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.