At the Frank Lloyd Wright Building Conservancy, an important part of our mission is to help facilitate the sale of Wright-designed houses to buyers who appreciate not only the wonderful design qualities of these great houses, but who are also willing and able to serve as long-term custodians of these houses via ongoing maintenance and eventual sale to like-minded buyers in the future. By doing so, the owners of these houses ensure that the houses are preserved for the enjoyment and appreciation of future generations. Given that the newest of the houses designed by Wright is now almost 60 years old, and with Wright’s earliest designs dating from the early 1890s, this aspect of our mission is becoming increasingly important in the preservation of Wright’s architecture.
The Wright on the Market section of the Conservancy’s website helps to connect Wright buyers and sellers to encourage sale transactions among preservation-minded parties. This resource also provides us with a helpful, up-to-date snapshot of the current market for Wright’s houses across the country. Through our advocacy programs, we are also in regular dialogue with Wright homeowners with respect to issues of preservation and related issues of valuation. As a result of these initiatives,
In considering the sales of Wright-designed houses, we have noticed some interesting, but related, trends: 1) Issues concerning the valuation of Wright-designed houses are beginning to arise more often; 2) Wright-designed properties tend to remain on the market for longer periods of time; and 3) The appetites of prospective buyers to take on large-scale restorations is diminishing. These three issues are, of course, all directly related to the state of the national economy at the time of sale of the given property. And the majority of Wright-designed houses on the market are priced in the luxury segment of the market at asking prices of $500,000 or higher, a category that was particularly hard hit in the most recent real estate downturn. However, if we put the national economic and larger market conditions aside for the purpose of this discussion, we think there are still some fundamental and relevant observations that can be shared that might be helpful to those who are considering the sale of their Wright-designed properties.
Every buyer would like to secure premium pricing when selling property. Qualitatively, it is certainly not difficult to attribute a premium to living in a house designed by Frank Lloyd Wright. The many attributes that make living in a Wright-designed house a special experience can surely be appreciated by homeowners on a day-to-day basis. Indeed, many homeowners will confirm the notion that living in a Wright house enhances their lives and even their physical health, and they have the longevity to prove it! And with minimal guidance, prospective buyers can appreciate these same attributes when touring the houses. Wright’s houses tend to be located in some of the most desirable neighborhoods and dramatic physical environments in the United States. Then too, there is also the cachet of being among the small group of homeowners who possess a work of architecture designed by America’s premier name architect.
It is for these legitimate qualitative reasons that Wright homeowners often introduce their properties for sale at pricing that represents a significant premium to the local market.
But it is more challenging to demonstrate a quantitative premium in pricing and selling a Wright-designed house. By demonstrate we mean to confirm, via actual completed sales (not asking prices or anecdotes), that premium pricing was achieved for a Wright house relative to local market pricing for a comparable house in terms of location, house size, land area and condition. It is these quantifiable attributes of location, size, land area and condition that truly dictate the market value of a house. And ultimately the value of the house must be confirmed via an appraisal.
The critical step in the sale process is for the seller and buyer to agree on price and execute a contract of sale for the property. But there remain some important steps necessary to the closing of the sale. Virtually all properties sold today will be financed, with a lender providing a loan for 80 percent to 90 percent of the purchase price (with the balance of the purchase price being equity provided by the buyer). To provide the financing, the lender will require an appraisal of the property to confirm its market value. It is important that this valuation “appraise out” at the agreed sale price, or there could be implications for how the sale proceeds, including the potential for repricing the transaction at a lower sale price. In an environment of restricted access to financing, the appraisal is thus becoming an important arbiter of value in the sale, and not merely a step to be checked off as part of the transaction process. It might be helpful to look at the basics of a residential appraisal.
The need for appraisals arises from the fact that no two properties are exactly alike, and the differences between properties create differences in value. (So far, this is all potentially good news for the owner of a distinctive house designed by Frank Lloyd Wright.) But the goal of the appraisal process is to determine, quantitatively, the value of the property via three independent approaches. These three approaches to value are:
- The Cost Approach: This approach looks at the cost to replicate the property in terms of today’s land values and construction costs; clearly, the older the house, the more difficult it is to apply this approach with accuracy.
