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appraisal adjustments

It’s not all about square footage in real estate

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A bigger house is always worth more, right? It’s really easy to fall into the trap of believing that, but it’s not always true. Let’s talk about it.

Myth: Extra square footage is always worth more.

1) Single story vs two story: Sometimes a large single story will sell for more than a larger two-story. This isn’t always the case, but in some neighborhoods we see this dynamic. So just because a 2-story is larger doesn’t mean it’s more valuable (or a good comp).

2) 55+ Community: In a 55+ community we sometimes see more emphasis on floorplan instead of square footage. Larger models still likely command higher prices, but at the same time the market doesn’t seem as sensitive to square footage differences like we see in other neighborhoods. For example, here are two models in Sun City Lincoln Hills with a 107 sq ft difference. Normally that might not mean much in a typical neighborhood, but it looks like there’s a pretty decent value difference here. On paper it seems like these two models could be perfect comps since they are so close in size, but that might not be the case. 

3) Layout: At times a house with a better layout will sell on par with a larger house with a less desirable layout (even outside a 55+ community). What I mean is buyers might pay the same for a 1,400 sq ft house with an open layout compared to a 1,700 sq ft house with a less open floorplan. This dynamic isn’t always easy to spot in MLS photos, and that’s why it’s so important for agents and appraisers to communicate. I recommend agents to open up conversation with appraisers about the listing (without pressuring to “hit the number”). What feedback did you get from potential buyers? What were buyers attracted to? Is there anything special about the house or neighborhood? When it comes to layout, this is often an “insider detail” that’s frankly easy to miss, so I can’t emphasize how important it is to communicate about this if it’s a relevant factor.

4) Dangerous to always adjust: It’s easy to get trigger-happy about making value adjustments whenever we see a square footage difference. Can you relate? But sometimes a square footage adjustment might not be needed. My advice? Be careful about always giving an adjustment and be cautious to not routinely give the same exact adjustment too. Try to look to the market to see if there should be an adjustment or not, and then proceed.

I hope this was interesting or helpful.

Questions: What point stands out to you the most? Anything else to add? I’d love to hear your take.

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How much value does an extra bedroom add?

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How much value does an extra bedroom add? The bad news is there isn’t a one-size fits all answer that makes sense for every neighborhood. But the good news is we can think through some of the key issues to respond intelligently. On that note, let’s kick around some ideas below. I’d love to hear your take in the comments.

value of a bedroom - sacramento appraisal blog

Things to consider about the value of an extra bedroom:

  1. More is often better: Let’s be realistic. More bedrooms is usually a better thing for value because a home with more bedrooms is more marketable to buyers. That’s obvious, though there comes a point when there are too many bedrooms, right? (like Evander Holyfield’s old house with 12 bedrooms and 21 bathrooms).
  2. Diminishing value with each bedroom: Generally speaking the added value of extra bedrooms tends to diminish with each additional bedroom. It’s sort of like how you pay less for each ounce of Starbucks coffee the more you buy. In other words, the value difference between a 1-bedroom home compared to a 2-bedroom home could be far more substantial than the value difference between a 2-bedroom home and a 3-bedroom home (or 3-bedrooms vs. 4-bedrooms).
  3. Canned adjustments: It’s tempting to give a token value adjustment for bedroom count differences. Maybe we heard it somewhere or learned from a “mentor” the value adjustment should be $10,000 for each bedroom. So we give this adjustment any time we see a bedroom difference. But does this amount really make sense if we are talking about 2 vs 3 bedrooms and 5 vs 6 bedrooms? Don’t you think the value variance could be huge for 2 vs 3 bedrooms but maybe minimal at best for 5 vs 6 bedrooms?
  4. Layout:  At times a 3-bedroom home may sell on par with a 4-bedroom home because of a stellar layout. Imagine a 1400 sq ft 3-bedroom house compared to a 1400 sq ft 4-bedroom house. One house obviously has more bedrooms, which on paper makes it sound more valuable, but the 3-bedroom house very likely has a larger Living Room, which could help it compete well with the 4-bedroom home. This is a good reminder to be careful about blindly letting bedroom count have the final say.
  5. It’s easy to adjust twice: If we adjust a comp for both square footage and bedroom count, we might actually double-dip on our adjustments. I’m not saying both adjustments are not needed, but at times it may suffice to adjust one or the other instead of both.
  6. The story of the comps: At the end of the day we need to find similar sales and let those sales tell the story of value. This means if we are valuing a 4-bedroom house, let’s use some 4-bedroom comps. Or if we are valuing a 3-bedroom house, let’s be sure we are using at least some 3-bedroom comps. Of course it’s okay to use sales with a different bedroom count and make value adjustments if needed. As a closing example, it’s easy to claim there is a huge price premium for that 5th bedroom, so it’s tempting to give an automatic canned adjustment. But have other 5-bedroom homes really sold at a premium? Let’s look closely at sales and try to find the answer.

I hope this was helpful.

