How much value does a huge backyard shop add?

A friend asked me a great question this week. How much value does that huge shop in the backyard add? He wasn’t sure how to pull comps, so I scratched out a few thoughts. Anything to add?

large workshop or garage value - sacramento appraisal blog

1) The market: Can buyers use whatever the structure is? Will they pay for it? These are good questions to ask. At times home owners build things that are so specific to their own needs that the market really might not even want it (or maybe buyers will simply use it for something else). I think of Michael Jackson’s Ferris Wheel at Neverland Ranch or a $125,000 recording studio in the backyard of an area of Sacramento where values are about $225,000. There might be one buyer out there willing to pay a premium, but does that one buyer really represent the market? Remember, lenders are going to lend based on the market.

2) Find something similar: The best way to uncover value for a large workshop is to find a few examples that have sold. Keep in mind we might not find something exactly the same, but we have to do our best to find something we might think of as competitive. In a rural market there are likely many examples, but in a residential market we might have to pour through years worth of sales to find a large workshop, detached garage, or some other competitive structure. We can then compare these sales to others in the neighborhood at the time. How much of a price premium was there if any? For example, I did a search in the Tahoe Park neighborhood and found some large detached structures by looking in MLS under Garage (I selected 3 and 4 detached), # of Garage Spaces (I selected more than 3 spaces to see what structures I could find), and Other Structures (you can select things like “Workshop Building” or “Outbuilding” under this category). It can be tedious to search in MLS, but sometimes it’s surprising how quickly something will come up.

Tahoe Park search

3) Cost: Let’s consider the cost of the structure so we are in tune with quality. This doesn’t mean the market is going to pay more just because it was expensive, but the market will likely recognize quality and pay more for something that is nice (and usable). Home owners often want the market to pay the full cost of whatever was built, but there’s a fat chance of that happening because when people buy something used they tend to expect a discount.

4) Make Something Up: I’m kidding on this one, but I will say at times in real estate we have to use professional judgement when data is extremely limited. This sounds so wishy washy, but there is something to knowing a market and coming up with a range for what we think a group of buyers might realistically pay. In this case we might not give a specific value adjustment for the structure, but we can always consider the value of it in our final number. What I mean is we might see a range of value in a neighborhood for similar properties and end up reconciling the final appraised value for the subject property toward the higher end of the range because the subject has more assets. Be careful on this point though (and don’t spend two minutes on research and simply go straight to #4).

Questions: What is #5? Did I miss anything? How would you figure out the value? Iā€™d love to hear your take.

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Comments

  1. says

    Thank you Ryan for the post. It is so important to find something to support a value conclusion. Like you said, I hope that when appraisers move to #4, they have indicators of value to reconcile. The cost new will give them an idea of an upper limit of value, especially if this is atypical and/or an over-improvement. Then a sale or two of homes with similarly desirable outbuildings can be paired up. I agree, appraisers sometimes forget that a paired sale does not need to be done in the sales grid. It could be a property that does not fit in the grid and even several years old, just that this sale is one that could be paired up with another sale that lacks the feature.

  2. says

    Hahahah thanks for the help Ryan! Great post!

    It always comes back to the comps. You have to do the data and research. You know us Realtors are always trying to find a shortcut though šŸ˜‰

    What was crazy about that shop was that not only was it twice the size of a normal garage, it also had a loft in it! Try finding a comp for that! šŸ˜›

    And that comes back to point #4, sometimes you just gotta make things up. Pick a decent number for an educated guess, and throw it out there on the MLS to test the market. Great post!

    • says

      And thanks for the inspiration Wes. šŸ™‚ That is a complicated situation and we probably wouldn’t find something that is perfect. Sometimes when something is really different, the best we can do is come up with a range that looks reasonable (based on years of data hopefully). During a purchase transaction the benefit to the appraiser is at least the appraiser now has a frame of reference for how the market responded. During a private appraisal there is no benefit of that. I think “educated” in “educated guess” is key. The market won’t like though. It tells the truth and will let us know if the price is too high or low.

  3. says

    Thanks for the great post Ryan. Your #2 demonstrates that when there is no other comparable sale with a workshop, that alternative uses with one degree or another of similar utility can be used as a proxy. But finding reasonable comparable sales with a workshop, or a reasonable alternative to a workshop, can be extremely time-consuming and not always come up with good results. MLS systems typically do not have a category for these amenities, and, even if they do, Realtors often times don’t fill out the listing with all of the information.

    I have found that another method of finding potential comparable sales is by running a Google map search using the aerial view. By scanning a neighborhood with the aerial view it is possible to get a visual on how many homes in the neighborhood have additional structures on the property. You may get lucky and find a property with an additional structure shown in Google Maps that sold within the past few years and then do analysis. But if you scan aerial photographs of the neighborhood and there simply aren’t any homes with ancillary structures you can reasonably assume that there is little, if any, demand for such structures.

    All of this additional work takes time. Typically, clients (lenders or otherwise) do not understand the amount of time necessary to reasonably research the contributory value of unusual property characteristics. And, they do not want to pay the additional fees required. Many times when you get an assignment you are not aware of an unusual characteristic that will require additional time. No one makes you aware of this until you have already accepted an assignment and quoted a completion date and a fee. Then you need to go back and ask for more time and more money. I often times have this issue with solar photovoltaic systems. Although I have taken the education and have experience in valuing these systems, no one seems to want to pay for the extra time needed to do the work. And, many appraisers just go to #4 and pull a number out of “wherever” and meet the time frame and low fee requirements of many clients. Like it or not, that is the competition.

