Appraisers are often the first ones to point out that cost and value are not always the same. For example, it might cost $15,000 to remodel your kitchen, but the value that it adds to your house could be much more, or it could turn out to be much less than the cost. We all want to make improvements to our homes that cost less than the value returned. So what are some indicators that show if cost is more, less, or the same as value?
Speculation (spec) homebuilders are uniquely in tune with what kinds of improvements add value to a house and what kinds do not. If spec homebuilders in your market area are building homes similar to yours without back yard landscape, air conditioning, or storage sheds, it is likely they have found that buyers are unwilling to pay as much for these features as the cost. Pay close attention to the kinds of features that always come standard on spec homes and the ones that do not. Standard features are likely to have contributory value that is equal to or greater than cost. On the other hand, extra features are likely to demonstrate value that is below the cost of adding such amenities during initial construction. Remember though, that adding a standard feature after construction, like an extra bathroom or granite countertop, might be more expensive; tipping the balance toward costing more than the value added.
The Principle of Conformity in real estate suggests that features of a property will be most valuable when they conform with other properties. Look around your neighborhood. Ask yourself if the update or improvement being considered will bring your property up to the level of most properties around you, or will it make your property better than most other properties. If you are putting in a pool and most properties in the area do not have a pool, then chances are that the typical buyer does not demand a pool and that adding one will contribute something less than it will cost. If the improvement does not conform to the neighborhood and you still think that it adds more value than it costs, ask yourself why aren’t more people doing it? Maybe that feature is a very new trend or is a difficult change to make, which relates to the next bullet.
General market understanding can provide an indication of the relationship between cost and value. A small city near Portland, Oregon is a great example. The city residents are quite affluent, yet near the center of town, many older properties are much smaller than residents would like or can afford. For many of these improvements, the value of additional living space is much higher than the cost of the add on. Smart investors are capitalizing on this demand by flipping homes after adding living space. Ask yourself if your neighborhood is growing, stable, declining, or in renewal. Growth or renewal neighborhood stages could signal that the market will accept more drastic changes than the Principle of Conformity might suggest.
If you are looking for some property improvements that are safe and that generally add more home value than the cost, check out this past blog post on Maximizing Real Estate Appraisal Value.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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