Questions: What is point #7? Did I leave anything out? I’d love to hear your take.

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How much value do higher ceilings add to a home?

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Would you pay more for a house with higher ceilings? I probably would, but I guess it depends. The ceilings in my home are a standard 8 ft. Would I have paid more if they were 9 ft? Probably. But what about 23 ft? No, that would be too high.

high ceilings in real estate - sacramento appraisal blog

Someone asked me a question recently about the value difference of ceiling height, and I thought kicking around some ideas here could open up a great discussion. Anything else you’d like to add? I’d love to hear your take.

Question: What is the difference in value for ceiling height? For instance, 8ft to 9 ft, 9ft to 10ft, etc?

Answer: That’s a great question. On one hand higher ceilings are a more custom feature, so buyers are likely to pay more for them. This is particularly true for single story homes. However, there isn’t some sort of ceiling height market formula we can apply to every property because real estate adjustments are frankly going to be different depending on the neighborhood, price range, and market. We often hope to extract the value of one particular feature, but let’s remember many times buyers are actually looking at the entire package of a home instead of parsing individual features. In reality ceiling height is only one part of the package when it comes to buying a home. For instance, 10 ft ceilings sound like an asset, but if they’re found in a home with a terrible layout, they might not command a premium at all. So just because they are there does not make them inherently valuable. This underscores the importance of using an “apples to apples” approach when selecting comps, meaning the goal is to compare the subject property with homes that are overall similar so we get a sense what the market has been willing to pay for such homes. We might not find homes that are exactly the same, but that’s okay because we can use homes that are deemed overall competitive. Thus as an appraiser, rather than isolating my search for comps to just ceiling height, I would simply try to find other homes that represent a realistic comparison. If an Excel Jedi wanted to geek out and crunch numbers to try to prove a value difference, maybe that could be done with extensive research (sort of like Jonathan Miller measuring value by floor location in New York). But keep in mind how difficult that would be since ceiling height levels are not recorded in MLS or Tax Records (in Sacramento at least). Most of all though, buyers don’t bring measuring tapes to properties, which reminds us to think in terms of the total package.

Questions: How would you answer the question if someone asked you? Anything else you would add? What did I miss?

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How much is that extra lot size really worth?

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I was asked a great question the other day about how much a larger lot is worth, and I wanted to share the conversation in case it’s helpful. Any thoughts?

Question: Does lot size play a big part when you determine a home’s value? Say for example the subject home is exactly the same in size and floor plan as a comparable home, but the lot size is 5000 sq. ft. bigger on the subject home. Will that give the subject home a lot more value compared to the comparable home?

larger lot - sacramento appraisal blog

Answer: A larger lot can add substantially to the appraised value, but how much value is really based on what larger lots have sold for in the neighborhood compared to smaller lots. If you can find some homes with larger lots and compare them to homes with standard-sized lots, that will help give you a good sense of what the market is willing to pay. Sometimes you’ll notice a very large difference in price depending on the lot size, but other times the difference might not be that much, which is why it’s important to consider the following:

6 things to keep in mind about valuing a larger lot size:

  1. Image purchased at 123rf dot com and used with permission - 14688774_s - smallerLocation of extra space: If the extra 5000 sq ft is in the front yard, that might not be too valuable. How many buyers want a really large front yard to mow?
  2. Small dent in total lot size: In some neighborhoods an extra 5000 sq ft might make no difference at all because the extra space might only be a dent in the total lot size. For instance, an extra 5000 sq ft when considering three acres is only 4% of the total lot size, and that’s likely minimal in the eyes of most buyers.
  3. Adverse location of lot: If a lot is located on a busy street or has some other adverse location, this can definitely impact the marketability of the larger size since buyers might pay less of a premium for the larger site.
  4. New construction premium: Builders often charge a tremendous lot premium for larger lots, but the resale market might not recognize and pay for that same premium. An owner might say, “I paid $100,000 extra for this lot when I bought it,” but that does not mean the market is willing to pay an extra $100K when the house sells on MLS a few years later.
  5. Utility of lot: Remember if the additional lot size is not usable because of zoning, an easement, vernal pools or some other issue on the lot, the extra space might not add much value.
  6. Double the size double the value: Keep in mind lots do not typically double in value when they double in size. It’s similar to an XXL shirt not selling for twice as much as a small t-shirt despite being nearly twice the size. For example, if one acre sold for $100,000, you probably won’t see 5 acres sell for $500,000. Each additional acre will likely have a lower price than the initial $100,000 per acre. This is the law of diminishing returns.

larger lot backs railroad - sacramento appraisal blog

As you can see, a simple real estate question can sometimes stir many issues. In fact, this post could easily be twice as long. Just remember when you are dealing with a lot that is larger in size for the neighborhood, pay attention to previous similar sales (be sure the lot has similar utility and zoning). You’ll need to crunch data and do research, but on top of that it will be important to get in the mind of potential buyers to understand how the market would respond to the larger lot size.

Question: Anything else you’d add? Comments are welcome below.

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