- The Sales Comparison Approach: This approach gathers sale transactions for houses considered comparable to the subject, i.e. of similar location, size, etc.; adjustments are then made to the comparable prices to account for differences between the subject property and the comparables.
- The Income Approach: This approach evaluates the property’s prospects as a rental property (at current market rents) and then discounts these future cash flows at an appropriate discount rate to determine a current market value.
The appraiser will then reconcile the three estimates generated by these three approaches to reach a final appraised value. The outcome of this appraisal process is market value.
As is clear above, the appraiser has unfortunately very little latitude to directly account for the qualitative attributes of a given property. Further, there is limited scope to take into account the “all in” investment a homeowner may have made in the form of additional restoration or renovation beyond the original purchase price. Given the various approaches employed by appraisers, the determination of market value is not simply driven by original purchase price plus restoration cost. Put another way, it is not a build-up equation that reflects original basis plus subsequent investment plus carrying costs during ownership. Yet this is a concept of valuation and pricing we have seen employed by sellers in the pricing of Wright-designed houses.
On the other hand, the buyer will approach the transaction using a residual type of equation that begins with what is the property’s achievable price on the market today (market value) and then subtracts any additional costs necessary to bring that house up to a market standard (for repairs, renovations, restorations). The remaining difference is what the buyer can logically spend to acquire the house today. It is therefore critical, from the buyer’s perspective, to acquire the house at a basis appropriately low enough to support the cost of the additional restoration work, while ending up at a total investment that relates to the house’s current market value.
One solution, from the seller’s perspective, is to commission an independent appraisal or an opinion of market value prior to placing the home on the market (the Conservancy often makes this recommendation to Wright homeowners). This is a different exercise, and a more formal process, than that of requesting sale price estimates from local real estate brokers. It might also be helpful to have estimates for any additional work the house requires, prior to engaging the buyer in a discussion of these same costs, as the buyer will be approaching these costs as deductions from the sale price. It is important to have estimated these costs in advance.
Of course, offering a fully restored house to the market simplifies this discussion dramatically. But offering a fully restored house is important for another reason. It is in line with what today’s buyer is consistently seeking: a completed or finished house, not a project that will require years of restoration.
It is important to recognize the difference between market value and price. Simply put, the former is more objective than the latter, which may be subjective in its determination. There can be many reasons why a prospective buyer places a higher price on a given property than its market value calls for. It is up to the seller (and his/her selling agent) to identify those attributes most likely to generate this premium, and to then identify a buyer who appreciates those same attributes.
How can the Wright homeowner maximize sale price in the current environment?
- Commission an independent appraisal or an opinion of market value of the house prior to placing the house on the market. Become familiar with the sale prices for homes that have sold in the immediate area. Be realistic on initial pricing, with a strong grasp of prices for houses of similar size, location and condition in the immediate area. All real estate is ultimately local; the guiding rule for pricing is to gather and review actual sale comparables of similar houses located in the same area.
- If the house is appropriately priced, then it should remain on the market for a period of time consistent with that of similar appropriately priced homes in the same area. The goal is to avoid protracted listing periods, which are time-consuming for all involved, and almost always work to the detriment of the seller in the final price that is achieved. If a house is mispriced by more than 20 percent (higher) relative to its market value, it may take a long period (a period increasingly measured in years) for the house to sell.
- In today’s market, the condition of the home is very important. Not only will a fully restored home limit the negotiations with the buyer over the costs of restoration required, it also will greatly simplify and speed the sale. And in today’s market, prospective buyers have little patience (nor available capital) to take on projects requiring major restoration.
We hope these observations are helpful to homeowners. Our objective is to demonstrate to prospective owners of Wright houses, via a steady volume of successfully completed sales posted on Wright on the Market, that owning a house designed by Frank Lloyd Wright can be as financially rewarding as it is aesthetically appealing.
Leo Koonmen is the former treasurer of the Frank Lloyd Wright Building Conservancy. He is a commercial real estate investment manager and consultant. He received his undergraduate degree from Columbia University and his MBA from the University of Chicago. A resident of Chicago, Leo is also a longtime active docent at the Robie House.
Posted on September 3, 2010