How much is a bedroom worth? What sort of adjustments do you give when looking at two houses with a difference of one bedroom? It’s always $10,000, right? Or wait, someone else said $20,000. What’s the truth? Let’s talk about this today. I’d love to hear your take in the comments.
SacBee presentation: This week I was honored to give a video interview for 30 minutes or so to The Sacramento Bee. Check it out (subscriber content).
THE BIG POINT: Don’t use one figure every time you see a bedroom count difference. That’s just not going to work. Thanks for coming to my TEDx talk.
FOUR REAL ESTATE TRUTHS:
1) There is no standard adjustment: There isn’t a one-size fits all bedroom adjustment. I know many of us were taught to adjust by $10,000 or $20,000 whenever we see a difference in bedroom count, but that’s just not how the market works. It sure would be easy if there was a quick adjustment to give any time we saw a difference, but the problem is canned adjustments won’t work in every price range, market, or location. I wrote about this more in, “Why a little black book of value doesn’t exist in real estate.”
2) Getting logical: The difference in value between a one-bedroom unit and a two-bedroom unit could be quite substantial, right? In contrast, the difference between a four-bedroom home and a five-bedroom home could be minimal. This goes to show there really isn’t a standard adjustment to apply for every single difference in bedroom count. Frankly when valuing a one-bedroom condo, I’m really looking at one-bedroom units for comps because I know there can be a huge value difference. In other words, it would be a massive mistake if I only used two-bedroom units and didn’t even look at one-bedroom units. In contrast, when pulling comps on a five-bedroom home there could be some four-bedroom units that really sell at the same level. The key is that we compare and contrast the comps to understand if there really is a price difference rather than imposing our preconceived ideas on the property. Sometimes we see a difference and there is obviously an adjustment to give because the market clearly paid more or less because of the difference. Other times we see a difference in bedroom count and we have to be bold enough to recognize that despite the difference there really isn’t any difference in value. So sometimes the best adjustment is giving no adjustment.
3) Exceptions to the rule: Sometimes modern units in Midtown only have two bedrooms despite a larger square footage and these units still command a price premium. The issue is the buyer pool doesn’t often need four bedrooms to fit a family, so it’s not a big deal to have fewer bedrooms compared to the suburbs. Or 55+ communities almost always have only two bedrooms and it may not be a premium at all to have an extra bedroom since usually just one or two adults live in the space. I recently met someone building a modern home in Sacramento and people are telling her to be sure to build at least three bedrooms. I mean, I generally like to see at least three bedrooms, but for this custom modern home the buyer pool will likely be good with only two bedrooms for the size of the home. Ultimately it’s easy to judge a home for not having enough bedrooms based on what we’d see in a typical tract area, but sometimes we have to back up and realize a lower bedroom count doesn’t always lead to a lower value.
4) Looking to the market: So what is the proper adjustment? Well, we have to look to the market to understand if there is a price difference. Ideally if I’m appraising a 4-bedroom home it’s best to use other 4-bedroom comps so I don’t even have to consider any difference. The problem is if I only use 3-bedroom sales as comps I haven’t really shown what a 4-bedroom home is worth. If I have some sales with varying bedroom counts though then I can start comparing and contrasting these properties to try to discern if there was a price difference because of having a different bedroom count. Of course the price difference might really be about the square footage, so I have to be careful not to double-dip on adjustments by automatically adjusting for square footage as well as bedroom count.
Okay, this isn’t a post on how to give adjustments because that could be a long topic, but here’s a piece I wrote called “4 questions to ask when giving real estate value adjustments” that might give some more insight.
Questions: How much were you taught to give for a difference in bedrooms? Anything else you’d like to add? What did I miss? I’d love to hear your take.
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One other thing that is missing when simply counting bedrooms is location in the home. Is the primary bedroom on main? Are there two primary suites? Are all the bedrooms on main or scattered? Is one of the bedrooms a maybe-nonconforming space in the basement? Not all bedrooms are the same.
So good Corey. Thank you so much. Very well stated.
I love different methods of valuing houses —-
in ALL 3 methods of valuation:
Cost Market & Income
Sq.Ft, bedrooms, baths, lot size, Linear feet on lakefront, first-tier from water and adjustments made between Comps & Subject – % adj slides UP with $$$? Regression analysis in hand?
My favorite wild method was a Texas guy in late 1960s – early 70s who counted the doors & multiplied by a number!!
NICE
Thank you Ed. I appreciate your commentary.
