Random Real Estate Thoughts

How preceptions effect market value

by John Rice

A pal of mine that is an agent wanted me to help him do a CMA (Comparative Market Analysis) today.  It is one of those houses that an older person has had forever.  It needs the usual paint, carpet, de-landscaping and all.  Other than some settlement on the back of the house, there really isn’t much that is wrong with it.  Yeah, there are a few age related items that will need attention, but it has been maintained well.

 The problem is that when people come in and see 50 years worth of stuff, out of style furniture, and over grown bushes, they don’t emotionally get a vibe for the house.  They can’t imagine themselves living there the way it is now.  Soooooo, you have to attract them with a good deal.  This house will probably sell for something like $35-40,000 less than what similar houses have in the same neighborhood because it needs $10,000 worth of cosmetic updates!

That is how “Market Value” works.

Why a house may sell for less than it’s 2005 Value

by John Rice

You know there is a lot of talk about house prices falling and all.  I really think Lexington is pretty safe.  If you throw out distressed properties (foreclosures, short sales, etc.) the prices have been pretty flat for houses under $250k since about 2005.  Granted, there are exceptions.  Some neighborhoods have seen the smack of the correction.  To keep this a blog and not a dissertation, I will work towards my point.

When I have a buyer these days, I like to do a “Market Analysis” for today’s value and what it would have been worth in 2005.  I do it for them to show them how their neighborhood has weathered the storm so far.  I do it for myself because I think it is kind of fun.  Makes me look smart too!

I have also spent a lot of time this year looking for houses that have sold both in 2005 (end of the boom) and once since then.  Just about all the houses are selling for around what they did in 2005.  There are a few that have sold for less than they did during the boom  (I am getting closer to my point.)  The ones that sold for less usually did so because the newest owner got a house with older carpet, older appliances, an older roof, and older HVAC system, older water heater.

So, I guess my point really is that people shouldn’t freak when a house down the road from them sells for ten grand less than it did 3 year ago.  We have been spoiled by blind appreciation.  There is a lot of stuff in any house that has a limited economic life.  If you use it up for yourself and don’t leave much for the next owner, it will affect your sale price.  That doesn’t mean the house really depreciated though, just means you are crediting the new guy for the amount you used and didn’t have to replace.

How cost vs. value really works when updating your home

by John Rice

I am sure you have seen those articles in magazines that say stuff like “Get back 89% of the cost when you update your bathroom.”  It’s not that I think they make that stuff up.  It’s not that I doubt that really happens.  The problem I have with it is that it makes people believe that the money they spend now is guaranteed to make them money in the future.

Here are the factors that are often overlooked when people think about cost vs. value:  Age, condition, style, design and quality are a few.  Why does all this matter?  The reality about value is that your improvements must be both desireable and have enough life left in it for the new owner.  Everything has an economic lifespan.   With updates, you also have style to consider.  New hardwood flooring that most people think is ugly may not add any value.  High end maple cabinets that are now 10 years old (and show it) may not add any value either.  Think I am crazy?  Ever see a high end remodeled bath from the 80’s with a blue toilet and gold fixtures?  Somebody spend a lot of money for that during the 10 minutes it was in style.  Had they sold it THEN, it would have been worth it all.  The same goes for pickled cabinets.  I have them in my house and I am sure they were an upgrade!  Now they hurt the value of a house.

Do you have to update in this market to sell?  No, not at all.  But you aren’t going to get any where near the “Potential Value” for your house.  Believe it or not, that isn’t a bad thing sometimes.  I have a great example.  I sold a house for a lady a few months back.  She built the house new 10 years ago.  She had not put one penny into any updates.  All the appliances were original, the carpet was worn out, the water heater was original…………you get the picture.  We sold it for about 94% of similar houses in the area that had been updated some.  Think about this!  Who really came out ahead here.  The buyer needed to put in all new flooring and paint everything and even then they still have all the original appliances and mechanical systems.  The seller “Lost” that 6% of value (about $15,000) but NEVER, EVER spent a penny over 10 years.  I think she is the winner here.  She got use of all the stuff that typically gets updated and passed them on to the buyer when they were of no value (depreciated).  Most of us would have spent more than $15,000 for updates over 10 years and wouldn’t have come out as good as she did!

That story leads me to the most cost effective update:  Paint!  I really think that if my seller had painted the whole house we could have gotten  a lot more money for it.  Most painters charge $1/square foot of floor space.  To paint a 2400 a square foot house would be about $2400.  If you do it yourself, it is even cheaper.  Paint is the biggest bang for your buck when it comes time to sell.

I will skip the stuff about updates that everybody has seen on HGTV.  I assume everybody knows that you shouldn’t over/under-improve for your neighborhood.  

 The bottom line is that yes you can get most of your investment back when you sell BUT it has got to still be in style and still look pretty new.