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.
Things to consider about the value of an extra bedroom:
- 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).
- 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).
- 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?
- 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.
- 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.
- 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.