How do we value a non-permitted garage conversion? Today I wanted to share a real life example of a property I appraised. I’ll keep things fairly brief because it’s impossible to get to everything in just one post. Though I do have a 10-minute audio clip for more depth on conversions. Any thoughts?
UPDATE: Read part 2 of this post HERE.
Garage Conversion Formula: It would be nice if there was a one-size-fits-all value adjustment we could apply to any conversion, but that’s not how it works because conversions vary tremendously in size and quality – not to mention some neighborhoods accept them and others really don’t.
Golden Data: In this case the conversion was nicely done and was even on a crawl space like the rest of the house. I searched the neighborhood for garage conversions over the past few years and literally found none. But I did have one very lucky bit of data since the subject sold four years ago on MLS as an arms-length sale. This means I was able to look back in time and find how the subject fit into the context of neighborhood prices.
What I wrote in my report: Based on the previous sale in 2012, it is clear the market recognized the subject property’s extra size as square footage and paid for it as such in the marketplace. The lack of permits on the garage was definitely disclosed in MLS. At the time of the sale in 2012 the market was willing to pay about $15,000 (6%) less for the subject property compared to otherwise similar homes that had a garage. In today’s market were no recent sales with a garage conversion, so the appraiser used historic data to give a downward $15,000 adjustment to Comps 1-3. The garage adjustment would really be reasonable anywhere between $15,000 to $20,000, but since the subject has been upgraded extensively in recent years it made sense to adjust at the lower end of this range since upgrades lessen the negative for not having a garage.
If I didn’t have a previous sale: Without a previous subject sale, I’d need to find other garage conversions in the neighborhood or search in a competitive area of town to try to find a reasonable adjustment for the lack of a garage (and lack of permits). In some cases I would maybe consider the cost to turn the conversion back into a garage – especially if the conversion was shoddy or minimal to cure. Still other times I might ponder the cost to permit the conversion or the cost to actually build a garage if there is space to do so. Remember, the adjustment at $15,000 made sense here, but it could be FAR DIFFERENT in other situations.
Garage Conversion Video: This audio clip is ten minutes or so and could be good as background noise while working. Watch below (or here).
Note on permits: As an appraiser it’s a liability to assume everything in a non-permitted conversion was done to code. What if I recognized value for a conversion but then in the future an owner had to rip out the non-permitted area? Can you see why some appraisers (and lenders) won’t give value to something unless it was permitted? Yet we still have to ask, “Is the market willing to pay something for this non-permitted area?” This is not an easy question to answer, but it is vital nonetheless. Hopefully we can find some comps, but more than that we need to disclose everything clearly, use logic and professional judgement, and maybe reach out for opinions of other trusted professionals too.
Questions: How do you deal with garage conversions? Any other insight? Did I miss something? I’d love to hear your take.
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When hunting for and evaluating homes for my flipper clients, garage conversions have a negative impact. In plain English, I calculate the cost to remove the conversion and restore the garage to original usage in 100% of cases. Why? Most conversions are unpermitted and ultimately that would have to be resolved. Most conversions are poorly executed, have issues with HVAC and access to bathrooms. Buyers want garages for vehicles and storage. While the conversion may have added temporary value for the seller, paraphrasing some of my favorite rock and roll: “you’re fooling yourself if you believe” it adds value for a buyer.
I believe that if done well, they are a wash. They add some value by increasing the size of the home, but at the same time detract value by removing the garage. If done poorly, they can absolutely remove value. This includes if they are done with shoddy workmanship, but also if they are done when there is a lack of other parking or storage space. I have seen numerous examples of homes with converted garages that have little on street or driveway parking and/or have nowhere to store the junk that would normally go in a garage. If someone were to want to do a conversion, they should have ample additional parking and a shed or some other type of storage space for typically garage stuff. I also think that when people do a permanent conversion that removes the garage door and replaces it with an exterior wall, it definitely detracts from the curb appeal and lowers value.
