Why Valuing Barndominiums, Tiny Homes Needs the Cost Approach

A Conversation With Ed Martinez

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Ed Martinez:

Cost approach is great, a benchmark of reality.

Maiclaire Bolton Smith:

Welcome back to, Core Conversations: A CoreLogic Podcast. Where we tour the property market to investigate how economics, climate change, governmental policies, and technology affect everyday life. I am your host, Maiclaire Bolton Smith, and I’m just as curious as you are about everything that happens in our industry.

When you’re buying or selling a home there are a lot of things that go through your mind. One of the major factors is how much that home is worth, to the buyer, to the government for taxes and to an insurance company. I know for us, that was really important when we were recently buying a home here in wildfire-prone, California. So it’s interesting though that depending on who you talk to, the value of a home can vary.

This idea really caught my curiosity. So I’ve invited, Ed Martinez, a Director of Industry Solutions here at CoreLogic, to talk about how things get even more nuanced when you talk about the type of home being considered and what materials were used to construct it. So think luxury barns or retrofitted mobile homes, or even just the run-of-the-mill track homes. So Ed, welcome to Core Conversations.

EM:

Wow. Thank you for having me. I am excited to be here.

MBS:

I am super excited to talk to you because you and I have worked together and known each other for a very long time, so this is going to be fun. And I’m excited because we’re going to talk about values today, and you are definitely one of our experts in this.

So, okay. I’ve talked a lot on this podcast about how we recently bought a home and the adventure that we went through with that. But the big thing is, depending on who you ask and depending on what you’re looking for, the home has many different values. So can you talk a little bit about, explain about why are there so many different values for a property?

Erika Stanley:

Before we get into this discussion, I wanted to remind our listeners that we want to help you keep pace with the property market. To make it easy, we curate the latest insight and analysis for you on our social media where you can find us using the handle @CoreLogic on Facebook and LinkedIn, or at CoreLogicInc on X, formerly known as Twitter, and Instagram. But now let’s get back to, Maiclaire and Ed.

EM:

Yes. Different opinions of value on the same dwelling. Yeah. I’m just going to touch upon four topics that come to mind. I’m sure there’s several others, but I’m thinking of the market value, the assessed value, insurable value, and the cost approach. So from a high level, the market value is essentially the price of home would sell for in the open market under normal conditions. It’s kind of a snapshot in time for the opinion of value.

MBS:

The number that you would see on the MLS or Zillow or something like that.

EM:

Totally, yes. What can your house sell for, right now? The assessed value though is something that is based for ad valorem taxation, property taxes, and that’s usually the major revenue source for both the state and municipal governments. And that is also a look at your market approach somewhat, but it’s usually a lower dollar amount than what you would see on the Zillow’s and that kind of thing, but it’s for taxation.

And then of course, the insurable value is the total risk that the insurance carrier may deem on the property, and it’s the maximum dollar amount that the insurance company will pay on a claim specific to that policy. And then the cost approach is really, based on comparison, it’s the cost of a new property or a substitute property with the same utility compared to the subject property.

MBS:

See, that’s an interesting one because I think people are… Everybody pays their taxes, everybody knows that they have an assessed value. We all are familiar with market value, we all insure our properties. The cost approach is probably something that a lot of people aren’t as familiar with. So that one is really interesting. Can we dive into that one a little bit?

EM:

Sure. The cost approach, there’s different ways to look at it, but it’s mostly the physical labor and material for the property to be built. So the cost approach is a method of real estate valuation where the value of the real property is determined by what it’s going to cost to rebuild it in case it was destroyed, or you just want another one like it.

MBS:

Okay. I know I’m not the only one that’s thinking this and wondering this. But why do we have to have all these different values, they’re all a tiny bit different? Yes, they serve a different purpose, but wouldn’t it just be easier for everyone involved if there was only one value? Why do you think we have all these different values and why are they all a little bit different?

