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bedroom count

When a home is almost three bedrooms (but technically only two)

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Imagine a house that used to be three bedrooms until the owner converted one room into a den. Is there a big hit to value now? Will the appraiser only give credit for two bedrooms? Let’s consider some thoughts below. Anything to add?

1) Big deal for value: First off, there can be a huge difference in value between a property that has three full bedrooms and one that only has two bedrooms with no other space that could possibly be used as a bedroom (such as a den). A three-bedroom unit simply has more utility and marketability, so when appraising a classic two-bedroom property I definitely want to take an “apples to apples” approach in my comp selection by finding other two-bedroom homes since those ones are most similar in appeal.

2) Buyers see the bigger picture: Sometimes we see homes that technically only have two bedrooms because a buyer selected a builder’s “den option” or maybe a seller removed a closet in the third bedroom. We’d be right to classify these homes as 2-bedroom properties, but at the same time my sense is if there’s an extra den or office that can be easily converted to a bedroom, buyers see the bigger picture of the house without getting too stuck on one less closet. Thus we can probably compare a house like this with other three-bedroom homes more than classic two-bedroom homes. Though we have to consider any impact to value for the lack of a closet.

EXAMPLE 1: A seller closed up a bedroom closet to use the space as an office and is now concerned an appraiser is not going to give him credit for the extra “bedroom.” Since there isn’t a closet, an appraiser will likely label the home as two bedrooms, BUT the appraiser will also recognize the house can very easily have an extra bedroom with the addition of a closet. Since the house is so much closer to being a three-bedroom home, it would be very limiting to only use classic 2-bedroom comps (see #3 below too). In other words, buyers see the big picture of a house and they probably aren’t going to expect a massive price reduction over one simple closet being removed.

EXAMPLE 2: I was asked how to value a 2-bedroom house that was close to 3000 sq ft and there were no other “comps” that size with only two bedrooms. But the thing is this house had extra space that could easily be converted to a third and fourth bedroom with the addition of closets. In situations like this it’s so easy to get locked into a rigid comp search and only look at two-bedroom homes. I’m a big fan of “apples to apples” where possible, but sometimes we have to step back and look at properties like buyers do. In this case there were multiple offers on the home because buyers were seeing the bigger picture of value rather than getting wrapped up in two closets missing. It’s possible this home could still sell at a discount, but let’s not start comparing it with significantly smaller two-bedroom “comps” either because that’s not what buyers are doing.

3) Logic and adjustments: Whenever we see a difference in bedroom count it’s easy to give a canned value adjustment. So without any research we hear, “The value difference between a 2-bedroom and 3-bedroom home is $20,000.” Okay, maybe that number works sometimes, but let’s step back and think like logical buyers. If looking at a home that has a den option that is otherwise similar to a traditional bedroom, it might cost around $2,000 to add a closet. In a situation like this does it really make logical sense to give a $20,000 negative adjustment? In other words, would buyers truly penalize a property at $20,000 because there is technically no closet? I would venture to say most buyers are probably not going to expect a huge price discount for such a minor cost-to-cure.

4) The market might not care: Sometimes the market doesn’t show much of a price impact for only having two bedrooms. We see this in 55+ communities, but we might also see it with architecturally interesting properties where prospective buyers might not need extra bedrooms. This is a good reminder to step back from being trigger-happy about giving the same value adjustment since the market doesn’t always make an adjustment.

5) Pro tip on downsizing: I recommend not turning a 3-bedroom to a 2-bedroom house. I see this happen when an owner wants a larger master bedroom, but it’s a quick way to lose marketability (and maybe value).

I hope this was helpful or interesting.

Think Like an Appraiser Class (I’m teaching): By the way, I’m doing my favorite class on Dec 7 from 9am-12pm called How to Think Like an Appraiser. We’ll talk through comp selection, making adjustments, tips for talking about value, and what to do in various scenarios. Details here.

Questions: What is #6? Do you have any stories or examples to share about the value difference (or lack thereof) between bedrooms? Anything else to add?

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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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Why did the appraiser say it was only two bedrooms? It should be three.

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The real estate agent marketed the property as three bedrooms, Tax Records said it was three, but then the appraiser said it was only two. What the heck? Let me share with you a situation I encountered recently where an appraiser (me) ended up removing one of the “bedrooms” from the room count because of a functional issue. Let’s look more closely below. I’d love to hear your take in the comments.

The layout of the house according to the agent:

2-or-3-bedroom-sacramento-appraisal-blog-part-1

It’s not normal to have a layout like this, right? Imagine getting up to go to the bathroom at night and walking through someone’s room to get there. The middle room really wouldn’t have much privacy either, right? I can also picture a kid in the middle bedroom setting up a taxation system and charging his brother for passage from the rear room.

bedroom access issue - sacramento appraisal blog

The layout of the house according to the appraiser (me):

2 or 3 bedroom - sacramento appraisal blog - part 2

I pulled three-bedroom comps before seeing the property, but I was surprised to discover it wasn’t really a 3-bedroom home because of a functional issue. I know this seems like a subjective call to axe a bedroom, but the functional issue definitely limits the use of the middle room, so it was not considered a bedroom. It’s too bad there was not more foresight when the addition on the rear of the house was done so the floor plan would be more functional. As a side note, I could have labeled the rear room as a den instead of the middle room, but since the rear room was larger in size, I thought it would more likely be used as a bedroom by the market.

Key Takeaways:

  1. Describe correctly: It’s important to describe properties correctly for the sake of clarity and even potential liability. This is true for both agents and appraisers.
  2. A Bedroom with functional obsolescence: I imagine some real estate professionals would call this a 3-bedroom home with functional obsolescence because one has to travel through a “bedroom” to get to a different bedroom. In my mind this was not a functional three-bedroom home, so I chose to describe it as a 2-bedroom home, but I would understand if someone wanted to describe it differently.
  3. The market’s response: The question becomes how to value something like this. Should we compare it to 2-bedroom or 3-bedroom homes? Well, it’s not really a regular 3-bedroom home, but it’s not really a traditional 2-bedroom home either because it has the extra space (den). Ideally, we should find a 2-bedroom property with a separate area like a den, office, or something else that is similar. If we’re lucky we might find a few sales with functional obsolescence (fat chance). Lastly, if the subject property has sold a few times in recent years, we might go back in time and see how the market valued the home. What did it compare to at the time of its previous sales?
  4. Tax Records isn’t the definitive authority: Just because Tax Records says it does not mean it’s accurate. In this case the home was functionally two bedrooms despite Tax Records saying it was three. As much as we want to trust Tax Records, sometimes we have to look at what is actually there and then try to understand why there is a difference between public records and reality. For reference, here are 10 reasons why public records and the appraiser’s square footage are often not the same.

I hope this was helpful. I’d love to hear your take in the comments.

Radio Interview: By the way, I did a radio interview last week on 105.5FM in Sacramento. Realtor Jay Stoops had me on his show. You can listen to our 20-minute conversation below (or here).

Questions: Is this a 2-bedroom home or a 3-bedroom home in your mind? Any other insight or stories to share? Did I miss anything?

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