How do you value a house when it’s significantly larger than anything else in the neighborhood? I’m talking 30-50% bigger than even the largest homes. Four years ago I came across an enormous property in a tract neighborhood, and I ended up shooting a quick 30-second video called, “Which house is overbuilt for the neighborhood?“. Being that this home sold recently, I thought it would be interesting to do a follow-up by asking two questions. Did this beastly house command a price premium because it was so much larger than anything else? Or did it suffer loss because it was simply too big for the neighborhood?
This is what the house looks like. You can check out the 30-second video below (or here) to see what surrounding homes look like.
As you can see, when looking at all sales in the neighborhood over the past six years, the subject property is significantly larger than anything else. It is basically 1000 sq ft larger than even the largest homes, and it looks like a mansion in the middle of a ranch house development.
Despite its large size, the subject property ended up selling at a level consistent with much smaller-sized homes in the neighborhood. The subject property was listed on MLS for 119 days at $325,000 as an arms-length sale, so we know it was adequately exposed. In cases like this it may not be possible to find other “comps” that have a similar size. We simply have to use smaller sales. The assumption of course would be to start making significant upward adjustments for square footage, but if we did that in this case the property would be overvalued (unless of course we made huge upward adjustments for square footage, but then also made huge downward adjustments for functional obsolescence (being overbuilt)). In cases like this it’s important to find similar overbuilt homes in either the subject neighborhood (older sales) or even a competitive neighborhood. This will create a better context and reinforce how the market has dealt with overbuilt homes over time. It would be golden too if the subject property sold at any point in the past so you could go back to see how the market perceived the property at the time.
The Reality of a Neighborhood Price Ceiling: Every neighborhood has a price ceiling, and it’s important to be aware of where the top of the market is at. In other words, buyers tend to only be willing to pay so much in a particular neighborhood before moving on to a different community they think of as superior. In this tract neighborhood it looks like the price ceiling is around $325,000, and this mammoth home sold fairly close to that level. This is why when dealing with a huge property in a tract neighborhood, one of the first things we can do is to find out where the price ceiling is at. Is it feasible for buyers to pay above this level? That’s the big question. Ultimately in this case, despite the subject property having a much larger size, it ended up suffering economic loss because buyers didn’t expect such a large home in this neighborhood, and they weren’t willing to pay a massive premium for the extra space. This example also underscores how important it is for home owners to be aware of the expectations of buyers in a neighborhood (ask an agent or appraiser for advice on upgrades before doing an extensive remodel). My advice? Don’t overdo it.
Appraisal Class I’m teaching for 2 hrs of CE: On November 11 in the evening I’ll be teaching a class called “How to tell the story of value in appraisal reports”. The class will talk in depth about how the local real estate market is moving and how appraisers can more effectively tell the story of market trends in appraisal reports. The class is for the Real Estate Appraiser’s Association of Sacramento, and it will be good for two hours of CE (for appraisers). Dinner is included, and anyone is welcome. Registration closes tomorrow-ish I believe. See the image and click here for details.
Question: Any thoughts, stories, or points to share? I’d love to hear your take.
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Tom Molinari says
November 6, 2014 at 7:54 AMThese are excellent points for analyzing the oddball property in a neighborhood. But it is also important to research other newer construction or new building permits to determine if the neighborhood is undergoing a change. Are buyers buying smaller homes and tearing them down? If there are vacant lot sales, are they being improved with homes that are larger? Does the price of a vacant lot meet or exceed the price of small homes in the neighborhood? Often times when desirable neighborhoods are fully developed, buyers will buy small homes and replace them with larger structures. In the example that you gave it appears that this home is certainly an over improvement. Great article for homeowners considering building an addition or remodeling their home with luxury amenities in a neighborhood that will not support the cost of such improvements.
Ryan Lundquist says
November 6, 2014 at 10:51 AMThanks Tom. I’m so glad you mentioned that. Your comment underscores how valuable blog comments can be for a post. You are correct about researching new construction. In this neighborhood there are some tear-downs, but usually in a more custom section of the market just a few blocks away (not really the same area). On this ranch-style street, it’s really not common. There are some neighborhoods in Sacramento though where small homes are purchased to tear down. I might approach appraising a house like this a bit differently in that type of market. I will say too it can be a dangerous assumption to conclude from the get go that a house is overbuilt for the neighborhood. I would only do that after research.
Gary Kristensen says
November 6, 2014 at 8:10 AMGreat blog post as usual and very smart to go back and look at this property after it sold. In my market I quite often see outlier properties that sell for above what the normal price ceiling would be for the market. I would have expected this property to also be at least a little bit of an outlier. Personally, I would not pay as much for this house as I would in a neighborhood of similar houses, but I would be willing to pay more for it than the properties that are 1,000 feet smaller, unless this location has some other strong negatives like crime or bad schools. Is it possible that the condition of this property, quality, or workmanship are subpar that kept the price down at the level of the much smaller homes?
Ryan Lundquist says
November 6, 2014 at 10:54 AMGreat questions, Gary. That is always possible. Elements like condition, layout, and quality of construction can make a big difference. Sometimes if a property has a bad floorplan too, it can really damage a property’s marketability. If it feels more like a group home than a residential home, that’s not a good thing for a typical buyer. Like you, I would also pay more for this home to get the size, but at the end of the day I would also keep an eye on prices in the custom section of the market just a few streets away. I would probably opt to buy into the lower end of the custom market rather than the very top end of this market.
ricardo says
November 6, 2014 at 9:23 AMLooks like Mad King Ludwig has some Latino relatives in Saramento.
What could compell a person to build such a, what? Bavarian-Spanish monstrosity?
Ryan Lundquist says
November 6, 2014 at 10:55 AMThese pop up all over. I actually have something very funky on my desk in the Oak Park area. When something is your home, people tend to add on in many cases before moving. It’s always interesting.
Lori says
November 6, 2014 at 9:47 AMCurious – what area is this home in? Is it 95864? It has that vibe. 🙂
Ryan Lundquist says
November 6, 2014 at 10:56 AMClose. It’s nearby in 95821. 🙂
Tom Horn says
November 6, 2014 at 10:01 AMWow, that house really doesn’t fit in. 🙂 So now you may have a reference point for loss in value for over improvement. Thanks for sharing your video again Ryan, love that one.
Ryan Lundquist says
November 6, 2014 at 10:58 AMThanks Tom. Yeah, it’s good to keep properties like this on file, and to research how the market responds to “McMansions” like this one in various neighborhoods. It’s easy for some to think a very large home might end up being twice as valuable, but that’s just not the case – in this neighborhood at least.
Jim says
November 7, 2014 at 9:11 AMSounds like the old advice of “never buy the biggest house in the neighborhood” is turned on its head? If you can buy the big house at the neighborhood ceiling, you’re getting the lowest $ per SF on the street and the best value. That’s assuming your primary goal is to actually live in it and price appreciation is secondary.
Ryan Lundquist says
November 7, 2014 at 4:22 PMI would definitely buy the biggest house with ease. I just wouldn’t want to build the biggest house. Thanks Jim. I appreciate the comment.