How much is a remodeled home worth compared to a home without upgrades? An owner might spend $50,000 on improvements, but does that make the home worth $50,000 more? How do appraisers determine the value of upgrades in cases like this? Let’s look at an example.
SUBJECT PROPERTY: Upgraded and sold at $350,000
This property had refinished cabinetry in the kitchen, granite slab counters, an extensively-upgraded bathroom, hardwood flooring, travertine flooring, new fixtures, plantation shutters, and all the bells and whistles (including a blue door). I did not appraise this property, but I’ve called it the “subject” since we are comparing this property to other sales in the neighborhood (one of which I did appraise).
COMP: Few upgrades and sold at $329,500
This property had a very similar square footage and the same bed/bath count, but very few updates overall. When comparing the subject property with this house, it looks like the market paid $20,500 more for the upgrades ($350,000 – $329,500 = $20,500).
MODEL MATCH COMP: Minor updates and sold at $320,000
This property is a model match and sold at $320,000, and really didn’t have many updates other than low-grade granite counters. The sales price was lower since it sold at a slightly cooler time in the market when there was more inventory, but also because there was a den instead of a full third bedroom. The cost to convert this den back to a bedroom was definitely a factor in the lower price. All things considered, this property easily would adjust out to $327,000 to $330,000 when considering the den and the market at the time.
As you can see on the graph, there are many other data points in the neighborhood to help interpret value. When considering comps above as well as all other information, the conclusion is straight-forward:
What are the upgrades worth? About $20,000 to $22,500.
KEY POINTS:
- Cost & Value: There is a difference between cost and value. The owner in this case probably spent more on the upgrades than he/she actually got in value. Other neighborhoods might show a much greater difference, but in this case the owner only got about $20,000 for some fairly expensive updates.
- Should you upgrade? If you plan to upgrade your home, tour some listings in the neighborhood and pay attention to what has been done to those houses and what they end up selling for. Ask yourself if it is worth the cost and effort to spruce up your home compared to the potential resale value.
- Overbuilding: There is a price ceiling in every neighborhood. If you improve your house too much, it probably won’t sell above that price ceiling since buyers are only willing to pay a certain amount in a particular neighborhood before moving on to look at other neighborhoods where values might be higher already.
- Rulers vs. Movers: Sometimes we want appraisers to “give” more value to certain features. The owner in this case would have loved to sell the house for $375,000, but the market was only willing to pay $350,000. This underscores the point that appraisers don’t give value, but instead recognize it in the market. In other words, appraisers don’t create value or even make value go up or down, but simply interpret the most probable price the market is willing to pay. It’s best to think of appraisers as rulers for the housing market instead of a gas pedal or brake pedal
Question: Any thoughts, insight or questions? I’d love to hear your take.
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