Appraisal House Blog

I get calls regularly from unhappy realtors telling me that I must be wrong on my value, because 5 other homes sold in this neighborhood that were $125 per/sf.  This always cracks me up, because why even pay for an appraisal if it were that simple?  "Okay, I've pulled up all of the sales in my neighborhood in the past year.  I see that the highest price per/sf was $170, so I will multiply my square footage by that amount, so my house is worth (x)".  What a great concept!

Unfortunately (or fortunately for me) it's just not that easy.  Appraisals are to determine the price that a typical informed/educated market buyer would pay, without undue influence (such as a seller in foreclosure).  So to me - and to all appraisers, I would hope - the price per/sf is a realtively worthless number, unless you are in a very homogenous neighborhood where every home was built by the same builder at the same time on very similar lots, and you can find three homes with the exact same floorplan that have not been changed since the original construction (no updates, swimming pools, etc.).  In that rare instance, if you can find several sales of the same house as yours in the past 6 months or so, go ahead and do the multiplication.

Otherwise, you need a professional appraiser.  We look to see what is the most similar to yours - not the highest sales in the neighborhood.   If your house is 2,000sf, we are not going to look at homes in the area that are 1,200sf, nor are we going to consider 3,000sf homes, unless there is absolutely nothing else available.  Similarly, if your home was built in 1975, and there are several homes in your area that were built in the 1990's, we are going to look for other homes built in the 1970's before we would ever consider looking at the newer ones.  The same goes for lot size, views, quality, location, room counts, garage spaces, and several other items.  When we have found what we consider to the be most recent and similar comparables, we make adjustment for the small differences between them.  This step can still cause large fluctuations between the price per/sf.  For example, consider a 1,500sf house that the owners want to put up for sale.  If I have a comparable sale that is the same age, but is 1,620sf, but has a pool and new granite counters, that might be a $4,000 adjustment for size, a $15,000 adjustment for the pool, and $8,000 for the counters.  So let's say the comparable sold for $227,000.  All other things being equal, the comparable sold for $140/sf.   Does that make the Subject property worth $210,000 ($140 x 1,500sf)?  No, because after adjustments the value is $200,000 ($227,000 - $15,000 - $4,000 - $8,000), or $133 per/sf.  

That is not a huge difference, but on more dissimilar homes it really adds up.  The bottom line is that you should never use price per/sf to determine a value.  Either call an appraiser and spend $400 to get the right value, or have your realtor do a complete CMA (competitive market analysis).    

A lot of people have the mistaken impression that if you spend $20,000 redoing your kitchen, you have just increased the value of your house by the same amount.  Unfortunately, that is not the case.  While there are some rough standard percentages (inground pool = 50%, bathroom remodel = 70%), it really all depends on your specific area.

If you are thinking about remodeling, take the time to think about why you are doing it.  If you want to spend $50,000 remodeling a kitchen on a $150,000 house, understand that it will be quite a few years (and maybe many more depending on how the local real estate market is doing) before you ever regain that investment.  My wife and I recently spent what I consider to be a small fortune (I'm cheap by nature) to do a major kitchen remodel - moving walls, custom cabinetry, high end fixtures and appliances, and granite counters.  However, we plan to be in our house for quite a while, so we wanted to do it the way we wanted - something we would love and be happy with, regardless of the cost.

Conversely, if we wanted to update the kitchen to sell, we would have approached the project differently.  Our kitchen was pretty dated, and it would have been a hindrance in the selling process.  So if we had wanted to update it to sell it, we would have left the footprint the same, but re-tiled the floors with an attractive (but less expensive) tile, chosen a slightly lower grade granite for the counters, and installed new (but less of a premium) appliances.  This would have saved us literally tens of thousands of dollars, and would have helped the house sell quicker and for more money.  However, even in this scenario I doubt that we would have recouped all of our money.  But in our neighborhood, buyers have an expectation of what shape the house should be in, and anything less gets a lowball offer or is the last one chosen over other active listings. 

So when are you doing too much?  To appraisers and real estate professionals, the concept is known as a "super-adequacy", or "over-improvement".  For example, an air conditioning system in a house at the north pole is a super-adequacy.  A 4-car garage on a 1,200sf ranch house in a low end subdivision.  A 6-bedroom house in a neighborhood of 3 bedroom homes.  Anything that is over and above what a typical buyer in that market is looking for is a super-adequacy.  So if your master bath has a double shower with travertine tile and $700 fixtures, an oversized roman jetted tub, and granite counters with a decorative above-counter bowl, and all of your neighbors have a basic bathtub and Home Depot construction grade vanity, consider yourself to be over-improved. 

