How can a 40K remodel only increase value by 20K?

Imagine you just finished up a sweet $40,000 kitchen remodel. The old cabinets from the 70s are gone, your green vinyl flooring has been replaced, and a thick granite slab and stainless steel appliances have trumped formica counters and crusty outdated appliances. You’re extremely happy, and also satisfied to have improved your property value by $40,000. That’s what you did, right? Not necessarily.

kitchen remodel - photo by Sacramento Appraisal Blog

Why do appraisers not recognize the full cost? It can feel maddening to property owners when appraisers don’t include the full cost of a remodel in an appraisal report. But there is a reason why the total cost might now show up in the final value (assuming the appraiser did a good job of course). The key issue in the mind of an appraiser is how much buyers are willing to pay for the remodel. Or in appraiser lingo, what is the reaction in the market for the kitchen remodel? Through research and comparison to other properties in the neighborhood or market, appraisers find out how much a kitchen remodel is worth. For instance, if homes with an outdated kitchen are selling at $250,000, but homes with a similar kitchen remodel are selling at $270,000, then it’s clear the market is willing to pay $20,000 for the kitchen – despite the cost at $40,000. By the way, there is no universal figure or percentage for what buyers will pay for a kitchen remodel. The $20,000 I used is only an example.

Cost vs. Value: This scenario highlights that there can be a huge difference between cost and value. Cost is what we pay for something and value is what it’s worth. As much as we’d like to think these two are the same, that’s not always the case. It’s easy to see differences between cost and value when we consider things like extra square footage, built-in swimming pools or a very expensive remodel that definitely won’t see the cost recovered in the market because the house is now overbuilt. Experienced inventors know this phenomenon well too because they have to be very cautious about their numbers. They know an $80,000 remodel doesn’t necessarily add $80,000 in value to the acquisition price – especially if the initial purchase really wasn’t that good of a deal. That’s why the goal is to buy low enough to fit in the cost of improvements and profit. Ultimately no investor wants to make the wrong type of improvements or outspend the resale value.

If you’re concerned about resale value, it might be worth it to talk with an experienced Realtor or appraiser about your plans (before you remodel).

Questions: What do you think adds the most value to a home? What type of improvements would you recommend for home owners? Any stories to share if you’ve had your property recently appraised?

If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook

How Legos can help us understand real estate

What could Legos possibly tell us about real estate? Scroll through the images below to digest some real estate concepts one block at a time. We’ll touch on issues such as functional obsolescence, code violations, the value of a view and FHA safety standards. What else do you see? I’d love to hear from you in the comments below.

Legos and real estate - photo by Sacramento Appraisal Blog - 1

Legos and real estate - photo by Sacramento Appraisal Blog - 2

Legos and real estate - photo by Sacramento Appraisal Blog - 3

Legos and real estate - photo by Sacramento Appraisal Blog - 4

Legos and real estate - photo by Sacramento Appraisal Blog - 5

Legos and real estate - photo by Sacramento Appraisal Blog - 6

Legos and real estate - photo by Sacramento Appraisal Blog - 7a

Legos and real estate - photo by Sacramento Appraisal Blog - 8

I used to play with Legos as a kid all the time. Did you? I still build though quite regularly with my two sons who are six and nine. They absolutely love Legos, and it really gives us a fun way to connect. We actually built this house a few days ago, and after building I thought it would be perfect for a blog post.  🙂  Two birds with one stone – family bonding and blogging.

Which photo do you like best?

If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook

Stairway to functional obsolescence

This is a nice looking house, right? It has upgrades galore and is over 4000 square feet. There are five bedrooms, four full bathrooms and a decent-sized lot. This house may be slightly overpriced, but on top of that, prospective buyers have not been making offers. Take a close look and see if you can guess why no offers have been made. What do you see?

Example of functional obsolescence

Why is this house sitting on the market? While this property has many appealing features, the stairs have been an issue for buyers according to the Listing Agent. Why? Because there are stairs to get to the front porch from the driveway, stairs inside from the first floor to the second floor and stairs from the garage to the first floor of the home. We expect stairs inside, but it can be very taxing for buyers to have to walk up stairs to get into the house from the driveway and through the garage. There is literally no other way to access the house besides going up stairs. This would of course be a great way to burn calories, but it would be a pain for grocery shopping, baby transport and many other everyday details of life.

