cost for roof or foundation. (Roof costs for a one-story house are often minimized by using a low pitched roofline.)
    One-story houses also require a greater amount of lot space in relation to the amount of living area, so they may be inappropriate or impractical on small or narrow lots.
14. One and One-Half Story House
    Also known as a Cape Cod, the ONE AND ONE-HALF STORY HOUSE has a steeply pitched roof that permits part of the attic area to be used for living space. Roof dormers, which add to the amount of usable upstairs space, are a common feature of this type of house. As in the case of one-story houses, the foundation may or may not include a basement. Construction costs per square foot tend to be lower for one and one-half story houses than for one-story houses.
    One and one-half story houses are often built with expandability in mind. Because the ground floor normally has at least one bedroom (and sometimes two), the upstairs level can be left unfinished until the extra space is needed. However, ease of expandability will depend on the quality of the original design and construction, which should allow for adequate access (stairs), ventilation (windows) and plumbing (bathrooms) on the attic level.
15. Two-Story House
    Compared to a one-story or one and one-half story house, the two-story house is more economical in terms of construction cost per square foot of living space.
    The reason for the economy is that square footage can be doubled without doubling foundation and roof system costs. This design also allows for the most living space on a given size of lot. Bedrooms are normally located on the upper floor, providing a natural separation between the public and private areas of the house.
    A concern with all multi-level houses is the design and efficiency of heating and cooling systems. Because heat rises, a poorly designed system will make it difficult to keep the lower level warm in winter, and the upstairs cool in the summer.
    With a well designed system, however, heating and cooling efficiency may actually be greater than for single-story houses, since the building has less exterior surface area relative to the amount of heated or cooled interior space.
16. Split-Level House
    A SPLIT-LEVEL HOUSE has three or four different levels, which are staggered so that each level is separated from the next by half of a flight of stairs. Bedrooms and baths are located
    217
    Chapter 7
    on the top level. Half a flight down are the main entry, living room, dining room and kitchen. Down another half-story, beneath the bedroom level, is space for a family room, den or spare bedroom; the garage is often located on this level as well. A fourth level, equivalent to a basement, may be located below the living/dining/kitchen space.
    The design of a split-level home lends itself to a sloped lot, where the garage and main entry can both open out at grade level. On a flat site, the main entry will be raised one- half story above the finished grade.
    A split-level house has some of the same benefits as a two-story house in terms of construction, cost efficiency and natural separation of the various functional areas of the home.
17. Bi-Level House
    A BI-LEVEL or SPLIT-ENTRY HOUSE has two main levels, one atop the other, with an entry or foyer located on a level halfway between. The lower level is sunk about halfway below ground, so the entry is even with the grade level. This design is sometimes called a “raised ranch,” since it is essentially a one-story home with a finished basement that has been raised partially out of the ground. The main rooms of the house are all on the upper level, with the lower story used for a family room or rec room, and perhaps a spare bedroom.
    Since the lower level of a split-entry house is partly below ground, special care must be taken to provide adequate insulation and moisture proofing. Another drawback to this design is the lack of a basement or crawlspace in which to run pipes and ductwork.
    Nevertheless, split-entry homes are cost-effective to build, and the finished lower level space is considered part of the “gross living area” for appraisal purposes in many parts of the country.
    II. Architectural Styles
    ARCHITECTURAL STYLE is the character of a building’s form and ornamentation.
    If homebuyers in a particular area do not find a particular architectural style desirable, homes of that style are likely to sell for less than similar size homes having architectural styles which are more desirable within that community.
    Architectural styles have traditionally been influenced by local factors such as climate and the availability of different building materials.
    There are many examples of traditional architectural styles that are adapted to a particular location❓: Spanish style houses with thick adobe walls and tile roofs in the south❓west desert, Southern Colonial houses with deep shaded porches in the hot, humid South, or Cape Cod style homes designed for protection from cold northern winds in New England (see Figure 7-3).
    218
    Residential Construction
    Figure 7-3
    Examples of Different Architectural Styles
    Colonial Cape Cod (1) Cape Cod (2)