    • says

      Fantastic stuff here Tom. Thank you so much. I agree with you about information in MLS too. I do find in our MLS there is not just one way to find workshops. I find having to search by garage, garage space #, other structures, and even property descriptions is how I find something similar.

      Thank you again for the wonderful commentary. You made the post better.

  4. Abdur Abdul-Malik says

    When I did review work for an AMC I would always tell appraisers to make sure they gave the underwriter something to hang their hat on. If you go to #4 just make sure that the report contains a good summary of the efforts made to find something.

    Great post as always!

  5. says

    And that workshop is often the pride and joy of the seller. It’s part of their identity. They have a long story about why the built it. They love it so they think they can find someone just like themselves who will appreciate what they’ve built, love it and will pay a premium for it.

    Then you need to be more of a psychologist than an economist.

    • says

      So true John. I’m really glad you said that. Thank you. Sometimes sentiment can blur how others see a property. I walked through an outdated home recently and the owner was so proud of it. She should be. Yet it’s not always easy to think buyers would walk through and see “good bones” only instead of what the owner sees.

  6. Chris Berninger says

    From a buyer’s perspective, I’d even take your #1 a step further. When we were looking for a home, if we ran across a unique feature (like a huge backyard shop) that we found undesirable/not useful, we would often consider it not only of zero value to us, but sometimes even of NEGATIVE value, for two reasons: (a) we had to factor in the additional cost of eliminating or changing that feature (who wants to live with an unwanted feature for years??), and (b) we knew the house was being sold at a higher price because of the particular feature, which meant we were paying more for the home simply because of a feature we didn’t even want!

    Obviously an appraiser’s perspective has to be broader than that of any one particular buyer, but all I’m saying is that a unique major element to a home could sometimes even REDUCE the value of the home in the minds of many buyers versus an identical home that didn’t have that feature. A unique major element could also make it take longer to find the eventual buyer, which could have a knock-on effect of reducing the price just due to being on the market longer.

    • says

      Hi Chris. I really appreciate your comment because you are exactly right. Just because it is there does not mean buyers are willing to pay for it. Several brokers emailed me after this post to say the exact same thing, which is why I mentioned we have to do research to see what sort of premium exists if any. It’s very easy to assume the feature is an asset and is worth something, but that’s not always the case. As a related example, the other day I appraised a property without a pool and I used one “comp” with a pool. My gut instinct said I should make an adjustment because the pool had some value, but this pool comp sold at the same level as homes without a pool, so I didn’t make any adjustment.

  7. says

    There’s a lot of truth in what John Wake says about appraisers being psychologists because we are measuring human behavior. Great post Ryan.

    • says

      True Tom. Thanks. I completely agree. We like to talk about real estate as if it’s just hardcore stats, but there is so much emotion to consider and interpret for anyone working in real estate.

  8. Helen says

    John Wake has hit the nail on the head. The question is “typical buyer,” what would a typical buyer pays for it? Is it even desirable to a typical buyer or just an overimprovement? To generalize, I have found that such structures are worth about 30% of what someone paid for them. If someone is going to do repair work, running a business out if it, or doing hobby work restoring cars it may be worth more to them. But it goes back to typical buyer. It had a borrower pay $85,000 for one. You don’t expect that in a residential neighborhood. The homes were on over an acre. But the garage/workshop was as large as the house……found a few sales. However, only a few out of hundreds of sales shows that it’s not typical, and has minimal appeal, but does have value.

    • says

      Great thoughts Helen. I agree. There is always one buyer willing to pay more, but how much will the market pay? That’s always the big question. For me as a guy who dabbles in woodworking, I would probably pay more than others. But what I pay may or may not reflect the market.

  9. Joe Regan says

    Great article, Ryan!
    But I would not go near #3 unless there were enough comparables to justify considering the cost (quality) of the amenity. As a group we often get drawn in to the fallacy that cost = value.

    A good approach in the Sales Comparison Analysis is to keep in mind that if the shop is really desirable to the market there will be other similar shops built, and enough of them to generate a comp or two.

    But #5 is clear to me, and should replace #4: Get on the phone and talk to some local, experienced agents – especially those that ever listed a property with a similar shop (and this includes withdrawn and expired listings). I’ve found in general that agents are an excellent resource, and once a sale is closed they are remarkably insightful and candid. There’s a lot of information about buyers that you can’t get just looking at a listing or playing with big data.

    (In your example of the pool above, a call to the listing agent might reveal not only that the comp’s pool needed major repairs, but how much the buyer was expecting to have to pay).

    • says

      Thanks Joe. I appreciate your thoughts and I think there is some wisdom there for sure. Cost in my mind is very important because it might say something about quality. All I’m saying is we need to be in tune with quality. The same would hold true for a kitchen remodel. Let’s know if it was a $125,000 kitchen remodel or a Home Depot kit at $30,000. Solid point on talking to others who know the market.

  10. Pat says

    I work in a retiree market. My appraisals say “Outbuildings similar to subject’s shop are seldom seen as an over improvement in this market”

    If it were not for the presence of the shops, aka “man caves” there would be more divorces and homicides among the retiree population. Think that makes them very valuable. LOL.

    • says

      Ha ha. That’s great Pat. It just goes to show each market is different. I know for certain in my own household I have a large workshop area in the garage. I never thought I would be a guy who likes to be in the garage, but that’s definitely me. I only do woodworking though. For the life of me I could not repair much on a car. Thanks for your take.

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