EM:

That’s a great question. And I’ve also heard other people say, “Why can’t they just all be uniform?” The first thing that comes to mind is as you know insurable value looks at the total risk, and they’ll have to incorporate things like debris removal and unforeseen circumstances like code change and hurry up and fix the property. So that can give you a much more accelerated number than somebody saying, “Well, we wouldn’t pay that much if it was just being built new. We don’t have any problems.”

So therefore there’s going to be a delta right there. And also maybe for other reasons for loans and things of that nature, I would imagine some people may prefer one answer over another because they’re both technically correct.

MBS:

Right. For different purposes. Is it safe to assume that the market value will always be the highest value of all of these?

EM:

Yes and no. That’s a great… I’m thinking back to the whole housing thing in 2008. There was actually properties, I don’t want to name cities, but there was cities where the house was selling for less than what it would cost to build.

MBS:

Wow. Yeah, I know. And that’s really what led to the housing crisis that did happen back during the Great Recession.

EM:

Yes. But generally they are higher, of course.

MBS:

Okay. That is interesting. And all of these are talking about the physical property itself and not the land at which it sits on how does that factor into the equation?

EM:

So cost new to replace your house minus any depreciation, then we add the land value, and that’s what kind of gives it the representation of the market is. And so it’s those combinations, but the cost approach is everything except the land.

MBS:

Okay. That makes sense. Okay. You mentioned briefly about taxes, about how assessed value is for taxes. Why when they’re developing the assessed value, when they’re determining how much tax you will pay on a property, it uses the material costs as a way of developing the tax structure versus why does it not just use the market cost or the market value?

EM:

No. It kind of is somewhat of the market value because the market value would incorporate the cost of the materials and the labor, and then of course the land value. But the ad valorem taxes are levied as a percentage of the assessed value on a piece of property, and that tax represents a percentage of the total property value, which as you know, we commonly refer to as, fair market value.

MBS:

Right. Okay. That makes sense. Okay. So I guess the other thing too, whenever we talk about home values, people always think, “If I want to increase the value of my home, what can I do?” And the number one thing people usually talk about when you talk about remodeling that kitchens and bathrooms are the two things that bring the value up the most. How influential really are specific rooms like a kitchen or a bathroom when it comes to the actual value of a home?

EM:

I think it adds a tremendous value because remodeling older homes with higher end materials, especially high-ticket items like kitchens and baths, to me, that could help to lower the effective age. And for those who might not be familiar with that term, the effective age is how well does it compare to other properties in the area? The house itself might be 50 years old, but the extensive remodeling made it look as nice and cool as a 25-year-old home because it has the same thing.

MBS:

Oh, interesting.

EM:

So therefore, that may make it more appealing to a prospective home buyer who might see the value in a ready-to-go home.

MBS:

Right. Wow. No, I think effective age, that’s a really important term. And one I wasn’t really thinking of, but I think in this day and age, really the last few decades, few years for sure, there’s been a lot of… flipping has become the thing to do. Where they buy a home and they upgrade it, and then they essentially, they’ve taken the effective age up decades, 10, 20, 30, 40 years to make it up to modern standards by making this new fancy home that may actually be a really old home. So that is something that can be really important to the value as well, I hadn’t thought about that.

EM:

Yeah, absolutely.

ES:

Before Maiclaire and Ed, continue the conversation about determining home values, it’s that time again. Grab a cup of coffee or your favorite beverage, we’re going to do the numbers in the housing market. Here’s what you need to know. In October 2023, the average US home down payment reached an all-time high. On average, down payments were up by 8% year-over-year in December 2023, according to CoreLogic public record data.

While this increase was across price tiers, low-tier homes saw the largest year-over-year rise in average down payment size. Down payment percentages were highest in the California cities of San Francisco, San Jose, and Anaheim, as well as Naples Florida, and New York.

Even with the increasing cost of homeownership mortgage delinquency rates are some of the lowest in years. In January 2024, 2.8% of mortgages were delinquent by at least 30 days or more, including those in foreclosure.