There are several factors that I take in to consideration when trying to determine what adds or subtracts value — OR — adds or subtracts to the desirability of a home in general. Best case scenario with a garage conversion that will add value = good workmanship, done with permits, and the presence of available garage parking that is consistent with the surrounding neighborhood. Worst case scenario with a garage conversion that will subtract value = poor workmanship, done without permits, and no available garage parking that is consistent with the surrounding neighborhood (See more of Erin’s thoughts on conversions 
I can definitely shed some light on how they could possibly add value, for the right buyer. I find that the older, tiny detached garages like ones found in East Sac or Land Park barely fit a car in them as is. When converted to a game room, man cave, or office, it creates a completely private place to escape to. The best example I can think of was an episode of Interior Therapy by Jeff Lewis. In the episode, Jeff converted a backyard garage into a home office and lounge type area. This garage was previously used as junk storage and by the end of the conversion you could see how much it brought to the property.
In my experience, garage conversions typically do not add value to a home. Right off the bat, a large handful of buyers will not even be interested in the property if it does not have a garage. Therefore, the seller is missing out on about 60% of the potential buyers. So now your competition/interest in the home has already dropped. Next, the question screams: “Was it done with a permit?” Most of the time, garage conversions were not done with permits. This causes red flags for buyers and also eliminates more buyers who are using financing that will not allow non-permitted garage conversion purchases. Additionally, most garage conversions have a step down into the room and it typically does not “feel” like the rest of the house. Due to this, it does not add value for the extra square footage. You lose a garage and in place have not as good quality extra square footage. This leads to using the original square footage when trying to value the home with recent sales. With all of this factored in: In most cases garage conversions decrease the value of a home. At best, the conversion equally cancels out the loss of the garage. The only time it would add value is if you are adding a bedroom and/or bathroom that was done with permits, does not have a step down, the central heat/air is tied into the space and gives the same “feel” as the rest of the home.
All I’d really say on the subject of whether garage conversions add value is: It depends. Are they common to the neighborhood? Some older neighborhoods of mostly two-bedroom homes have seen a large number of garages converted to additional living or bedroom space, and in neighborhoods like this it makes sense. Generally speaking, though, I think most people want a garage and are willing to double an office as a guest bedroom instead of looking for two rooms. More often than not when I take clients through homes with garage conversions I get comments like “this is kind of funky” and we have the discussion about how difficult it would be to convert it back to a garage.
Buyers want bedrooms, bathrooms, nice living spaces and in most cases, a garage. In the past 12 years I’ve sold 3 homes with converted garages. These are their stories: 1) A single mother; 2) An investor looking for his next rental, and he liked the converted garage so he could charge more for rent (since it was called a “bedroom” – never mind that the driveway drainage was poor and it slanted down into the garage); 3) An elderly librarian who was also a first time home buyer, who had 12 cats. Yes, the converted garage was for the cats. So for those potential buyers, go ahead and convert those garages! Otherwise, please leave a garage as a garage. I haven’t even gotten into the hassle on the lending side if this conversion was done without permits. If you want to make your home appeal to the most buyers, and sell for more money, leave the garage intact.
I think conversions would really be on a case by case basis… and mostly dependent on the needs of the buyer. I am a strong believer that each sale is unique, and if you are in the right place at the right time, you could sell a property for significantly more than you would at a different time. This definitely includes conversions, as some people try to maximize on their living area. Not having a garage though will definitely have a negative impact on the value. Another big factor would be the neighborhood. Many of the lower priced neighborhoods may even benefit from having a conversion (kind of like diluted price per square foot), so it may have a positive impact on the overall price. Higher end neighborhoods, however, don’t necessarily look at the total square footage to determine the price but more on the outlay, condition, and lot. It would also have a much larger negative impact in a higher end neighborhood as it’s not necessarily seen as “desirable” to live in a conversion. Maybe a cheaper alternative to an in-law quarter. 🙂
As far as conversions, we usually convert them back. We’ve found that most people value a garage more than an additional bedroom. The need for extra storage space along with the reality that most conversions aren’t done very well leaves us converting about 90% back to garages.
No permits: The conversion was done without permits (illegal).
What does this mean for home owners and buyers? You may not get the most bang for your buck in the resale market when converting a garage. If your conversion is done in a professional workmanlike manner though, maybe you’ll come out mostly even (this depends heavily on the quality of conversion and acceptance of conversions in your neighborhood). Ultimately, without regard to market value, if you need more space, converting a garage is a fairly inexpensive way to make that happen. Just keep in mind your future plans to sell the property and how your particular conversion might be perceived in your real estate market (and how much it might cost in case you need to turn it back into a garage).