“I paid $25,000 for a new roof and AC unit. How much is that worth in an appraisal?” I get questions like this all the time and my answer can be frustrating as I say, “It depends.” Here’s my thought process though and why I can’t just rattle off a quick number. Anything to add?
The full amount: A new roof and AC unit are costly, and sellers often want to pass on the full cost to buyers. The idea is, “Hey, I spent twenty five grand, so the buyer is going to reimburse me.” But cost doesn’t always equal value, and it’s not so common for buyers to pay “dollar for dollar” either.
Boring & bling: A roof and AC unit are definitely important, but they’re sort of boring maintenance items instead of bling. What I mean is buyers don’t tend to visit a property and say, “Oh my gosh, did you see that epic new roof? I’m in love.” Nope, they tend to be more impressed with the latest trendy features instead of the age of the roof or AC unit.
Bare minimum: Buyers expect a working roof and AC unit as a minimum. Lenders definitely expect a roof with a minimum of two years of life also. This is why buyers aren’t always willing to pay big bucks for these features because on some level they simply expect them to be adequate already.
Long-term improvements: A roof and AC unit are going to be an advantage for decades, but a buyer might only be in a house for 10 years. So it probably doesn’t make logical sense to pay for the benefit of the entire lifespan of these items in one instance. In other words, the seller has added marathon improvements, but buyers may not pay that during their sprint to purchase.
Location: An AC unit in Antarctica probably isn’t too valuable, so on some level we have to consider location. On a related note, the higher-end of the price market might react differently compared to the lower end of the market. The truth is buyers in some locations or price points are going to be more informed or picky about certain features. Let’s remember energy efficiency can be a factor here too in light of extra savings.
The comps: At the end of the day we have to look to the market for the answers. I tend to consider all the things above, but I also have to be careful not to impose any of my general thinking on the appraisal. Here’s the key. What have buyers been paying for these features? As we look at comps, what seems to be a reasonable amount that buyers would pay? Let’s study comps to begin to get clues about value.
I know, I didn’t actually answer the question. But that’s not my goal here. My goal is to highlight some important thinking as we try to find the answer.
I hope that was helpful or interesting.
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It’s not what he paid for it. It is part of normal maintenance.What would a typical buyer pay extra to have it? Seller invested in hopes of return on investment. That return also makes it more desirable to a buyer. If it had not been done, buyer would most likely deeply discount the offer.
Yep. Well said Helen. I think that sums up my entire post perfectly. One buyer might pay the full cost, but how much would a typical buyer pay? In other words, what would the market pay instead of that one buyer?
I agree on a price discount, though my observation is first-time buyers aren’t always thinking of long-term issues like this because in many cases they aren’t coming to the table with knowledge based on experience. This reminds us a price discount might not be the same in every location or price point. Moreover, if the market is blazing “hot” buyers might be more willing to overlook some issues….
I enjoyed you post Ryan! I appreciate the point you made that some buyers are looking to own a home long term, which can affect how valuable something like a roof or AC unit is going to be to them. Investors are usually aware of this and don’t sink tons of money into these kinds of things. They usually go for the ‘bling’ because that’s what sells, like you pointed out. Great stuff!
Thanks Jamie. So true about investors. They’re not going to replace the roof unless they absolutely have to do so. If a loan can’t happen, it’s time to replace the roof. Or if it looks really bad, it’s time to probably do something.
I had almost this exact question today from a client and was able to share your blog post as I often do. LOL, thank you for the resource.
Haha. That’s great. Thanks Gary. I get a version of this question every week. This morning I just talked with someone about an entry street vs court location (that could be a blog post at some point). 🙂
By the way Gary, I wonder if everyone in Portland is taking today off to celebrate that Damian Lillard shot. That was unreal.
That shot was amazing, especially taking into consideration how far behind they were in the final minutes. That was almost as amazing as the last time the Blazers advanced to the second round. I don’t know if you remember that shot, but in that game the Blazers were behind by two when Lillard took the shot https://youtu.be/V2GJ2PwXQ4E
Agreed. He was so far back too. Thanks for the clip. I didn’t know about that one. To me it seems like Portland flies under the radar without too much national recognition. Well, I don’t follow basketball extremely closely either, though we usually hit up a couple Kings games each year.
Good post Ryan. A roof is not really an amenity but rather an expected component. An air condition may be more of an amenity in some markets as you said but analyzing the value of both is best viewed from the condition analysis and any added marketability. The simplest approach is citing sales with updated roofs and A/C.