Nationwide, the overall mortgage delinquency rate held steady in January and the serious delinquency rate fell from a year ago. However, one-third of metros posted an increase in the overall delinquency rate from one year earlier. A handful reported an increase in serious delinquency rates.

The uptick in the metro area around Lahaina, Hawaii is a result of last year’s wildfire. However, increases in other areas of the country could be a sign that borrowers are experiencing budget strains. And that’s the SIP. See you next time.

MBS:

Okay. I want to talk about something that I had not heard this word before, but it’s now that once I heard it, I hear it all the time, but “barndominium.” So I guess are, when we talk about renovating properties, people aren’t just renovating the standard home, they’re renovating all kinds of different properties right now. And one like renovating barns and turning them into these ultra luxury properties, rather than just buying a run-of-the-mill track home has become a thing.

So I want to talk about this a little bit because it’s more of a thing than I realized it was. So can you talk a little bit about something about how popular barndominium are, and actually what’s this all about?

EM:

Barndominium are beautiful. If you Google them, you’ll see that they’re on these large parcels with many acres. But the idea of what I see, the big appeal is that it offers today’s modern features and construction materials in this beautiful house with high ceilings, open living space, and just luxurious aesthetics. And the cost can actually be somewhat cheaper than a traditional home.

MBS:

Really. Wow. Why? Why would it be cheaper?

EM:

Well, there’s many different models, but if you’re thinking of the open floor plan, they are less expensive to build because they use fewer materials. And this gives the homeowner the chance to add more luxury items like granite countertops or wraparound patios. But a couple of key points is faster construction, there’s less framing, lower cost for foundations, especially if you don’t have a basement and they’re open concept floor plans.

And so all those things mixed together just enable it to be a less expensive build when compared to a traditional home.

MBS:

Interesting.

EM:

And generally, you might not have as much partitioning going on.

MBS:

Sure.

EM:

So it kind of gives you this expansively, beautiful, large space.

MBS:

Wow. Okay. So kind of tying back to some things that you mentioned earlier when we talked about the cost approach. And it makes me then think of there are other kind of potentially non-traditional type homes. Tiny houses have also become quite popular in this day and age. There are studio sheds, there are little casita’s or mother-in-law cottages in backyards. For these kind of non-traditional homes is it the cost approach really the most widely used approach for valuing these types of properties?

EM:

I’m going to say yes, it is. Because of the lack of comparable sales and because of that, the cost approach kind of plays a larger role in helping to determine that opinion of value.

MBS:

I hadn’t thought about that. That’s a really important thing that one of the major things that goes into market value is comparable properties and other properties that are like it in the similar area. And if you don’t have anything else like it, you’ve got nothing to compare it to. So that does add this extra importance to the cost approach. I would never have thought of that. Interesting.

EM:

Cost approach is great, the benchmark of reality.

MBS:

Okay. I’m still stuck on these barndominiums just because it’s a fun word to say, but just the concept of it, because to your point, just the sheer volume of space that you end up getting, there’s these beautiful properties on tons of land. And if you had a custom home or even a track home on a property like that, it would be exponentially more expensive because of the type of property it is.

So I can see why this has become a fad, probably something that people have really dug into because it is an interesting way of getting a beautiful home that you can customize yourself, that’s significantly cheaper. So yeah, it’s really interesting.

I’m moving into HGTV land right now as I think of these things.

EM:

I love that show.

MBS:

So I guess the question is too barns specifically, but are there other types of buildings that people are renovating as well too? I know I’ve seen TV programs of people renovating old churches and different types of structures, or is everybody really flocking towards barns? Are they just more available or are we seeing this concept from other large, open-ish type properties as well?

EM:

That’s a good question. I don’t know if that makes barndominiums more popular in certain parts of the US that may have that larger space versus Los Angeles. But that’s an interesting question because sometimes they’ll use containers. Container homes that you see for shipping cargo to build certain types of dwellings, and you just see different types. So it may be more specific to certain regions of the country than others as to what people are really gravitating towards.

