Most consumers, and for that matter many Realtors simply do not understand how to properly value real estate and how to effectively determine the market value of a home. Here we discuss three common valuation mistakes:
- Add value to a property for a bedroom
- Incorrectly adjusting for square footage
- Compare non similar style homes with no adjustment
Add value to a property for a bedroom
This is by far the most common error. In some cases a bedroom will add value but this is not always the case. If a house has more bedrooms it is likely larger and a large home is more valuable, however, the bedroom itself is not adding the value, the square footage is. If two houses are the same size and one has an additional bedroom, in most instances it is lacking something else (a loft of bonus room, a den/office, etc.) OR features smaller rooms, which reduces the home’s appeal and is likely to deter some buyers. As such the additional bedroom becomes a wash for valuation purposes. The one exception to this is if the house does not conform to the neighborhood. For example, if the entire neighborhood consists of three or four bedrooms houses and yours is a two bedroom, adding a third bedroom should add value to your property, even if you are keeping the house the same size. I would be very careful in these rare cases as it can be difficult to determine how much value a bedroom will actually add. So when you are looking at your comps, look at the size and not the number of bedrooms.
This does not hold true for bathrooms. Bathrooms will almost always add value.
Incorrectly adjust for square footage
A less common, but more devastating error that I see is to use a price per square foot model to value a home. Many agents make this mistake. The error is to use an average price per square foot and multiply that number by the size of the house you are attempting to value. It is not wise to use this method, especially if your house is on the small or large size for an area. Think about it. Is a 2,000 square foot house really worth twice as much as a 1,000 square foot house that might be right next door? The area brings a certain range of values that all houses fall in and the lot values should be close to identical no matter what size house is on it. Further more, major contributing factors to the cost of a home include items such as appliances, HVAC systems, roof, foundation, electrical and plumbing and while a 2,000 square foot home is likely to have a larger foot print and thus a larger roof and foundation, it is still likely to have but one kitchen, one HVAC system and perhaps another bathroom. Using a price per sq foot model does not consider these factors and therefore does not account for the lot.
It is true that you need to adjust for size as larger homes carry more value, however, it is easy to fail in properly making this adjustment. The best way to do this is to dig into the recent comparable sales (those that have occurred within the past 6 months is preferred but banks will allow appraisers to go back as far as 12 if the sales data is limited, within the same community or close proximity to the subject property, and preferably within a 10-15% size margin) and get an idea for the required adjustment. This can be very difficult as the value per square foot decreases as the homes get larger. It is a safe bet to never buy the largest or smallest house in an area (for more on this read the Principle of Progression and Regression in short it outlines the affect neighboring homes have on other homes within the community), but if you do, use a very conservative adjustment for size. One rule of thumb that I like to use, as it is commonly used by appraisers, is 1/3rd of the average price per square foot as the size adjustment. This is pretty close to average, so it is nice; but again is a rule of thumb and is not science.
Keep in mind that the adjustments that I mentioned are above the ground adjustments. Basements do NOT carry the same value. In fact, below grade space is typically worth less than half of the above ground square footage. For example, in a nice area an above ground adjustment might be $90.00 above ground but basements in that area might only be worth an adjustment of $30.00 per finished sq foot. While this is difficult for many consumers to understand and they often protest that a finished basement is usable/livable space and many people love basements, the simple fact is this is how appraisers assess value and you don’t need to understand why it is true as long as you know it is true and use this formula when assessing your home’s market value.
Compare non-similar style homes with no adjustment
This is far more common that is should be and the most significant error is comparing a ranch or rambler style home to a home with stairs, like a bi-level or 2-story. All other things being equal the one story home is going to carry a higher construction cost due to the factors mentioned above, the home will have a larger foot print due to the fact it’s square footage is located on a single level (or if the home includes a finished basement two levels) and thus the home will include a larger foundation and a larger roof (where as the bi-level or 2-story will have a smaller foundation with a portion of the square footage on the second level (single story homes also tend to be built on larger lots to accommodate the larger foot print). Ranch style homes are also presently in higher demand, this as baby boomers are beginning to reach retirement age and are considering their future mobility.
Another common example of this mistake is comparing older homes to newer homes. In fact, we often receive calls from sellers comparing their homes to near by new builds. While these homes may be nearly identical in size and within a quarter of a mile of each other, you cannot compare a brand new homes to an existing one that was built 10+ years ago without making the necessary adjustments. While some owners have difficulty understanding this, we encourage them to consider this, “would you buy a used home for the same price you can get a recently built new home that includes brand new everything, appliances, roof, windows, flooring, fresh paint throughout, HVAC System, electrical and plumbing systems, etc. and a home that is more energy efficient and which will save you hundreds of dollars on your monthly energy bills, not to mentioned will cost you less to insure and will include lower maintenance costs in the years to come? This doesn’t even take into consideration that with the new home the buyer is likely to have the option to select materials/finishes, paint and flooring colors. In short, the newer home is worth more, and it is best to do as an appraiser will do and use comparables that are of approximately the same age and to then adjust accordingly.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
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