In colonial times your house was taxed based the panes of glass
Hmm, I’ve never heard of that. Fascinating. I guess it would be incentive to have less windows then. 🙂
I did a blog post that looked at the average difference between three and four bedrooms in Portland years ago and segmented by square footage. Often, four bedroom homes are less valuable than three. People buy mostly on square footage, but then amenities, condition, etc…. When square footage is the same, a three bedroom home will feel larger and often sell for more. Here is a link to my analysis:
https://www.aqualityappraisal.com/Are+Four+Bedrooms+Worth+More+Than+Three+Bedrooms+in+Portland+Homes
Thank you Gary. I really appreciate it. I’ll check out the link. I love your line too that it’s mostly about square footage. I tend to agree. I think at times we are so hyper-focused on bedroom count that we fail to see the bigger picture of layout, size, and other features. Of course we have to look to many factors, but it’s important not to just isolate one thing like bedroom count and call it a day.
Great post Ryan! Spot on! It all depends on the home and the market. So many factors to consider. Market support for our analysis and opinions is so important.
Thank you so much Jamie. I appreciate it.
I dealt with this thorny issue just yesterday. Subject is a 3,800 square foot house with 3-bedrooms and no feasible way to re-do the floor plan to add a fourth. I researched the MLS for the market segment with houses over 3,500 square feet. Intriguingly, the 3-bedrooms sold for more per square foot. I believe that to be the economies of sale. Median selling prices did show a difference and the number of 4-bedroom sales was notably more. I think it is necessary to consider bedroom counts on a case-by-case basis.
And, thanks to my friend, Jamie Owen, for talking it over with me yesterday!
Thank you Cynthia. I like the way you tried to use data to understand any difference too. Kudos to you. Very well stated too. This is a case-by-case situation, so it would be extremely unwise to impose a list of adjustments on this property or any.
“The appraiser does not adjust for variations in bedroom count as any required adjustment is performed in the square footage adjustment. In addition the appraiser notes that bedrooms do not have plumbing.” My take…….very seldom do I adjust for bedroom counts. When the marketplace shows me a 4 is worth $xxx amount more than a 3 (or similar) than I might make an adjustment.
I like it Scott. Everyone, pay attention to this statement. I think there is something here. For me it’s often about square footage more than anything. I do find myself adjusting for bedroom count in condo neighborhoods though if I’m comparing one and two-bedroom units. That’s where it’s likely more than just square footage.
I believe that all of these items mentioned must be taken together as a whole and compared to the location and the market. a 3,000 sf gla home with one bedroom and a 3,000 sf gla home with three bedrooms may not be competing in the same market. same may also apply for a 3,000 sf gla home that is two floors as compared to one floor home with similar amenities. Market drive should dictate if they are comparable. It’s a hard fight to keep from having set “rules” which we use to adjust bedroom count (or window panes 🙂 ). This is especially hard to do when so much pressure is placed on quick turn times, and the heavy volume of work we currently have.
Thank you Dan. I appreciate your commentary and I agree. There is no quick list (despite agents and even appraisers producing adjustment lists at times).
Great points, as always! I love all of your intelligent analysis, which elevates the quality of the whole industry. I’d add that having three bedrooms vs. two bedrooms (or 2 vs 1) may or may not affect the value of a house directly, but it will likely affect the size of the buyer pool. I think a three bedroom house might attract a larger buyer pool than a two bedroom house (generally), even with equivalent square feet. A larger buyer pool could also attract a higher sales price in a competitive market.
Thanks Kim. Yeah, this becomes a marketability issue. A two-bedroom home is simply not going to work for many people. It’s not just families either. These days lots of people are working from home and they need extra space to make things work.
Thanks for this post! Everyone wants to know the easy “rule of thumb” but yes, adjustments are always derived from the market. Each market is different and markets are fluid, not static. Great information here.
Well said, Shannon. Thank you.
#d8neighborhoodvine http://www.cahomesbydaphne.com What’s in a bedroom? Well this works when the dimensions of the rooms are comparable. But like our listing on 6504 75th Street, when you have approximate 600sf vs your typical 120sf room this table would not work. Having worked in the flooring industry homes before 2000 were about 120sf, some in 2010 were larger 180sf the homes post 2015 were 300sf at the most a 20 x 15. Some are 25 x 20 (500sf) which are in some 1 acre lot homes or 2800+ sf homes. I believe layout and sf affect this chart along with the count itself. CA DRE 01890521
Thanks Daphne. Yeah, this table is what we should NOT BE doing. I tried to make that clear, but I’m afraid some people are taking a quick glance and thinking I’m saying these adjustments need to be made. I’m not saying you are saying that though. You have a great point that size and layout matter for value.