MBS:

Yeah, that’s a really good point. I know I have friends that commented, especially during the pandemic when everyone ran out of space because everyone was at home, that people were using containers to build offices in their backyards, and it gave them that extra bit of space that they could extend their property without actually extending their property.

EM:

Yeah.

MBS:

Okay. So let’s talk more about these barndominiums because this is just so cool. When an appraiser does an appraisal, or an assessor does an assessment of a home, they go inside the house to look at everything too because if you were to look at a barndominium from the outside, it might just look like a barn. It might not look like it’s got these beautiful granite countertops and expansive beautiful insides.

Do you have any kind of data or anything that we’ve done that looks at the impact of what you can do on the inside of a barndominium and what that does for the value?

EM:

Sure. One way you can go about it is take the cost of a barn, which is sometimes in a price range around $50 a square foot, it varies, but let’s just say $50 a square foot because it’s generally an open design, designed for other things than living, if you’re really looking at your traditional barn, like on a farm.

However, take that to the next level and then finish out the interior. And now you have the cost of residential amenities throughout the barn. So what I did is I threw a couple of examples down by saying, what is the cost of a 3000 square foot barn, good quality? And it came in at about $48 a square foot, which is about 145,000.

MBS:

Which is-

EM:

Right. But that’s-

MBS:

An order of magnitude different than buying a home.

EM:

Correct. When I ran a good quality home, not a barndominium per se, but just good quality home, it came in at about $167 a square foot for a cost of about $503,000 to build. So you can see how there’s some savings in the open floor plan that you get from the shell, and just the overall design. But then you go finish it out with the nice stuff on the interior. So you end up with a number that’s somewhere in between depending on what you’re looking to do. But by all means, it’s still, in general, less expensive than if it was a site-built home.

MBS:

Probably one of the most economical ways of getting a luxury home.

EM:

And then with the kits that are involved, they offer all levels of what you can get at the base model versus this model.

MBS:

Whoa, whoa, whoa, whoa. People are selling barndominium kits like convert your barn into your luxury home. This is a thing?

EM:

Well, yes. You can get kind of manufactured kits that have everything ready to go when you think about the economies of scale. They work with the cabinet makers and everything, so they can offer you this ready to go kit that just needs to be brought to the site and put up.

MBS:

Luxury home in a box.

EM:

Yeah.

MBS:

Wow.

EM:

Yeah.

MBS:

Barndominiums folks.

EM:

Yeah. It’s out there.

MBS:

Wow. The future of luxury real estate, barndominiums.

EM:

Absolutely.

MBS:

Wow.

ES:

Before we end this episode, let’s take a break and talk about what’s happening in the world of natural disasters. CoreLogic’s Hazard HQ Command Central reports on natural catastrophes in extreme weather events across the world. A link to their coverage is in the show notes.

With hurricane season just around the corner, there are already conversations about the shift to the La Niña phase of the ENSO weather pattern. Historically, there is a tendency for La Niña to follow strong El Niño events. The transition is notable due to this weather pattern’s influence on hurricane development. The last La Niña phase coincided with storms such as Hurricane Ian, Hurricane Nicole, and Hurricane Ida.

April 3rd brought a magnitude 7.4 earthquake to the coast of Taiwan. The original shock occurred at 7: 58 AM local time and was followed by nearly 30 aftershocks, including a magnitude 6.4 earthquake 13 minutes later. As Taiwan is the global leader in semiconductor chip manufacturing, a major impact to plant facilities or shipping networks could have a significant global impact.

Fortunately, early reports from Taiwan indicate little to no damage or disruption to chip manufacturing plant operations.

MBS:

So if we think of homeowners out there, what’s the most valuable thing that they should be aware of when they’re thinking of either buying a new home, selling their home, or remodeling their home? We just went through this process of buying a new home. For me, the number one thing I was thinking of was space. Space and location. It was a good location. Does it have good schools? And does it have the amount of space that we need, that we can have enough bedrooms and enough offices because we are both working from home. So we needed space and location.

