The term barndominium, first utilized in the 1980s, derived from owners converting part of a barn into a living area. Other common names for this type of structure are pole barn house, housebarn, barndos, or shouse. Most often, construction is post framing with a steel exterior, but the material and quality of finishing are only limited by one’s imagination.
Barndominiums are increasing in popularity. They are cheaper to build, have lower maintenance costs, and allow for flexibility with the interior finishing. However, barndominiums often have financing difficulties and have a smaller pool of buyers. The smaller pool of buyers originates from a variety of sources, but this causes the most problems in the valuation process.
Traditional approaches to value include the income capitalization approach, the sales comparison approach, and the cost approach.
The income capitalization approach is generally not applicable to this type of property. Barndominiums are generally owner-occupied and limited market data exists to develop the necessary inputs.
The sales comparison approach is applicable and the preferred method. Comparing similar barndominium sales provides market-driven support for the direct interactions of buyers and sellers. A smaller pool of buyers will be directly represented in the sale price, if this issue exists. Each market may perceive barndominiums differently.
To find adequate sales, it may be necessary to contact neighboring jurisdictions or look further back in time. A certain property type will behave similarly within a market area, and this market area may extend well beyond the borders of your jurisdiction.
The cost approach is applicable and should be considered. Adaptation of the cost approach is not difficult but does take some additional considerations.
To start, which cost source should be used? The typical barndominium includes a post-frame barn with a living area finishing in part if not all of the structure. The traditional cost guide for a barn would under-report the cost of the structure. Similarly, the traditional cost for a residential dwelling is likely to overreport the cost of construction. Some cost providers also report a segregated cost method. With this analysis, a pole frame barn base cost can be used and residential finishing added. This is much more labor intensive and these alternative cost schedules may not be available to you. You will need to determine which cost source makes the most sense in your jurisdiction.
Once the cost is established, physical depreciation must be considered. The typical building life of barns is lower than a dwelling. So, which is appropriate? Further, how is functional and external obsolescence adequately handled?
To answer these questions, we must first consider the tools available. Then we must query the market to determine how the market is reacting to the property type. Tools available to support market interactions include market survey, linear regression, grouped data analysis, depreciated cost, sensitivity analysis, and extraction. Out of these tools, extraction is the preferred method for the cost approach. This method extracts depreciation from sales of other barndominiums and provides direct market interaction. The basic formula is:
Sale Price – Land Value = Sale Price to the Improvements
Replacement Cost New – Sale Price to the Improvements = Depreciation
Once extracted, the depreciation can be converted into a percentage or a percentage by year. The analysis can also be taken one step further by removing physical depreciation based on the typical age/life method. This provides the market perception of the functional or external obsolescence associated with the property type.
Using market extraction will somewhat regulate the cost method you decide to use. For example, say you use the traditional dwelling cost. You reconcile this method because it is easy and readily available. The market-extracted depreciation will indicate a higher amount of depreciation present in the property because the cost figure used was too high to start with. However, by using the extraction method, the depreciation will adjust the property to an appropriate value. If the segregated cost method is used instead, extraction is likely to indicate less depreciation on the property.
The valuation of barndominiums is a unique challenge. The more sales available in the area will help paint a clearer picture of how the market perceives this property type. However, by utilizing consistent cost providers and consistent physical deprecation calculations, extraction can help answer the remaining questions.
Robert D. Becker is the Owner & Principal of RD Becker Valuation LLC. Robert holds the MAI, SRA, AI-GRS, ASA designations and is an instructor for the IPAI.