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worth of upgrades

Why a little black book of value doesn’t exist in real estate

September 23, 2014 By Ryan Lundquist 14 Comments

little black book of real estate values 2 - photo purchased and used with permission by sacramento appraisal blogReal estate would be so much easier if we had a little black book to tell us how much each feature of a home was worth. Imagine a list of values for things like bathrooms, bedroom count, garage spaces, square footage, extensive landscaping, built-in pools, etc…. The truth is I get asked all the time how much a particular something is worth, and my answer is very often “it depends”, which I know can seem frustrating. But this is the best answer because what something is worth is based on the location.

Location Matters: It’s Real Estate 101 to know location plays an enormous role in shaping value. For instance, if you took the same house from Sacramento and put it in San Francisco or Hollywood, it would be worth substantially more in those cities. We all know this, but one thing we sometimes don’t consider is how the value of certain upgrades or features is also strongly influenced by location. Let’s consider the following examples.

A) Kitchen Remodel: Imagine a $50,000 kitchen remodel. You could literally put the same kitchen in a $150,000 neighborhood and a $500,0000 neighborhood, and the contributory value would be less in the lower-priced neighborhood and more in the higher-priced area. Why? Because buyers in the $150,000 neighborhood do not expect a kitchen that costs 1/3 of the entire home’s value, and affordability may also be a factor. In contrast, the remodeled kitchen would be much more acceptable in the $500,000 neighborhood, which means it would command a higher premium. This is why when someone asks, “how much is a kitchen remodel worth?”, the answer is, “it depends”, because the value of the kitchen is tied to the location.

B) Extra Bathroom: During a recent appraisal in a classic area of Sacramento the subject property had three bedrooms and one bathroom, whereas many of my comps had three bedrooms and two full bathrooms. How much is that extra bathroom worth? At the end of the day I ended up subtracting $25,000 from the comps with two bathrooms because that’s what it seemed the market was willing to pay. But this adjustment wouldn’t apply to every neighborhood because it would be WAY TOO HIGH in many other areas where the adjustment could easily be $10,000 or less. The value for a bathroom might also vary depending on whether we are talking about the difference between 1 and 2 bathrooms, 2 and 3 bathrooms, or 3 and 4 bathrooms.

C) Square Footage: How much is extra square footage worth? This is one of the most striking examples of how important location is for determining value. In some neighborhoods buyers could easily be willing to pay more than $100 per sq ft for additional square footage, but other neighborhoods might show a modest $30 per sq ft. This effectively means buyers could shell out $20,000 for an extra 200 sq ft in one neighborhood, but in a different community buyers might only pay $6,000 for the same 200 sq ft. Remember, we are not talking about the cost to build the extra 200 sq ft, but the amount buyers are willing to actually pay for the additional space in the resale market. As you can see, there is no standard square footage adjustment because the value of extra space is tied to the location. Read How appraisers come up with square footage adjustments for further insight.

different price in a different neighborhood brick house

The Big Reason why a Black Book Doesn’t Exist: It would be nice if a little black book of value did exist, but in real estate specific values are tied to specific neighborhoods and price ranges. This means it’s impossible to generalize about the value something might add because the same thing can be more or less valuable depending on where it is located. The danger of course is when an appraiser or real estate agent gives the same value adjustment for features regardless of the neighborhood.

Questions: What other examples have you seen where value is substantially different depending on location? Any further insight, questions, or stories to share?

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Filed Under: Resources Tagged With: book of values, built-in pool, extra bathroom, Home Appraiser, House Appraiser, kitchen remodel, little black book, location in real estate, market insight, Real Estate Values, worth of upgrades

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