    Cottage Victorian Mediterranean
    Southern
    Saltbox
    Ranch
    Chalet “A” Frame Contemporary
    Illustrations courtesy of Marshall & Swift
    219
    Chapter 7
    Local traditional styles can still be found in many areas, but location is much less of an influence on architectural style than it used to be.
    Builders are no longer limited to using local materials, since modern transportation systems make different building materials widely available at reasonable costs. The invention of central heating and cooling, as well as improved insulating materials, has broadened the range of architectural styles that can be adapted to local climates.
    A. COMPATIBILITY
    COMPATIBILITY means that a building is in harmony with its use or uses and its environment. In terms of value, one type or style of house is not inherently better or worse than any other. What is most important to value is the compatibility of the design. Compatibility has several different aspects. To maximize value, the design of a house should be compatible with the designs of other homes in the area, with the physical and environmental characteristics of the building site, with the materials used in the construction, and with the preferences of the local market.
    First of all, the design of a house should be compatible with the styles of other houses in the local neighborhood.
    The market may welcome a limited degree of uniqueness in design, but value will generally suffer if the design contrasts too radically with surrounding houses.
    Subdivision developers often impose design restrictions on their developments, because they know that compatibility of design will have a positive impact on property values in the subdivision.
    Case/Example: A contemporary style house located in a neighborhood of other contemporary style houses is likely to be viewed positively by the market. But the same house located in a neighborhood of traditional style homes might seem “out-of-place,” and its value could suffer as a result.
    Compatibility of design also refers to the suitability of the design for the particular building lot and location. Value is enhanced by a design that takes advantage of physical site characteristics, such as views. The design should also be appropriate for the topography of the site. For example, split-level designs often work well on hilly sites, while colonial style houses do not. Finally, the design should be appropriate for the local climate. A design that is specifically adapted to a hot desert climate, for example, would be inappropriate in an area with cool, rainy weather.
    A building’s architectural style is often defined at least in part by the materials used in its construction. Spanish style homes have clay tile roofs, Tudor’s utilize timber framing, contemporary designs incorporate large areas of glass. A compatible design is one where the materials are appropriate to the style.
    Case/Example: A clay tile roof on a Cape Cod house would look ridiculous to most potential homebuyers.
    The final aspect of design compatibility is perhaps the most important: the design must be compatible with the demands of the market.
    220
    Residential Construction
    The popularity of any given design is influenced by the economic and social forces that affect value. As lifestyles and demographics change, so does the demand for different design features in housing.
    Ultimately, it is the local market that determines what is a “good” design, and what is a
    “bad” one.
    Case/Example: A development of new contemporary style houses is built in an older community with mostly traditional style housing. If the market places an emphasis on the historic character of the community, the contemporary homes will be viewed as incompatible, and their value will suffer. On the other hand, if market forces are creating a demand for more modern housing in the community, the contemporary homes may not be incompatible at all, but may simply represent a new trend in community standards.
    III. Elements of House Design
    An appraiser must be able to identify the various elements of house design and evaluate any defects in those elements. The elements of house design include siting, interior functional zones, and room characteristics.
    He or she may use mobile apps to reproduce accurate renderings to use for comparison purposes.
    A. SITING
    SITING refers to the placement of the house on the building lot. Placement is normally limited to some extent by building code set-back requirements, which call for minimum distances between the house and the property’s boundaries. Topographic considerations such as slopes or poor soil conditions may also limit where the house may be placed on the lot. Within these limits, however, careful placement of the house on the lot can have a significant impact on value.
    There are four basic considerations in designing the placement of a house on its lot: orientation to the sun, orientation to prevailing storm winds, orientation to views, and the division of the lot into functional zones (see Figure 7-4).
    Appraisers can create figures like the one above by using appropriate mobile apps.
