5 things to remember about the value of landscaping

How much value does landscaping really add? Nothing. A minor amount. A huge total. I’ve heard it all when it comes to what people think landscaping is worth. Today let’s kick around some ideas from an appraisal standpoint. Anything to add?

landscaping in appraisals - sacramento appraisal blog

5 things to remember about the value of landscaping

1) The myth of no value: I’ve heard the sentiment from some real estate professionals that landscaping does not count toward the value. My take? Landscaping is often very important to buyers – especially when it is extensive or highly expected in certain neighborhoods.

2) Front vs back: My sense is front yard landscaping does not sway buyers like the backyard does. I’m not saying it’s not important or curb appeal doesn’t matter (it does). I’m only saying the rear yard tends to make a much more significant impact on value since people spend more time there.

3) One size doesn’t fit all: The value of landscaping will vary significantly depending on the price range and neighborhood. For instance, a few years back during the height of home flipping activity, it was common to see flippers at the lower end of the market do very basic cosmetic landscaping in the front yard while doing almost nothing with the backyard (seriously, rear yards were at times just dirt or bordering on unkempt). In contrast, higher priced homes were getting full-service attention in both the front and backyard. Why? Because the market had different expectations by price range and the investors’ sense was spending the money was worth it in some neighborhoods and not others.

4) On par after huge money spent: Sometimes owners will spend good money to redo an unkempt yard only to expect a huge price premium. The problem is post-landscaping the owner is now basically on par with other homes in the neighborhood rather than in a position to command a premium. This is not easy to swallow, but it’s important to recognize in order to avoid overpricing. 

5) Dollar for dollar: While we like to get a “dollar for dollar” return on our improvement projects (at the least), that’s not always possible in real estate. So when an owner says, “I spent $125,000 in my backyard” and otherwise similar homes are selling for $700,000, can we really expect this property to be worth $825,000? That’s probably not realistic, right? Most of all though, let’s find comps with incredible landscaping and let those properties tell the story of value. That way we are letting actual market data speak to us to set the tone for what buyers have been willing to pay for similar landscaping. Isn’t that better than shooting from the hip about what landscaping may or may not be worth?

Case-in-point for an incredible backyard: While appraising in the Natomas area of Sacramento I came across a house with an incredible backyard. I ended up NOT using it as a “comp” because this property sold about 10% higher than others because of the built-in pool, custom covered patio, built-in BBQ, outdoor fireplace, and everything else in the yard. I’m not calling all of these things landscaping of course, but at the same time let’s be realistic to think buyers may lump some of these items in the same category. Anyway, at times it’s tempting to give a token $10,000 upward value adjustment when we see a nice rear yard because that’s what a mentor taught us to do, but sometimes the market is willing to pay more like 10%. In this case otherwise similar homes seemed to come in around $450,000 and the subject sold for $495,000 (there were 7 offers). There was one other sale at $485,000 and it also had a sweet backyard. As you can see on the graph, the incredible backyard seemed to really matter.

incredible landscaping - sacramento appraisal blog

Here is what the rear yard looked like. I could live with that. You?

house with amazing rear yard - sacramento appraiser

Remember, let’s find a few examples of extensive rear landscaping (or an amazing backyard) if possible so we don’t base our perception of value on only one sale. After all, what is that one sale sold too high or too low?

The Washington Post: Two weeks ago I wrote a post about the ugly side of appraisal fees, and as a result Ken Harney of The Washington Post interviewed a handful of appraisers (including me) for a piece that went live today. Ken is a nationally syndicated columnist, so the conversation that took place here is going to be moving to a much bigger level. Thank you everyone. Here is Ken’s article.

Questions: What stands out to you most about what I mentioned above? What is #6? Did I miss something?

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4 questions to ask when giving real estate value adjustments

Let’s talk about adjustments. Last month I wrote about being a trigger-happy real estate adjustment giver, and I had some great feedback. One appraiser told me she is going to stop adjusting for some of the very minor stuff like fireplaces and covered patios, and an agent told me his list of adjustments was basically the one I shared as an example of what not to use. It’s great to hear of growth like this, and I love the honesty, yet I think anytime we start talking about adjustments, it can also make us feel insecure because we begin to question everything we are doing. So for the sake of growth and conversation, let’s kick around the topic a bit more. I’d love to hear your take in the comments (or send me an email).

giving real estate adjustments - by sacramento appraisal blog - image purchased and used with permission from 123rf dot com

4 questions to ask when giving real estate value adjustments

Does the adjustment represent how buyers behave? When valuing a property, we adjust the comps when there are value-related differences compared to the subject property. The adjustments are not about what one buyer would pay, but rather what a representative buyer in the market might pay. In other words, if you lined up a group of 100 interested and qualified buyers, and they would pay a difference for that certain feature, we then adjust by that difference. Remember, there is always going to be one buyer who is going to love a feature, and pay way more because of it, but we have to ask, “How much is the market going to pay for this?” Example: House shaped like Darth Vader’s light saber.

Does the adjustment seem reasonable? Take a step back from the adjustment you are giving and just ask, “Is this reasonable?” If you’re giving a $500 fireplace adjustment, does that really seem like a reasonable adjustment, or is it purely made up? Does a $10,000 location adjustment for the busy street really represent what the market is willing to pay? Or does a $25,000 condition adjustment between the fixer and remodeled home make reasonable sense? This is a big question to filter our adjustments through, and I recommend getting into the habit of asking it. By the way, I find sometimes when it comes to condition, the adjustment might be more like 20% instead of $20,000.

