Why a little black book of value doesn’t exist in real estate

little black book of real estate values 2 - photo purchased and used with permission by sacramento appraisal blogReal estate would be so much easier if we had a little black book to tell us how much each feature of a home was worth. Imagine a list of values for things like bathrooms, bedroom count, garage spaces, square footage, extensive landscaping, built-in pools, etc…. The truth is I get asked all the time how much a particular something is worth, and my answer is very often “it depends”, which I know can seem frustrating. But this is the best answer because what something is worth is based on the location.

Location Matters: It’s Real Estate 101 to know location plays an enormous role in shaping value. For instance, if you took the same house from Sacramento and put it in San Francisco or Hollywood, it would be worth substantially more in those cities. We all know this, but one thing we sometimes don’t consider is how the value of certain upgrades or features is also strongly influenced by location. Let’s consider the following examples.

A) Kitchen Remodel: Imagine a $50,000 kitchen remodel. You could literally put the same kitchen in a $150,000 neighborhood and a $500,0000 neighborhood, and the contributory value would be less in the lower-priced neighborhood and more in the higher-priced area. Why? Because buyers in the $150,000 neighborhood do not expect a kitchen that costs 1/3 of the entire home’s value, and affordability may also be a factor. In contrast, the remodeled kitchen would be much more acceptable in the $500,000 neighborhood, which means it would command a higher premium. This is why when someone asks, “how much is a kitchen remodel worth?”, the answer is, “it depends”, because the value of the kitchen is tied to the location.

B) Extra Bathroom: During a recent appraisal in a classic area of Sacramento the subject property had three bedrooms and one bathroom, whereas many of my comps had three bedrooms and two full bathrooms. How much is that extra bathroom worth? At the end of the day I ended up subtracting $25,000 from the comps with two bathrooms because that’s what it seemed the market was willing to pay. But this adjustment wouldn’t apply to every neighborhood because it would be WAY TOO HIGH in many other areas where the adjustment could easily be $10,000 or less. The value for a bathroom might also vary depending on whether we are talking about the difference between 1 and 2 bathrooms, 2 and 3 bathrooms, or 3 and 4 bathrooms.

C) Square Footage: How much is extra square footage worth? This is one of the most striking examples of how important location is for determining value. In some neighborhoods buyers could easily be willing to pay more than $100 per sq ft for additional square footage, but other neighborhoods might show a modest $30 per sq ft. This effectively means buyers could shell out $20,000 for an extra 200 sq ft in one neighborhood, but in a different community buyers might only pay $6,000 for the same 200 sq ft. Remember, we are not talking about the cost to build the extra 200 sq ft, but the amount buyers are willing to actually pay for the additional space in the resale market. As you can see, there is no standard square footage adjustment because the value of extra space is tied to the location. Read How appraisers come up with square footage adjustments for further insight.

different price in a different neighborhood brick house

The Big Reason why a Black Book Doesn’t Exist: It would be nice if a little black book of value did exist, but in real estate specific values are tied to specific neighborhoods and price ranges. This means it’s impossible to generalize about the value something might add because the same thing can be more or less valuable depending on where it is located. The danger of course is when an appraiser or real estate agent gives the same value adjustment for features regardless of the neighborhood.

Questions: What other examples have you seen where value is substantially different depending on location? Any further insight, questions, or stories to share?

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Comments

  1. says

    Ryan, I got a call a couple of weeks ago from an agent friend regarding something like this.They had somehow been given a list of adjustments from an appraiser, who was also an agent. The list gave adjustments for various features. They did include a disclosure and said it was hypothetical but I doubt anyone saw that part of the the list. I thought it was irresponsible because it could give people the impression that adjustments are the same everywhere. Thanks for explaining.

    • says

      Thanks Tom. It’s dangerous to have a list like that because the list just won’t make sense when applying it to different neighborhoods. I understand the desire to want such a “little black book of values”, but real estate is all about location, so the real estate community simply has to research various neighborhoods to determine the added value of certain amenities and upgrades. There is no quick and easy way to get figures like that without doing homework and comparisons in the neighborhood.

  2. says

    Tom, I have seen that very same thing here in my market. A laminated full page list of adjustments for real estate agents to use when completing their CMAs. It was complied and distributed by a local appraiser. Kind of a “one size fits all” type of list of component values with no regard to home size, value or location within the sub-markets.

    Great post Ryan! Excellent information as always!

    • says

      Wow, David, that is such a dangerous list. I think of square footage alone as I mentioned in this post. There is a huge variance for what buyers are willing to pay for extra space, and it all depends on the neighborhood. Well said on no such thing as “one size fits all”. While that can be frustrating for the real estate community to hear, it can also be liberating for both agents and appraisers because they get to focus on becoming the local expert who knows the answer to the value questions in the neighborhood.

      As a further example, I appraised a house last week in a classic neighborhood in Sacramento where there really aren’t many pools. In fact, only 6% of all sales over the past year had pools, whereas it’s common for about 15% of all sales in other neighborhoods to have pools. In this community, buyers really don’t go into the neighborhood thinking they will find a pool. Since they don’t really care for pools much, I find the contributory value for a pool is a bit softer than other surrounding areas. Agents who know the neighborhood reinforce that idea too as many say their buyer really didn’t care whether the pool was there or not.

  3. says

    Ryan, everything you say is true. I just wanted to add that I am an appraiser with my own little black book. I call it statistical regression modeling and I wrote about it in my recent blog post: http://www.aqualityappraisal.com/Statistics%20Work%20for%20Real%20Estate%20Appraisers,%20Even%20with%20Few%20Sales

    If you have a good sample of similar properties from an MLS search export, you can quickly estimate quantifiable adjustments like the ones that you’re talking about using an Excel spreadsheet. Less quantifiable factors like condition, quality, and view could be more difficult to estimate without a great deal of manual sifting and controlling of data.

  4. Ralph Valencia says

    Ryan,

    Just one more example of an extreme that really hits home… and thats a pool. CA beautiful weather… pools can be more a luxury than say in AZ… with its hot weather for months.. or even in TX… How about the east coast and pools where things freeze… maintenance becomes a bit more of an expense… and bad maintenance can wreak serious cost havoc if not properly cared for in various climate differences..

    Or brick exterior homes here in TX… hail damage, or higher winds (tornadoes)… so features by location definitely play on value!

    As for those little lists… they are around.. I was given one by a realtor here in TX…

    Nice post Ryan!

    • says

      Thanks for pitching in your thoughts Ralph. I really appreciate it. Good point on the built-in pool. I bet we could both find many lists online right now. But those lists might only fit certain neighborhoods for a certain time period. We both know too the value of something can change depending on the market. When a market is increasing rapidly, buyers tend to gloss over locational challenges and cosmetic issues, but in a slower or declining market these both become a bigger deal, and buyers will end up paying more for upgraded homes and less for homes needing some TLC.

  5. says

    You can have 5 different real estate agents offer 5 different opinions as the price of a home… so many things change the value and without seeing it, it’s hard to offer an exact value and even then, the appraisal may be off as well. The biggest thing is if the range is reasonable and if buyers will actually pay the price. Great post!

    • says

      Thanks Jay. I appreciate your take. I think you’re spot on about the concept of being within the range of values. It’s actually not uncommon for me to convince clients to use a range of values instead of a specific value in an appraisal report. Sometimes when a property is unique, a range is really a more realistic focus – even from an appraisal standpoint.

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