Adding Value to Your Home versus Marketability
Greetings!
Sometimes ideas for these blogs come from the simplest of places. Today’s topic was courtesy of an email I received this morning from one of our agents. The email, to paraphrase, basically was a question from her sellers regarding their home. The question posed was “We just put a brand new AC system in our house and it cost $16,000. Why didn’t the appraiser add that value to the home?” And so, the topic today is, what really adds value to a home versus the concept of making the home more marketable. Allow me to jump right in.
Appraisal
The answer, while ‘simple’ has a little art to the science. I totally can understand why a Seller would think they should see some value add for installing a Brand New AC system, but it runs a bit deeper than that. See, homes, especially in the middle of the desert, are expected to have certain things in working order. And at the top of that list would be a cooling system. AC systems are a way of life here, and are expected. Are all homes EXPECTED to have brand new systems? No, of course not. But the fact is, a person buying a property, and more directly, a lender lending money on a property, would expect that a home had a working AC system. Therefore, when an Appraiser is touring a property, that expectation is passed down on them.
You’re almost NEVER going to get a dollar for dollar addition to anything. So the fact that a system may have cost $16,000, that won’t be put into an appraiser; it doesn’t work like that. An appraiser MAY give a slight bump in the overall condition of a property, and make an adjustment compared to an inferior comparable property, but they are not going to give value specifically for an AC unit.
In fact, the list of adjustments an Appraiser will generally give includes, but is not limited to:
Bedroom Count
Bathroom Count
Garage Bays
Size of Home
Size of Lot
Pool / Spa
Deck / Covered Patio
Condition of Property
Timing value (an increasing market will see some Appraisers give value compared to a home that sold 3-6 months ago)
This list is pretty much it. Do you see an area for “AC” System? No… Also, many appraisers have ‘guidelines’ if you will, for most of the categories above. An home with a 4th bedroom may get between $5,000 and $10,000 or so more than a similar home with 3 bedrooms, but that part is not ‘science’. An appraiser will simply apply values with a set of guidelines.
Most of the above categories will have a guideline, with the exception of ‘Condition’. This is where there can be some subjective approaches to an appraisal. If you take two homes, of identical size, age, and location (next door neighbors if you will), and one is in original condition and one has had bathrooms and kitchens redone, the appraisal will look VERY similar, with the exception of the Condition of Property category. Again, an appraiser is NOT going to break down every aspect of the updates. They won’t itemize all the updates you have done, and they DEFINITELY won’t give dollar for dollar value.
Marketability
So, we discussed the differences of what a home may be worth when it comes to an appraiser, but now I want to talk about the opposite side of the coin; the MARKETABILITY of a home. This is what is going to attract attention to your property, what is going to help you get HIGHER offers than your neighbor, etc.
So that $16,000 AC system we discussed above. Is that going to add right back to your bottom line? NO! Not directly. But it’s going to make your home more attractive to buyers, especially those that are worried about older systems malfunctioning and breaking. So, while the correlation of value is not direct, it will indirectly help you get more attention on our home. This attention will lead to more showings, more offers, higher offers, and a more successful chance of closing. Yes, an appraisal MAY slow things down a bit, BUT in the current market, we are seeing people almost completely ignore appraisals these days, and agreeing to pay more than appraised value for homes they really want.
So AC units aside, other things will greatly improve the MARKETABILITY of your home. We mentioned the list of items above that an appraiser looks at, but we’ll dive a bit deeper in it for marketability.
So take again, the example above. Two identical homes, same street, same size, same everything. But one has the Upgraded Kitchens, bathrooms, landscaping, etc. The other is a 1997 Builder Grade home that hasn’t been updated since, well, the builder handed the keys to the initial buyer. One will sell for more of course, and even an appraiser will give one a higher value. However, the $50,000 in updates will not transfer directly. An appraiser just may assign a value of $20,000 or $30,000 for the property condition. The extra value, personal preference and MARKETABILITY. If your home was on the market, would you want the updated one or the one that was the 1997 vintage?
Again, in the market we are seeing today, often, it almost makes less sense to update a home right before you sell it, UNLESS you’re looking for that buyer that is willing to pay a huge premium, even over what an appraiser may think it’s worth. In this market, that’s not a bad idea. But when the market is more even or, dare I say, flat, having a home that is updated will get your property sold faster and for more money.
When I’m talking with a client that is considering selling, the concept and idea of updates always comes up. “Geoff, should we update the home to get more money?”. If done in small amounts or correctly, yes. It doesn’t hurt. Blowing out a kitchen and fully remodeling it, just to put the home on the market? Unless you’re willing to find the ‘outlier’ type of Buyer that will pay a huge premium, and more than what an appraiser may think the home is worth, it’s better to leave the major updates to an end user, that will also be able to enjoy the updates.
The biggest violator of all of this is a POOL. Most people LOVE swimming pools, but as an ‘investment’, they are hardly worth it in terms of an APPRAISAL. Will it make the home more MARKETABLE? Absolutely. But consider this. The average pool build these days will cost between $30,000 and $40,000 for something nice, but not anywhere ‘over the top’ (think 75k plus for those). So you can build a pool for $40,000, but that appraiser may only put the value of the pool at $15,000 - $25,000, a huge loser from an investment standpoint. I love to use the pool as the best example and biggest takeaway to describe the difference between MARKETABILITY and APPRAISED VALUE.
What are your thoughts on this? What’s something you feel is undervalued when an appraiser looks at a property?