Is the adjustment supported? It’s easy in real estate to pull out a list of canned adjustments and start giving them whenever we see any difference between a comp and the subject property. So we see a built-in pool and automatically give a $10,000 adjustment for the difference. Yet we need to do some research in the neighborhood. Is there a price difference between similar homes with and without pools? At times our canned adjustment at $10,000 might actually make really good sense, so it’s perfect to use, but other times we might see a different story of value. It’s easy to get stuck giving that $10,000 adjustment in every case, but this is where we need to let the market speak to us. Research the sales and let them set the tone. This means the adjustment might look different in each valuation. Maybe you’ll have no adjustment at all for a pool if there really isn’t a discernible price difference, while other times you might adjust twice as much as you normally do because the pool is something special and it looks like buyers paid a premium for it. Remember, the goal ought to be to find other homes that actually don’t need any adjustments at all because they are truly comparable. I know that’s a fat chance, but keep that in mind.

Does the adjustment fall in the range of value? As much as we’d like to think there is one perfect and precise adjustment out there to give, it’s most likely we will see a range of value emerge. For example, if we surveyed a neighborhood and found homes with built-in pools were tending to sell between $8,000 to $15,000 higher in price, we have to make a decision. What should the adjustment be in the case of the subject property’s pool? If it’s an older pool, maybe we end up giving a value adjustment closer to $8,000. But if it is a higher quality newer pool we might reconcile the adjustment closer to the top of the range.

I hope this was helpful.

Questions: What is question #5? Anything else to add?

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How much is one extra bedroom or bathroom worth?

A real estate agent asked me this question last week via email, so I thought I would share my response. How would you answer this question?

Question: I was wondering if you could tell me how much value you give a bedroom and full bath. Is there some kind of guideline for us agents to look at?

Image-purchased-at-123rf-dot-com-and-used-with-permission-14688774_s-smallerAnswer: There really isn’t a standard bedroom or bathroom adjustment. Well, I will say appraisers often give $5000 for a bathroom and $5,000 to $10,000 for a bedroom, but those are often just filler adjustments that may or may not really reflect the market. Ultimately it depends on the neighborhood as well as the overall square footage. For instance, the difference between a 2-bedroom and 3-bedroom unit can be substantial depending on the neighborhood and sometimes easily $20-30K+ (not just $10,000). The same holds true for the distinction between one and two bathrooms as the price gap is often much wider than just $5,000. It seems like the price variance between three and four bedrooms depends heavily on the size of the property. A four-bedroom unit is usually larger in size than a 3-bedroom house, so it naturally carries a value premium. However, that’s not always the case. For instance, an 1100 square foot 4-bedroom house might not sell for more than a 1100 square foot 3-bedroom house because the 4-bedroom house probably has a tiny Living Room.

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I wish I could give an exact answer, but the most honest response is that there is no end-all solution other than to research sales in the neighborhood. What do the competitive sales tell us? It’s also important to look closely at square footage because a price distinction for bedroom count may in part be due to the larger size. Lastly, I try to always compare single story with single story and 2-story with 2-story. That helps promote better adjustments.

Any other thoughts? Feel free to share your insight in the comments below.

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How do appraisers make value adjustments in their reports?

Have you ever wondered how appraisers make adjustments in their reports? Where do they get the numbers? Do they just make them up? Let me give you a little insight by comparing two model matches on the same street in Rancho Cordova.

Zinfandel Drive sale in Rancho Cordova - photo by Sacramento Appraisal Blog

House on Zinfandel Drive - photo by Sacramento Appraisal Blog

Comparing two houses: Both of these homes sold in a very similar period of time and had the exact same size. They are model match sales, though the exterior has a slightly different roof design above the garage. All things considered, one property was renovated throughout and sold for $160,000, and the other one was VERY average, which means it was outdated but in decent shape. The spruced-up house ended up selling for 26% more than the house in average condition, which means buyers were willing to pay $33,000 more for all the additional upgrades (this helps us see that cost and value are not always the same). In this case the updated house sold for $160,000 after an investor had previously purchased it for $100,000 on the court steps. The numbers could work to flip the property because there was enough of a difference between acquisition cost and resale value – and some of the repairs may have already been there too.

Anyway, how do appraisers make adjustments in reports? We know the market paid 26% more for the remodeled property, so this adjustment would be very easy to do since there are really few differences between these two properties other than condition. The appraiser probably shouldn’t be using these two sales in an appraisal report since they really aren’t competitive, but if that did happen, the adjustment for condition would be $33,000 because that’s what the market was willing to pay for the difference in condition (the appraiser would call this the “reaction in the market” to condition).

Built-in pool photo - by Sacramento Appraisal BlogOther non-model match examples & built-in pools: It would be a simple world if we only dealt with model match sales, but that’s not always the case. Say we found another rehabbed sale that had a GLA (Gross Living Area) of 1450 and sold at $167,500. We could then compare the renovated house above with a GLA of 1322 and a price at $160,000 to determine that 128 square feet (1450 minus 1322) is worth $7,500 – assuming there are no other differences. If this pattern kept showing up in the market, the appraiser would probably be making square footage adjustments at 55-60 per square ft since the difference here was 58.60 per square foot. The same holds true when comparing the number of garage spaces, bedroom count, lot size, or location. Appraisers analyze other sales and data in the neighborhood to decipher what buyers are willing to pay for a certain feature. You may have noticed I keep mentioning what buyers are willing to pay rather than the cost of something. That’s a key point in how appraisers should make adjustments since they are essentially interpreting how buyers in the market respond to various features (as opposed to the cost of something or simply making up numbers- which I know happens). A last and perfect example would be a built-in pool with an adjustment in the appraisal report that is often somewhere around $10,000 (despite a much higher cost to install a pool). Buyers are simply not willing to pay the entire installation cost of a pool in the resale market, so appraisers find what they are willing to pay by comparing houses with and without pools – and then extract an adjustment.

I hope this makes sense. Let me know if you have any stories or specific examples to share. I’m open ears.

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