What is functional obsolescence? It is ”a reduction in the usefulness or desirability of an object because of an outdated (or odd) design feature, usually one that cannot be easily changed” (from Investopedia). We see functional obsolescence when there is a feature of a house that is not useful to buyers for one reason or another. It may have been acceptable at some point in the past, but is now outdated, or it may simply be odd and less appealing. Other examples of functional obsolescence include having to walk through a bedroom to get to another bedroom, having no dishwasher in the kitchen, no laundry hook-ups, or having no bathrooms on the first floor of a house.

This is a very nice home that’ll sell eventually, but since all buyers have passed on this property so far, it’ll likely sell at a discount because of the stairs. While appraising a home in this neighborhood, I chose not to use this listing in my appraisal report because of the stairs. I explained in my report why this property was not a good indicator of value for the market.

Would stairs like this matter to you?

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Twitter, subscribe to posts by email or “like” my page on Facebook

5 real estate words that make you sound smart

In case you want to win in the real estate category on Jeopardy or boost your real estate IQ, this post is for you. Here are five real estate words that will definitely might make you sound smart. Enjoy and find a way to use them soon.

This yard has a huge staircase to the front door (it's very odd for the neighborhood)1.  Superadequacy 
Superadequacy is basically a synonym for “overimprovement”. It’s when a property is overimproved and the cost exceeds the value it adds to the property. Examples of superadequacy would be an 8-bedroom house in a 3-bedroom neighborhood, an air conditioning unit in Antarctica or a $50,000 kitchen remodel in a $100,000 neighborhood.

Example: It’s nice that Lola’s McMansion gives shade to all the neighbors, but it’s still a superadequacy.

price reduced sign2.  Functional Obsolescence:
Functional obsolescence is “a reduction in the usefulness or desirability of an object because of an outdated design feature, usually one that cannot be easily changed” (from Investopedia). In real estate, we see functional obsolescence when there is a feature of a house that is not useful to buyers for one reason or another. It may have been acceptable at some point in the past, but is now outdated, or it may simply be odd and less appealing. Examples include having to walk through a bedroom to get to another bedroom, having no dishwasher or laundry hook-ups, having a giant indoor spa that takes up half the master bedroom, having no bathrooms on the first floor or only having one bathroom in a 4-bedroom house.

Example: The property on Main Street sold for less because of functional obsolescence. Buyers just didn’t like only having a sink in the master bedroom instead of a full bathroom like all the other houses.

3.  Fenestration
space ship house on Garden HighwayFenestration is the design and placement of windows (and other openings) in a building. Most of us probably observe fenestration all the time by saying things like, “ooh, I love that big bay window off the front dining area” or “I like the house for the most part, but the windows make it look like a space ship.”

Example: Ginger loved the house, but wasn’t so sure about the fenestration. Would future buyers really buy a house with parallelogram-shaped windows next to a circular entry door?  

4.  Bifurcation
yodaBifurcation is a word to indicate something is split into parts. When it comes to the housing market, we’d say the market is bifurcated because there are different segments of the market. We see this clearly when there is a price difference between traditional sales, short sales and foreclosures. In this case the market would be bifurcated because the market is split into distressed sales vs. non-distressed sales.

Example: Johnny knew the market was bifurcated, so he hoped to buy a bank-owned fixer for less so he could “move up” into a more expensive neighborhood. 

5.  Easement Appurtenant
An easement appartenant is an easement which is annexed to the ownership of one parcel of land that allows one party the use of his or her neighbor’s land and which runs with the land when the title is transferred to another party (from RealEstateWords). The best example is one neighbor driving over another neighbor’s land to get to his lot.

Example: Everyone says I’m a nice guy for letting my neighbor use my driveway to get to his house, but it’s really just the easement appurtenant.

Picture from Wikipedia 200px-Kyle_Plante_mullet_5th_grade6.  Parcel Mullet (Bonus Word)
This word probably won’t make you sound smart, but since we’re talking about real estate words, it’s worthy of mention. My friend Heather Ostrom and I invented this one. A parcel mullet refers to the phenomenon of having a well manicured short lawn in the front yard, but a wild long yard in the back. Or in laymen’s terms, business lawn in front, party lawn in the back. If you didn’t know, the mullet is a hairstyle that is short at the front and sides, and long in the back (Wikipedia). Read more on the parcel mullet here.

Example: Bobby felt strangely proud of his parcel mullet being three feet high. 

I hope you enjoyed the post. If you want some practice using these words, I’d love to see you slip one of them in a comment below.

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