What do you think really are those most important things that homeowners should be aware of when they’re thinking of the assessed value of their home?

EM:

Sure. Well, you made it a perfect example of that. That is correct. The location has a lot to do with it because as you know, certain school districts offer more options in certain neighborhoods than others. So the location is definitely paramount. The size. Is it big enough for a growing family? What have you, the floor plan. Is it open floor plan or what have…? And then style of home also plays a role. Is it an older cottage style or is it the more modern day type of two story or two and a half story, whatever it might be. And then of course, the effective age. Has it been remodeled? Does it have things that you’d expect to find in some of the newer homes?

MBS:

Yeah. That effective age is the important one. I’ve mentioned a few times about how when we sold our house, our house sold very quickly, within 24 hours it really was the first people that saw our house. So I like to say our house sold in nine minutes because it was literally the first people that came in right after it listed are the people that ended up buying it. So it sold very quickly.

And our agent first, he told us our house would sell quickly because of the floor plan, and we had done some cosmetic updates really. And because it looked really good and it was in a fairly good neighborhood, he’s like, “Yeah, this house will sell very quickly.” It sold a lot quicker than we thought it would.

EM:

Excellent.

MBS:

I guess the question I have about effective age is some homes do cosmetic updates that make them look newer, but they actually are still pretty old. They don’t do things like updating electrical or updating plumbing. I’ve chatted before in an episode with Molly Basil, about how we were in contract for a home and it fell apart, and we ended up buying a totally different house, this house. But the house that we had initially planned to buy, that was it. It was a beautiful home, had been beautifully updated.

But when you peel back the surface a little bit, there were a lot of things that needed to be fixed in terms of the more important things like the electrical and the plumbing. And so my question is, how do those structural type things play into the effective age?

EM:

That’s a great point because you have the key things that are must fix. You must make sure the foundation, the framing, the electrical, and all that is in order because those are definitely the main portions of the house. Repainting the bathroom looks nice, but it’s not the same as ensuring that there’s no leaks, making sure that your electrical is sound and so forth. So I would say that the superstructure, the substructure, however you want to look at it, is definitely critical. That’s the more critical element, because everything else can really just be cosmetic.

MBS:

Right. So it is those structural things that are really increasing the effective age of a home. And it isn’t just putting some paint on something and making it look better.

EM:

Sure. Because an appraiser may look at that as depreciation, curable versus incurable. Can we fix it or is it going to be a fortune to fix and just not worth it.

MBS:

Right. Yeah, no, that’s really interesting. Okay. This has been really interesting.

EM:

Thank you. Yes.

MBS:

I hope you can get a barndominium someday.

EM:

Me too. Yeah, definitely. It’s on my bucket list.

MBS:

All right, well, thanks so much for joining me today on, Core Conversations: A CoreLogic Podcast.

EM:

Thank you.

MBS:

And thank you for listening. I hope you’ve enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life, Producer Jessi Devenyns, Editor and Sound Engineer, Romie Aromin, our fact’s guru, Erica Stanley, and Social Media duo, Sarah Buck, and Makaila Brooks. Tune in next time for another Core Conversation.

ES:

You still there? Well, thanks for sticking around. Are you curious to know a little bit more about our guest today? Well, Ed Martinez, is the Director of Industry Solutions at CoreLogic. He focuses on research and thought leadership and has decades of experience as a subject matter expert on the proper use of the cost approach. He has a particular focus on the applicability of this approach for insurers, appraisers, assessors, lenders, and more. Prior to this role, he traveled across the US and Canada teaching clients on the usage of the cost approach.

The CoreLogic statements and information in this blog post may not be reproduced or used in any form without express written permission. While all the CoreLogic statements and information are believed to be accurate, CoreLogic makes no representation or warranty as to the completeness or accuracy of the statements and information and assumes no responsibility whatsoever for the information and statements or any reliance thereon. CoreLogic® is the registered trademark of CoreLogic Solutions, LLC.

Written by: Maiclaire Bolton Smith

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