Two houses on the same street. One is smaller and has been renovated. The other is bigger and has had a few minor updates.
The smaller renovated one sells for more money that the larger one with mild updates is worth.
Which owner would you want to be?
You are probably thinking that the renovated house that sold for more would be the owner who comes out better than the other, but you’d be wrong.
That’s because the cost of a remodeled kitchen with a tiled backsplash and stainless appliances, remodeled bathrooms and new flooring greatly exceed the difference in values.
Back when the market was slow, it could have been harder to sell a house that hadn’t seen any big ticket updates like a new kitchen and/or baths. That’s cause there were more houses for sale than there were buyers. The problem is the opposite today. There are more buyers than houses for sale, especially in the sub $200k range.
Sure, everybody loves a renovated house with all the trendy finishes. Buyers will pay top dollar for that look, but for the person who wrote the check for the work, it is a little bit of a bummer because most of the time a seller is lucky to get half back in the increased value. Great for the buyer. Bad for the seller.
I had to tell a seller not too long ago that her house was worth about the same as she paid for it nearly 10 years ago. On paper, you’d think that wasn’t possible. She hasn’t done anything to the house other than enjoy living there. Everything is nearly 10 years older now. Sure, her house could potentially be worth another $15k, but she would have to spend over $20k to add that value. She is actually coming out ahead by selling for about the same as she paid for verses getting a high sale price that lost money to achieve.
They don’t tell you all this stuff on HGTV.
The best bang for your buck on updates are paint, flooring and lighting.
It is like April of 2005. I am sitting in a class to teach me how to be a realtor. It’s all been common sense stuff so far. I’m the only one who isn’t taking notes and who is wearing shorts. I am also the only person in that class who is still a realtor.
The day I have been waiting for finally comes. It’s the day they teach us how to do CMAs, which means Comparable Market Analysis, which means what a house is worth compared to what has sold in it’s neighborhood.
Figuring out value has always been fun for me. I like the numbers. I like the fortune telling aspect too. I love it when I am right, which happens almost all the time. The only time I don’t like it is when a seller thinks their house is worth more than I tell them. Usually what happens there is that some other agent gets the listing and I watch them reduce it until it sells for what I had already told the seller. It’s a hollow victory.
Back to that day. A line I will always remember was said by the broker of that agency. He said “If the comparable sale is superior, you subtract value. If the comparable sale is inferior, you add value.” Most of the people struggled with this since it is worded counter-intuitively. Sort of like asking somebody “Is red NOT your favorite color” verses asking “Is red your favorite color.”
By the end of that day, everybody finally understood that if the house you are about to list is better than the comparable sale house, then you need to add value to what the comparable sale house sold for to know what your listing is gonna be worth. There are assigned values for differences such as square footage, number of bathrooms, etc. Some of it is subjective too, and that is where experience comes in handy.
And all of this leads me to the real topic of this blog post. I almost sold a house last weekend. I looked at the comparable sales in the area for my clients. All the similar houses had sold for about $170-172k. The list price on the house they wanted to buy was $172k. Why did I suggest the value was about $165-168k then? All of the comparable sale properties had flat and usable backyards. The backyard for this house was flat for about 3 feet and then sloped steeply uphill. It needed to be worth LESS than the other similar sized and equally finished houses in the neighborhood.
The seller got a higher offer than the one we submitted. Good for him. Bad for the buyer. I am finding in this fast moving market that agents don’t seem to be doing as much leg work as they used to do. I suspect that the buyer’s agent just looked quickly and saw that similar sized houses sold for $170-172k and thought it was okay to pay that much. Looking at all the pictures would have helped. The buyer is probably happy to have gotten the house, but if they need to sell in a Buyer’s Market, they will realize that buyers who have choices prefer not to have a sloped backyard.
Those same buyers of mine ended up with a move in ready house that has a perfectly flat and private backyard. It will sell well in any market.
I sold a house a few days ago. The listing agent told me that it appraised for $25k more than the list price.
Which begs the question: Why didn’t it sell for that?
Because there is a big difference between market value and appraised value.
Market value is what the house is worth to a buyer. Appraised value is a way to spend $375 and still not really know the market value. The main purpose of an appraisal is to justify the purchase price to a lender.
Lots of things affect market value, such as floor plan, decor, features, view, lot size, odors, etc.
An appraiser doesn’t care about any of that. I mean, they aren’t buying the place so it is all about comparing data to them. Square footage, condition and what has sold in the area recently are what drives appraised value. Appraised value is often more about the area the house is in than it is about the subject house. I’ll also mention that in an appreciating market, appraisals are often incorrect because the data they use is recent history. In other words, the current appraised value is based on the past. Market value is always in real time.
Which leads me to this house that I sold.
The area around the house has homes that are 20 years old to brand new. Values are all over the place. The brand new houses that are the same size as the one I sold go for $50-75k more than what my client paid. The same size house in the nicest section of the area is a lot more too. By comparing my client’s new house to the more expensive and brand new houses, I can see how the appraisal was more than $25k higher than the actual sale price.
How did I help my client determine what the house was worth? I excluded the more expensive houses up the road. I excluded the brand new homes since that is a unique sale-they are only new once. I looked at similar sized houses. I looked at the finishes of each house. Did they have hardwood? What were the appliances like? What was the backyard like? I looked at all the pictures of every comparable recent sale. Then I thought about it. I made adjustments for size and condition just like an appraiser, but I also thought about it through the eyes of a buyer. I then told her what I thought the house was worth and she made an offer.