    Orientation to the sun affects the amount of light and heat that can enter the house. In most areas, a design where the living areas of the house face south is considered optimum. This orientation takes best advantage of natural lighting in the most used areas of the home, and helps maximize solar heat gain in the winter. Excessive summer heat gain can be avoided by using wide roof overhangs, which shade the house in summer when the sun is high in the sky, but allow light and heat to penetrate in the winter when the sun’s path is lower.
    Screening with deciduous trees is another effective way to block the summer sun but still allow it to shine through in the winter when the trees are bare.
    221
    Chapter 7
    Figure 7-4
    Exterior Functional Zone Example - Windbreak Layout
    Cold Winter Wind
    7 P.M. Sun
    (low)
    4 P.M. Sun
    (high)
    Morning
    Sun
    Cooling Summer Breeze
    Noon Sun
    (high)
    In some areas, orientation to prevailing storm winds is an important siting consideration. In areas that are subject to frequent or heavy storms from a particular direction, it is best to minimize the amount of window area that is directly exposed to the winds, in order to cut down on heat loss. Entries should also be sheltered from the direct path of the storms.
    An attractive view can add significantly to the value of a house. Views should be visible from the most used areas of the house. Even if the site does not have an attractive territorial view, careful landscaping can provide a pleasant view of the lot from the living area.
    The last aspect of house siting is the division of the lot into functional areas or zones, the so-called public, private, and service zones. The area that can be viewed from the street frontage is the public zone. Areas shielded from the street by the house, or by fencing or other landscaping, constitute the private area. The service area includes access ways (driveway, walkways, etc.) and outdoor storage areas. Good design maximizes the amount of private area available for household activities.
    B. INTERIOR FUNCTIONAL ZONE
    An appraiser cannot underestimate the importance of FUNCTIONAL UTILITY, which concerns a building’s ability to perform the function for which it is intended according to current
    222
    Residential Construction
    market tastes and standards; as well as the efficiency of use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.
    A well-designed house should provide space for three basic activities: living, working, and sleeping.
    Ideally, the spaces provided for each of these activities should be separated, so that one activity does not interfere with another. For example, bedrooms should be located where they will not be disturbed by activities in the living and working areas of the house.
    Figure 7-5 shows how the spaces for the three different activities can be separated into zones. The LIVING ZONE includes the public areas of the house: the living room, dining room, family room and guest bath. The WORKING ZONE is comprised of the kitchen and laundry/ utility room. Bedrooms and private baths are located in the SLEEPING ZONE.
    Figure 7-5 Interior Functional Zones
    LIVING ZONE
    Family
    Room
    Living
    Room
    Master
    Bedroom
    Fireplace
    Ba.
    Ba.
    WORKING ZONE
    Kitchen
    Laundry Ba.
    Dining
    Area
    Ent.
    Bedroom Bedroom
    SLEEPING ZONE
    Garage
    (Appraisers can create similar figures by using floorplan apps online.)
    The separate activity areas of the home are connected by hallways, stairs and entry ways, which are sometimes referred to as a fourth zone of the house, the CIRCULATION ZONE. While the three activity zones should be designed to provide separation of the activities, they should also allow for easy circulation between and within zones.
    Design features that affect desirability affect value because value is determined by supply and demand features of the marketplace.
    223
    Chapter 7
    A house’s value is affected by the building’s FLOOR PLAN, which is an architectural drawing indicating the exact layout of rooms and illustrating the functional or nonfunctional relationship between them. Structures with wasted space might lack space where it is otherwise desired so that the property will be less desirable to buyers than similar size homes.
    How the designer allocates space affects desirability for many buyers. An example is while a custom 3,000 square foot home might have only two bedrooms because that is what the original owner wanted, to most potential buyers, the design would be a negative feature.
    Case/Example: In a retirement oriented community, a two-story home without a bedroom on the first level is likely to be far less desirable than one with this feature.
    C. ROOM CHARACTERISTICS
18. Kitchens
    The kitchen is commonly the most used room of the house, so its design and location have a large impact on the functionality of the overall floor plan.
    Kitchens should be conveniently accessible from both the main entrance and service entrance of the house, and should be located adjacent to the dining room and family room, if these rooms are included in the design. Also, the kitchen should be designed so that it is not necessary to walk through the working area in order to reach other rooms of the house.