I’m in Oakland and always think,
“This I gotta see” when I read 3/2 in 800 sq ft…
Oh, I’d love to see that too. 🙂
Under 1M is a $10,000 adjustment. 1M to 2M is a $20,000 adjustment. 2M to 3M is a $30,000 adjustment and so fourth. Residential Appraiser Handbook page 100.
Haha. So good. Thank you Ken.
On a side note this makes me think of these $100M listings we hear about. I recall one that had something like twenty two bathrooms and eighteen bedrooms. It’s funny to think of bedroom and bathroom adjustments there…
Between similar models roughly the same size, sometimes two relatively larger bedrooms are more valuable than three relatively smaller bedrooms. Especially in communities more popular among single buyers, young families, and empty nesters.
Excellent commentary George. Totally agree. This is exactly why we have to think about the bigger picture rather than having a laser focus on bedroom count alone.
As a side note, the last time my family bought a house was six years ago and and it was absolutely essential at the time to have at least four bedrooms. But guess what we bought? We purchased a three-bedroom home because the layout simply worked. In fact, it was even better than other four-bedroom homes we saw on the market at the time. There is something to be said for the total package of a house…
Two almost model match homes where one home has 3 bedrooms and one has 4 bedrooms the 3 bedroom home is likely to have larger bedrooms.
Thank you James. At some point it’s splitting hairs. Which is more valuable? The house with 3 beds and a larger living room? Or the house with 4 beds and a smaller living room? This could be a gigantic war of words on Twitter because we could make arguments for either case. But it really doesn’t matter what anyone thinks. What do the comps say? Can we really see any difference? In so many cases properties like this simply sell at the same level.
Quite right. When I run the numbers for 3 bedrooms and a similar 4 bedrooms the median is usually very close. If there is a difference it is usually small.
Thank you James. I appreciate it. I typically do not give bedroom adjustments as I think the bigger issue is square footage. But I am really careful when it comes to 2 vs 3 and 1 vs 2 and such. This can really matter. I appreciate you pitching in your thoughts from experience.
Not considered in any of the commentary that I’ve seen, is the builder option of a 4th bedroom or an open loft/office/playroom area. In that case, the SF is the same as the 4 Bdrm, but the absence of an additional wall & closet opens up the area, making it feel much more spacious. I believe bedroom adjustments are 100% dependent on location: 125 yr old home in Mid-Town or a tract home in Whitney Ranch for example.
Thanks Linda. Yeah, that’s something we have to consider. I actually have a blog post about that, but my post focused on the difference between two bedrooms and three bedrooms. https://sacramentoappraisalblog.com/2017/11/08/when-a-home-is-almost-three-bedrooms-but-technically-only-two/
I totally agree about location. I think that’s a detail that is often lost in our perception that there should be a one-size-fits-all adjustment. Nope.
When it comes to comparing rental market values bedroom count seems to take on greater importance than consideration of bedroom count does in the owner occ resale market.
Excellent point. Thank you Jim.
I think floorplans are really market specific, whether your adjusting for bedrooms or for GLA. There’s seldom areas where the demographics are very uniform, ie. size of the family units, predominance of larger families or single working professionals, etc. In areas where the market is somewhat uniform, the data will reveal the needed adjustments and market reaction to bedroom/GLA adjustments. But in diverse unit area’s, there may be no need for a bedroom count adjustment, since the demand may be mixed. As far as square footage, generally the smaller the unit, the more it will matter. In a 4000 SF home, 500 SF can be hidden throughout the whole home and really not be noticeable to the typical buyer in this market. So do you adjust for it if there is no market reaction? In both situations, the key is knowing your market area. Adjustments become quite easier afterwards.
Thank you Suliman. I really appreciate your thoughts and I’m with you. There is not a one-size-fits-all adjustment to apply to every location, price range, or market. This is exactly why we have to look to the comps to help understand the story of value. It’s not always easy to discern if there should be an adjustment or not, but one thing is certain we don’t need to be giving token adjustments for every little difference. I completely agree about square footage also. That 500 extra square feet might not mean much at all to buyers for a very large home, but it could mean a tremendous amount for the difference between say 1,000 sq ft and 1,500 sq ft.
I appreciate the topic of the post and look forward to future topics.
Dealing with some out of state AMC’s, it almost seems like they are looking for tokenized adjustments, disregarding geographic competency.
Thanks Suliman. And feel free to pitch in your two cents whenever you’d like. Have a great week!!