If you are preparing to sell your home and you have the money to do some work on it, your first step is to understand what your competition has.  Your realtor, or various on-line sites that list properties in your area, can show you what those homes have in them and what has been done to them, and this will show you what you need to do to get a similar price.  For example, if your house is in average shape - well-kept but no major updates or improvements recently - and you see that the active listings in your area are all pretty similar, but have been freshly painted, then you know you have to at least paint.  Additionally, you might consider a relatively small update that will get attention from potential buyers, such as installing new ceramic tile in the kitchen and bathrooms.  A simple tile job can be done for as little as $5/sf by a professional installer ($2/sf for tile and $3/sf for the install).  If you have 200 sf of baths and kitchens, you would likely easily recoup that $1,000 investment and sell your house quicker.  But if you spent $15,000 on (for example) hardwood flooring, bath and kitchen remodels, etc., you may have priced yourself over what buyers are willing to pay for a home in that area.  

The bottom line is that it is in your best interest to get help from a qualified real estate professional.  They will know what you should do to get your home ready to sell at the most effective price.  Also, there is also nothing wrong with consulting with a realtor well in advance, as long as you are upfront with them that when you finally get ready to sell you will be interviewing different realtors to decide which one to use.   Finally, if you are not particularly skilled in home improvement projects, keep in mind that a poorly done tile job is worse than just leaving the old sheet vinyl.   Pay someone to do it right! 

When setting up an appointment, I always try to talk to the homeowner (or listing agent, borrower, or whomever) to get a better understanding about the house.  One of the comments I usually get is about all of the "updates" they have done.  However, what people don't understand is that there is a difference between an "update" and "maintenance".  Here are some rough definitions/examples of the terms appraisers tend to hear:

Update - replacing your shag carpet and fuzzy wallpaper with more conventional coverings (typical Home Depot carpet and textured/painted drywall)
Upgrade or Improvement - Replacing your construction-grade living room carpet with hardwood floors is an "upgrade".
For simplicity, we will consider "updates", "upgrades", and "improvements" to be interchangeable for this article.

An improvement is something that you have that your neighbor, who has a pretty similar house, does not have.  For example, if you have replaced the laminate kitchen counters with granite, that is an "update".  If you had just burned the laminate with a hot pan, or chipped the edges from typical use, and then replaced it with new laminate, that is "maintenance".

Your roof, siding, water heater, air condition, heater, dishwasher, oven, microwave, etc. all have a limited life span.  When the water heater dies and you replace it, you are doing maintenance, not upgrading the property.  If you put in a high-efficiency tankless heater, that would be an upgrade.  If your original Whirpool dishwasher dies and you get another $250 one from Home Depot, that is maintenance; if you buy a Bosch for $800, that is an upgrade.

Think about it this way:  What does a buyer expect to have when they buy a house?  One big thing is a roof.  So if you just put on a new roof in the past month, that might be worth some minor additional value, because the buyer has some assurance that he has one less long-term expense to worry about.  But if you did it three years ago, it likely has no additional value.  Roofs are meant to last around 20 years, so at some point a 10 year old roof and a 3 year old roof have no discernable difference in terms of market value.  If your roof is 30 years old and failing, then that would be something that an inspector or appraiser would likely note on a report and would need to be fixed prior to a sale.  Similarly, a buyer expects to have a working HVAC system.  If you have a 10 year old 10 SEER system (SEER is the rating system for AC units) system that works fine, would you change it out to a 12 new 12 SEER unit?  Not likely, right?  So just because your 10 SEER unit died and you replaced it with a 12 SEER doesn't mean you increased the value of your property.

So just keep in mind that fixing things that need to be fixed and replacing things that need to be replaced is just "maintenance", and does not necessarily increase the value of your house.  It will make your house more marketable and appealing to buyers, and will usually make your house sell faster, but it doesn't always add value. 
However, adding some "upgrades such as hardwood or ceramic tile floors in place of carpet and sheet vinyl will add value.   Understanding the difference will help you price your house correctly and hopefully sell it faster.