    A critical aspect of kitchen design is the work triangle, which is formed by the sink, refrigerator, and range. The distances between the three points of the work triangle can make the difference between an efficient kitchen design and a poor one. If the distances are too small, the kitchen will be cramped; if they are too great, preparing a meal will seem like a five-mile hike. A distance of four to seven feet between each point of the work triangle is considered optimal (see Figure 7-6).
    Figure 7-6 Kitchen Work Triangle
    SINK
    REFRIGERATOR
    STOVE
    224
    Residential Construction
    Kitchen sizes vary considerably. Eighty square feet of space (8’ x 10’) is considered a minimum, but kitchens twice that size are not uncommon. Larger kitchens often include an eating area or family activity area. The design should include adequate counter and cabinet space, and plenty of electrical outlets for kitchen appliances.
    Lighting and ventilation are important considerations in kitchen design. Overhead lights should illuminate all areas of the kitchen, and a vent or fan should be located over the cooking area to allow cooking fumes to escape. Natural lighting is desirable, but the placement of windows can be a problem. The best location for a kitchen window is over the sink. Additional windows are desirable so long as they do not take up space needed for wall cabinets.
    Windows should never be placed over the cooking area.
19. Laundry/Utility Rooms
    Laundry areas are best located where they are convenient to the sleeping area of the house, off the bedroom hallway for example. However, location of the laundry area is not as critical as most other rooms of the house, and laundries are often located in the garage or basement.
    The laundry area should be well-ventilated, and located where noise from the appliances will not disturb others.
20. Living Rooms
    The living room is the main public room of the house.
    It should be located near the main (guest) entry, be separated from the sleeping area, and preferably be on the south side of the house. If the house has a dining room, it should be next to the living room. It should not be necessary to cross through the living room in order to reach the kitchen or bedrooms.
    The size and shape of the living room should allow for easy arrangement of furniture. About 200 square feet is the minimum size, and rectangular shaped rooms tend to work best for furniture placement. The modern trend is for smaller living rooms, particularly in homes with a separate family/recreation room.
21. Family Rooms
    In many areas, the FAMILY ROOM (also called a recreation room) has taken over the role of the living room as the main center of entertainment and socializing in the house. As part of the living zone, the family room should be separated from the sleeping zone; however, it is usually considered an advantage if the family room is next to (or near) the kitchen.
    Since the family room is a center of activity for household members, direct access to the outside is also an asset.
    225
    Chapter 7
22. Dining Rooms
    Dining rooms may be formal or informal. A formal dining room or area is a separate room that is designed for that purpose. Informal dining areas are usually attached to or part of the kitchen itself, and may take the form of a nook or alcove.
    The main considerations for the dining area are that it should be large enough to accommodate a dining table and chairs (including room to get in and out of the table), and it should have easy access to the kitchen so that food does not have to be carried through other areas of the house.
23. Bedrooms
    The number of bedrooms has a major effect on house value.
    Normally, homes with different numbers of bedrooms appeal to different segments of the market, that is, to families of different sizes or lifestyles. The average household size in the market will have a large impact on the desirability of three- or four-bedroom homes, as opposed to two-bedroom homes.
    Ideally, bedrooms should all be located in a separate sleeping zone, to provide both privacy and noise insulation. The most common arrangement is to locate the bedrooms on a separate story or wing. Each bedroom should have convenient access to a bathroom, either directly or via a private hallway. Also, it should not be necessary to go through a bedroom to reach another room (other than a private bath).
    Depending on the room layout, a size of 9’ x 10’ is the minimum needed to allow for a single bed, 10’ x 12’ for a double bed. Whether larger room sizes will add to value depends on local market preferences. Most homes have at least one bedroom that is larger than the others, the MASTER BEDROOM. Modern master bedrooms will often have walk-in closets and other amenities.
    Each bedroom should have its own clo
    Here’s a detailed scientific summary of the chapter “Valuation Approaches: Cost, Sales Comparison, and Income” from the “Mastering Home Design” course, tailored to the book content and course description:

Scientific Summary: Valuation Approaches - Cost, Sales Comparison, and Income

This chapter, “Valuation Approaches: Cost, Sales Comparison, and Income,” within the “Mastering Home Design” course, provides a critical foundation for understanding how design choices and property characteristics ultimately influence residential property value. This knowledge is crucial for realizing the course’s objective of crafting functionally superior and aesthetically pleasing homes that meet modern market demands and elevate property value. The chapter systematically presents three fundamental valuation methodologies used in appraisal, bridging the gap between design principles and financial outcomes.

1. Cost Approach:

• Principle: The core principle is substitution. A prudent buyer will pay no more for a property than the cost to acquire an equivalent site and construct a new, similar improvement. This approach is especially relevant in home design because it underscores the direct impact of construction materials, labor, and design complexity on the overall value.
• Methodology: The cost approach involves:
  • Site Valuation: Estimating the market value of the land as if vacant (a concept detailed in Chapter 6, referenced within the chapter). This is essential for establishing a baseline value.
  • Replacement Cost (New): Calculating the current cost to construct a new structure with similar utility, design, and materials (or, in some cases, the reproduction cost of an exact replica). This calculation is directly linked to the selection of materials and design specifications covered in the course.
  • Depreciation: Quantifying the loss in value to the existing improvements due to physical deterioration, functional obsolescence (e.g., outdated design, poor floor plan impacting functional utility), and external obsolescence. The chapter highlights the difficulty in accurately estimating accrued depreciation, especially for older or non-conforming properties, which aligns with the course’s emphasis on modern designs meeting current market demands. The formula is: Property Value = Value of Site + Replacement Cost (New) - Depreciation.
• Relevance to Course: The cost approach makes home designers aware that design choices and materials are directly linked to the replacement cost and the level of depreciation.
• Implications: Understanding the cost approach empowers home designers to make informed decisions about materials and construction techniques. High-quality, durable materials and modern, functional designs, which are directly addressed in this course, can minimize future depreciation and improve overall property value.

2. Sales Comparison Approach:

• Principle: The principle of substitution again applies. The value of a property is directly related to the sale prices of comparable properties in the same market area.
• Methodology: The sales comparison approach relies on:
  • Identification of Comparables: Locating properties (comparables) that are similar to the subject property in key characteristics (physical features, appeal to similar buyers, location within the same market, recent sale date). This step highlights the importance of understanding the target market, a central theme of the course.
  • Adjustments: Making monetary adjustments to the sale prices of the comparables to account for differences between them and the subject property (e.g., a comparable with two bathrooms sold for \$145,000, while the subject only has one; an extra bath is worth \$5,000; therefore, the adjusted value of the comparable is \$140,000). Subject Value = comparable sales❓ Price +/- Adjustments.
• Relevance to Course: This approach underscores the direct correlation between design and market preferences. The features included in the floor plan directly relate to the “adjustments” needed to be done in the sales comparison approach, and having modern features increases the value in the marketplace.
• Implications: The sales comparison approach emphasizes the need for home designers to be aware of current market trends and preferences. Features that are highly valued by buyers in the target market, such as modern kitchens, desirable layouts, and energy-efficient features (all covered in the course), will translate to a higher appraised value.

3. Income Approach:

• Principle: The value of a property is related to its ability to generate income. The greater the income, the greater the value.
• Methodology: The chapter focuses on the Gross Rent Multiplier (GRM) method, which is typical for residential properties:
  • Comparable Rental Data: Collecting data on the sale prices and gross monthly rents of comparable rental properties.
  • GRM Calculation: Dividing the sale price of each comparable by its gross monthly rent to determine the GRM.
  • Application to Subject: Selecting an appropriate GRM from the range of GRMs and multiplying it by the subject property’s gross monthly income to estimate value. Example: Subject Monthly Rent x GRM = Value by Income Approach.
• Relevance to Course: This approach helps designers understand how their design choices influence a property’s rental potential and overall investment appeal.
• Implications: This method emphasizes the importance of designing homes with features that are attractive to renters. These include open floor plans, modern amenities, and desirable locations (all key areas of the course). Design choices impact the rental income a property can command, thus directly influencing its value as an investment.

Reconciliation:

The chapter concludes by introducing the concept of reconciliation, where the appraiser weighs the value indicators from each of the three approaches to arrive at a final estimate of value. The reconciliation process requires the appraiser to consider the reliability of the data, the logic applied, and the intended use of the appraisal.

Course Integration:

Throughout the summary, connections are drawn between the valuation approaches and the “Mastering Home Design” course’s core principles:

• Orientation, Zoning, and Functional Spaces: The cost and sales comparison approaches emphasize the economic benefits of designing functionally superior spaces that meet modern market demands.

• Maximizing Natural Light and Minimizing Energy Costs: Design elements promoting energy efficiency are factored into the cost approach and can influence adjustments made in the sales comparison approach, directly impacting value.

• Evaluating and Enhancing Floor Plans and Room Characteristics: All three approaches emphasize the importance of functional and aesthetically pleasing floor plans and room characteristics, as these contribute to both the property’s appeal to buyers and its potential rental income.

In conclusion, this chapter equips the student of home design with the knowledge to understand how their design decisions translate into measurable financial outcomes. By mastering these valuation approaches, course participants can design homes that are both beautiful and valuable assets in today’s market.