A bigger house is always worth more, right? It’s really easy to fall into the trap of believing that, but it’s not always true. Let’s talk about it.
Myth: Extra square footage is always worth more.
1) Single story vs two story: Sometimes a large single story will sell for more than a larger two-story. This isn’t always the case, but in some neighborhoods we see this dynamic. So just because a 2-story is larger doesn’t mean it’s more valuable (or a good comp).
2) 55+ Community: In a 55+ community we sometimes see more emphasis on floorplan instead of square footage. Larger models still likely command higher prices, but at the same time the market doesn’t seem as sensitive to square footage differences like we see in other neighborhoods. For example, here are two models in Sun City Lincoln Hills with a 107 sq ft difference. Normally that might not mean much in a typical neighborhood, but it looks like there’s a pretty decent value difference here. On paper it seems like these two models could be perfect comps since they are so close in size, but that might not be the case.
3) Layout: At times a house with a better layout will sell on par with a larger house with a less desirable layout (even outside a 55+ community). What I mean is buyers might pay the same for a 1,400 sq ft house with an open layout compared to a 1,700 sq ft house with a less open floorplan. This dynamic isn’t always easy to spot in MLS photos, and that’s why it’s so important for agents and appraisers to communicate. I recommend agents to open up conversation with appraisers about the listing (without pressuring to “hit the number”). What feedback did you get from potential buyers? What were buyers attracted to? Is there anything special about the house or neighborhood? When it comes to layout, this is often an “insider detail” that’s frankly easy to miss, so I can’t emphasize how important it is to communicate about this if it’s a relevant factor.
4) Dangerous to always adjust: It’s easy to get trigger-happy about making value adjustments whenever we see a square footage difference. Can you relate? But sometimes a square footage adjustment might not be needed. My advice? Be careful about always giving an adjustment and be cautious to not routinely give the same exact adjustment too. Try to look to the market to see if there should be an adjustment or not, and then proceed.
I hope this was interesting or helpful.
Questions: What point stands out to you the most? Anything else to add? I’d love to hear your take.
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Great post Ryan. I agree that square footage adjustments are not always required, but in my experience and market it not very common that a larger home will not sell for more given all other factors are the same. I think the main point is that there are diminishing returns to size based on highest and best use and the principle of conformity. If a 2,000 square foot home satisfies the needs of the typical buyer and conforms with the homes around it, 3,000 might not increase the value by much.
Hi Gary. Yes, I agree with you that the vast bulk of the time a larger home sells for more. Though there are situations where that is not the case. You are definitely right about diminishing returns on extra square footage. Sometimes a home is larger because it has a couple additions too, which makes the floorplan weird. I’ve seen larger homes like this not command any premium because of the functional obsolescence. On paper the square footage was much larger, but in reality the market didn’t bite at the idea of paying more. That’s another thing we have to consider.
I just think it’s worth a pause before getting trigger-happy with giving an adjustment. Is there an adjustment to give here? Am I really seeing the market? If this property is 1,400 sq ft with an open floorplan, can it readily compete with something that is slightly bigger at 1,700 with a clunky floorplan? Just questions. Always asking.
Thanks for your great post! I appreciate your mentioning that sometimes an adjustment is not warranted even though there is a difference in square footage. Nice points were made, as always.
Thanks Jamie. I appreciate it. This is actually one way I think UAD works well for appraisers. I like that “0” in there on the grid when there is no adjustment to give. I say this was a grain of salt of course as I’m not a huge fan of UAD. Just thinking out loud. 🙂
Yes indeed! Technically zero is an adjustment.?
Ha. Well, I’m sure we could create a thread on Facebook and have appraisers argue about that. 🙂 I’m saying NO.
Haha! It could be an intereting conversation. I think most would agree wih you.
Thanks for all the great insights over the years.
When talking with sellers and buyers about values I tell them that there is both an art and a science to values. The $/square foot is part of the science of it. Layout, curb appeal and so much more affect the art of values.
As you’ve pointed out, you can’t just price based on the science, you have to look at the big picture and see how all of the art pieces effect the value.
Thanks for another good blog post.
Thank you Nathan. I appreciate you pitching in here and I love the “art vs science” angle too. If we only see the facts of the property such as square footage and bed/bath count, but we don’t consider some of the intangibles like layout or market perception, we might miss value. I was just in a real estate office this morning leading discussion. In part of my talk I said value is difficult. It’s not easy to see the market at times. This is exactly why it’s important to weigh everything rather than giving quick adjustments that may end up masking the way the market really perceives the property. Thanks again.
Big homes are “more to love” … and paint, and carpet, heat and cool :/
Were you out driving around inside Sun City Lincoln Hills recently? Pretty nice, isn’t it? 😀
Location and View out there is meaningful – like maybe a $100K adjustment worth of meaning for a sweeping foothills view, maybe more.
Floorplan matters too like you said. For me, I MUST have a living room window that looks out onto the street. I’d feel isolated if I had to go the kitchen or to a front bedroom to see what’s going on out front. A cheaper house w/no front LR windows the street is not a bargain to me.
With that said, I’m totally overpaying for my new dinky Sun City home LOL and the owner vehemently disagrees, but it has windows to the front and a level backyard with no short-rooted redwood trees planted in a loose man-made landscaping hill towering over it like a guillotine… I don’t know what the adjustment would be for that (guessing $10K based on my situation)
Thanks Anne. I did do a recent appraisal in SunCity. You are so right about location / view meaning quite a bit for value. It’s no joke.
It’s interesting to hear how important the front window is to you. I get that. It seems either a Living Room will open to the street or to the backyard. I can see pluses and minuses either way.
Good luck on your sale. I suppose I’ll see on Twitter when you’ve closed. Looking forward to that tweet. 🙂
Great post, Ryan. I think you covered all the bases. Basically, a size adjustment, just like any other adjustment, must be supported from the market. I can appreciate the part about older folks sometimes wanting a smaller house because of easier care; getting ready to downsize myself. If that becomes a primary part of the market area, it could certainly impact size adjustments.
Thanks Steve. I appreciate it. Smaller homes really are easier to keep clean. My household actually has a smaller home and we are extremely happy with the size only because the layout works well (open kitchen, separate dining room, bar area, and most importantly a 4-car garage). It’s nice because we can manage cleaning and it’s just enough space for everyone. Good luck on downsizing soon.