• Credit: Ken Orvidas

From the bailout of failed investment banks to the deflating real estate market, the question of how to calculate value is on a lot of people's minds these days. During the joyride, houses of every ilk were routinely overpriced as appraisals became unmoored from any objective standards. As the dust settles, architects and their clients are back to grappling with the pesky appraisal issues they encountered before the boom. That is, toting up the cost of land, construction, and design doesn't always produce a loan-to-value ratio that enables clients to turn their construction loans into mortgages. And in this traumatized lending climate, the process is even trickier.

What is a house worth? To set a price, appraisers call up recent sales of homes in a neighborhood, comparing such items as size, number of bedrooms, and the quality of kitchens and baths. That checklist approach makes sense in builder-designed communities where economies of scale resulted in overall similarities. But the “comp” method on which banks base their loan risk has little to do with the expressive, one-of-a-kind residences that architects design.

The reality, sadly, is that the system is wired for the common denominator. Lenders care less about an award-winning design than they do about how quickly they can sell the house if the owner can't pay the mortgage. And while it's true that the free market ultimately determines a house's worth, architects and their clients are finding that value judgments can't be left to chance. “You can't ask someone who deals with numbers every day to distinguish a better floor plan,” says Eric Rawlings, AIA, principal of Rawlings Design in Decatur, Ga. “They don't know where to begin.”

That's why some architects are taking appraisers under their wing. Erik Lerner, AIA, an architect and real estate broker in Beverly Hills, Calif., routinely points out the subtler attributes of the architect-designed homes he sells. An excerpt from a Web site he prepared to advertise a new home by Predock_Frane Architects reads: “The home's formal street elevation gives way to open, casual interior spaces, which follow the descending contours of the lushly landscaped site to a shaded glen at the rear. The design makes much of its connection between the inside and the outdoors, using an array of skylights and windows at the perimeter and an internal court to distribute daylight and provide natural ventilation throughout.”

Those features are obvious to professional designers, but they're often overlooked by Realtors and real estate appraisers focused on granite countertops, cherry cabinets, and hardwood floors. Even if appraisers notice these qualities, they might not be able to articulate their benefits well enough to justify a higher price point. “My job of pointing out why the spatial qualities [of an architect-designed home] are superior to the builder house next door is easy,” says Lerner, who works in the market's upper echelons. “Every room in this house has daylight on at least two sides, which is a really impressive design feat on a challenging site. On a more ordinary house you'll notice a difference in the quality of light and natural ventilation.”

Anecdotal evidence suggests that more new homes are failing to appraise at a price the buyer wants to pay, Lerner says. “Banks are reluctant to make loans altogether, so the idea of a house appraising for a premium they previously didn't understand is definitely a much harder sell now. Our market favors the buyer with a lot of cash, and that's true for the general market now as well.”

a cut above

Of course, there are ways to get around the appraisal system. For the deep-pocketed clients of high-end firms like San Antonio-based Lake|Flato Architects, bank loans have barely been an issue. Those who do finance their projects are usually building on remote ranch properties (and not comparing themselves to anyone) or in areas with historically high real estate values. When problems arise, the firm shows appraisers other homes they've designed in the city or suggests they call other architects to check the construction cost of similar projects. “The lender is looking at the creditworthiness of the owner more than comps,” says partner Karla Greer, AIA. “They also realize that many areas are in transition and the project may create a market for more to come.”

Working often in the tight-knit architectural community of Venice, Calif., near his office in Santa Monica, David Hertz, FAIA, LEED AP, also steers appraisers to other homes of similar caliber. But in this rarefied housing environment, real estate rules can be broken. On a spec house for a Hollywood director completed last October, “we argued over comp value with the owner all through construction,” Hertz says. “He wanted to compromise, but we convinced him that if you go the distance with materials and make an architectural statement, you can reach way outside of averages for a buyer who's not stuck in the fray of comps.” The owner was hoping for $2 million to break even, Hertz says, and the house sold in seven days for $3.24 million (more than $1,600 per square foot) to one of the Pritzkers, of Pritzker Architecture Prize fame. “They would never have bought a house that was just run-of-the-mill,” he says.

Other times, appraisals do matter. When a recent European client wanted a minimalist house with open rooms and cabinetry rather than closets, Hertz explained that it wouldn't appraise well without a closet in every bedroom and full baths. “People hate full baths because they take up space and the tubs are never used,” Hertz explains, “but we end up putting them in, because some appraiser 50 years ago said a bathtub makes it a full bath, or a closet makes it a full bedroom. We end up giving the bank sets of drawings that have closets, but the client can choose not to build them out.” Still, he allows, it's not the ideal solution.

To ensure bank values align with construction costs, Michael Ryan, AIA, Loveladies, N.J., provides quantifiable market data in the form of plans and materials costs when asked. He occasionally gets calls from appraisers seeking to validate the costs quoted by the homeowner. “A lot of times they're looking to us to tell them how to value the house,” Ryan says. He's noticed that while many appraisers simply drive up to the house, those who go inside quickly grasp the intangible merits like daylighting and layout.