Portland Area Real Estate Appraisal Discussion

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?

1. 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.

    

2. 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.

    

3. 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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Thanks for reading,

Gary F. Kristensen

This a great topic, not to mention a very important one in the real estate market. Every home owner who doesn't know how cost to value works should certainly read this article. My wife and I bought a SE Portland bungalow fixer in 2003. Since then we repaired any damage and made it perfectly livable. At that time it really conformed to the neighborhood. Later, we added a complete second story with slightly higher end finishes than probably most homes in the neighborhood. Then updated the main level with similar quality finishes as the new upper level. It eventually looked great after it was all completed. At that time, I realized there were really no other houses like it unless you searched in the nicer more desired neighborhoods a mile or so away. I'm glad we were not planning to sell then. The cost would most likely have been more than the value the improvements added to the property. Any who would have been interested in our quality home, would have also desired a nicer neighborhood. Anyone targeting our neighborhood at the time, would have most likely not been able to afford an asking price we would have liked. As the years passed, our neighborhood has been a hot spot for property investors either flipping or building larger new homes with similar quality, and has became safer, more family friendly, and a desired location for a wider range of buyers. I am sure happy about that.

Another enjoyable post. Good stuff, Gary. I like how you said, "Ask yourself if your neighborhood is growing, stable, declining, or in renewal." Just this morning I inspected a property, and the neighborhood is clearly in a growth stage. Houses are well kept generally already, and values are higher than surrounding areas too, but you can see the money continuing to being poured into the community by the curbside work trucks alone. Some cosmetic fixers are being flipped and there are outhouses in front of other homes because of remodels being done. This is not a period of renewal since this community is nowhere close to having been declining for decades. These small clues though help show that more money is being poured into the neighborhood. That's telling. It's just as you said too where investors are buying smaller homes and adding on to them.

Thank you for the comment Ryan. Did you notice that the neighborhood stage link is to your website? You've always got such great information on your appraisal blog. Lucas, thank you for the comment too. It sounds like maybe your renovation was ahead of the trend for your neighborhood and now might conform. If you plan to stay in the home for a long time, then it does not matter as much if cost is equal to or greater than the value added. It is important to have a home that you enjoy living in.

I find that an important part that is often left out of the puzzle is the value the homeowner places on the enjoyment of the improvements. The question of how long they plan to use these upgrades is seldom brought into the value discussion. Assigning a time-value can be difficult and somewhat subjective so this piece of the improvement cost vs. value puzzle is skipped over.

Very well said Mike. I agree. I've made many improvements to my personal home knowing that they will not add anywhere close to the amount of money that I spent on them. However, I plan to stay at the house and receive enjoyment from these upgrades for many years.