Good luck finding a sale with a new roof that recently sold in same class as subject. Maybe in cookie cutter Sacto!
There’s bound to be data out there. In my mind rather than making a specific adjustment I would more likely consider everything collectively about the house and give more or less weight to some comparable sales. Or maybe give the subject less weight if it has some more dated elements. Roofs and AC units definitely matter to buyers, though at the same time buyers don’t always go through a house with a fine tooth comb and assign value to all of the components (they do in real estate books though…).
Thanks Mike. A colleague emailed me this morning and said a roof is somewhat like tires on a car. I love that analogy (thanks Truett).
Love it Ryan! Roof, HVAC, and windows … things we tell sellers that those are what many buyers are going to notice / ask about, and care about (whether when they drive up to the house, or findings in inspections) – or the buyer’s agent will encourage this dialogue or inquiry happening. But like you stated, if it’s the forever home, or they’re going to be tight on the budget, post close of escrow, they expect some of this to be good enough for their duration … these things can signal trouble or be deal breakers or a cue for a credit request, or a number of outcomes (repair, replacement – what gets agreed to, always a different outcome or a deal breaker). The roof being in bad condition can encourage a drive-on by buyers along with a cringe, if it’s a troublesome looking shake roof (for example). Best time to buy a troublesome roof that might be in the gray area of “potential trouble” – is the rainy season, and also the worst time to ask for repairs and find a roofer … sometimes weeks booked out … then there’s the A/C the Summer – the Game of Seasonal chaos.
Thank you Heather. I love it. Excellent commentary. I think you are right about the issue here. There is a sense where buyers expect adequacy at the least, but there are also moments where deferred maintenance will kill interest in a home (or outright disqualify a home from traditional financing).
I talked with an agent yesterday who has a home without any air conditioning. Yeah, that’s going to have an impact, especially in Sacramento.
My rule of thumb is a buyer might pay 50% of the money spent by a seller on a new roof, but expect a 200% discount if buyers have to do it themselves (to compensate for inconvenience and aggravation).
P.S. New carpet vs. carpet allowance:
Sellers should always put in new carpet and get the extra benefit – it smells ‘clean’ which is a clincher early for women.
Don’t worry about buyers wanting to select their own carpet. They all want a medium-grade with neutral color.
I love it Jim. Thank you. I’m really glad you mentioned this because I think there is something to what you are saying. I’ve observed a similar dynamic where buyers will absorb some of the cost for a new roof, but it is a much bigger hit to value when a roof is on its last leg. This is where we really have to be in tune with the cost of a roof because buyers are absolutely going to be in tune with that figure. Of course if a roof is really bad the house might not be able to obtain financing. Though I’ve seen homes slip through the cracks even though there is no way a 2-year roof cert could be obtained.
Early = especially
What are the top 5 improvements that get the best return?
I don’t know that there is really any legit list for the top five improvements because that list could vary substantially by price range, location, and what the market is doing at the time. I actually wrote about this last year in a post about getting “dollar for dollar” in real estate. Even Remodeling Magazine shows most improvements don’t actually yield their full cost in the resale market (according to their research). So in that regard nearly every type of improvement is a loss in terms of what it costs vs what it yields. This is why sometimes I tend to tell people to focus on smaller-ticket items instead of fully remodeling a kitchen. Though backing up, obviously things like a remodeled kitchen, open layout, updated bathrooms, and killer backyard tend to help sell a property. And of course the thing that gives (or takes away) the most value is what the market as a whole is doing.
Sorry I couldn’t give the five best improvements, but maybe read this and let me know what you think…. https://sacramentoappraisalblog.com/2018/05/02/the-myth-of-dollar-for-dollar-in-real-estate/
I also wrote an article for Comstock’s Magazine on the subject of upgrades. Just in case it’s relevant for any onlookers. https://www.comstocksmag.com/article/are-home-upgrades-worth-it
Gosh, Ryan, I was hoping you would tell us what they are worth. I’m doing an appraisal on a home with a new roof and AC and need an adjustment amount. Just kidding, but I really like your point that buyers will most likely not consider the full cost of the improvements since they may only be in the house for 10 years. You have definitely given some food for thought when considering the cost of repairs and improvements.
Thanks Tom. Yeah, if only I could have given a specific amount. This week I happen to be appraising something where the roof does need to be replaced. There have been three roofers out and none of them will give a 2-year roof cert. In a situation like this there could be a bigger discount.