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Archive: August 2016

 

  • What Drives Residential Real Estate Value Part 2





    Part 2- Cost Versus Value

    In Part 1 of this series we presented the truism “Sellers Set Price, Buyers Set Value.” Understanding the needs and desires of the common buyer is crucial when assessing the market value of a home. To further explore the impact of value-drivers in residential real estate, it’s important to understand the distinction between cost and value.

    Cost is simple to define – it’s the price paid for an improvement, a repair, an appliance, etc. When preparing a home for sale, many homeowners will tally the costs incurred over the history of their ownership and simply add it to the perceived value of the home to reach a “bottom line” price. This is the classic mistake of confusing cost with value. These familiar costs can be divided into three basic categories, illustrated as follow:

    Systems

    Improvements

    Decorative

    Roof

    Deck or Patio

    Paint and Wallpaper

    Windows

    Remodeling

    Floor Coverings

    Heating and Cooling

    Upgraded Fixtures

    Shelving Systems

    Plumbing and Electrical

    Room Additions

    Window Treatments

    Money spent on systems repairs and replacements are assumed by many to be expenditures that directly add value to the home, mostly for the simple reason that they are expensive. But are they really value-drivers? Most often not, because a typical buyer expects a home to exhibit the functionality of a sound roof, operational windows, and safe and effective temperature control, plumbing, and power systems. Though there is value in proper preventative maintenance, and buyers in the market may demonstrate a willingness to pay more for a home that has new heating or a new roof, it’s likely that nearly every other home for sale in the neighborhood has also been properly maintained. Thus, the true price value for these improvements may be negligible, but still greater than the steep discount that occurs when a home exhibits poor maintenance or inefficient systems.

    Second to location, property improvements are effective and readily observable value-drivers. Depending on buyer needs and wants in a particular marketplace, improvements deliver varying returns. Adding a deck or patio where there wasn’t one before, increasing above-grade living space, improving the usefulness of a basement, or remodeling a dated kitchen or bath to modern expectations – all of these can deliver a substantial return on investment. It is important to keep in mind, however, that a dollar-for-dollar return on investment is unlikely, particularly in the short term. If a seller chooses to invest $25k in a kitchen remodel and then puts the home on the market 6 months later, in most marketplaces, the full $25k will not be recouped.

    While fresh updating typically enhances the home’s initial appeal and can speed a sale, decorating remains a very personal decision. Some owners worry about resale and try to keep their color scheme neutral, while others see homeownership as an opportunity to express personal tastes and style. Some folks like elegant draperies and valances, while others prefer the minimalism of sheers or blinds, and a few more even lean toward the functionality of shutters. Tastes can be generational as well; where hardwood floors were once a sign of economic struggle in cheap apartments, they’re now considered a hallmark of luxury. Buyers rarely look at a home and feel they could move in without adding their own touch of décor, so very few will see the cost of the seller’s decorating as a contribution toward the home’s value. In practice, most buyers will deduct the perceived cost of redecorating from the market price when making an offer.

    Remember that buyers look first for location and functionality: the right area, an ample number of rooms, and enough space for their lives are requirements that must be met. These are the primary value-drivers, followed then by the home’s condition and particular appeal. Sellers are cautioned against assuming buyers will share their personal preferences. What’s right in the home for the seller may be exactly what’s wrong for the buyer, as can be seen in the dwindling attraction of formal living spaces and corner lots, or in-ground swimming pools outside of the warmer states. Buyers want what they want, and they’ll pay top dollar for the house that meets their specific needs and desires, but they’ll discount an offer on the home that falls short.

    In summary:

    • The costs of maintenance and repairs are the costs of ownership. They won’t add appreciable value to the property, though keeping a home in good condition does prevent steeply declining appeal.

    • Location, condition, utility, size, features and amenities all drive value. The location can’t change, but much can be done with the rest to enhance performance.

    The trusted relationship that a sales counselor builds with his or her prospective residents often means the sales counselor will find him or herself engaged in conversation about the sale of the home. It’s helpful to have an understanding of value drivers to prevent your prospective resident from spending money unnecessarily or delaying the move, citing home improvements as the reason. For additional information, or to discuss positioning with your future residents, do not hesitate to contact Moving Station.


  • What Drives Residential Real Estate Value Part 1





     

     

    Part 1 – What’s My Home Worth?

    Selling your home is a significant, emotional, and (for most) an infrequent event. Homeowners – especially those who haven’t been in the market for years – tend to rely upon easy resources that fail to predict an accurate home value. Web sites such as Zillow, Trulia, and Realtor.com feature useful information regarding a range of values within a marketplace and even offer a nice glimpse into recent activity within the area. In the end, however, an accurate approach to valuation requires examining the unique features of the home in question (location, condition, size, functional utility, features, amenities, and improvements) in terms of their appeal to buyers. Unfortunately, owners typically find it difficult to see their homes through the eyes of buyers.

    Sellers Set Prices, Buyers Set Values

    Predicting the likely sale price of a home requires an appraiser or real estate agent to “walk in the shoes of the buyer” and report an objective analysis of value. So what drives this value? Looking at competing homes and recent sales, the analyst gains awareness of the common attributes recent buyers are looking for in a home:

    •  Location – could be about schools, parks, waterfront, cul-de-sac, or even less obvious attributes like sidewalks with mature trees or the unique history of a specific area

    •  Condition – not simply functional but cosmetic too. A newer roof or water heater is necessary for the proper function of a home, but new kitchens and baths, updated floor coverings of exotic woods and tile, and modern electrical, heating and plumbing systems all feature heavily amongst the competition in most markets.

    •  Functional Utility – family-friendly number of bedrooms and baths, a spa-like master suite, full basement, outdoor living amenities, and sufficient garage space can be crucial to buyers.

    •  Appeal – exterior style of the dwelling (whether grand or charming), interior decorating, construction material, observable maintenance, attention to landscaping, and surrounding area.

    When shopping for homes, these are the features and amenities by which buyers judge the appeal of what’s available. These are often the “must-haves” that represent the “value drivers” of the property. Understanding the impact – and, therefore, the price – associated to the value drivers includes an unbiased assessment of the subject home’s conformity, or lack thereof, to the nearby houses that have recently sold, as well as to those currently on the market. Unbiased experts can quantify the market price of the features and amenities described above by identifying trends in home sales that reflect buyers’ behaviors and preferences.

    By contrast – and counter to the goal of pinpointing the current value of a home – homeowners unfamiliar with the accepted methods to measure market prices instead rely on a number of popular but misguided indicators:

    •  Attention grabbing media headlines about a “hot” market and articles about appreciation rates.

    •  The “Zillow” value.

    •  Indiscriminate formulae based on average prices in the city or dollars-per-square-foot.

    •  The appraised value from a “few” years ago, or even longer – don’t forget that real estate values and trends are fluid!

    •  The base cost of the home plus the money spent over the years on improvements and updates.

    •  The asking price of friends’ and neighbors’ homes, regardless of differing style, size, location, etc.

    These misconceptions tend to blind the typical homeowner from seeing their own home through the eyes of prospective buyers and accurately pricing a home for a successful and timely sale.

    In short:

    •  There’s no shortcut to predicting value. Recent, nearby comparable sales are the foundation of valuation, and measuring the typical buyers’ responses to differences in size, condition and functional utility is the finishing touch.

    •  There’s no substitute for the comparable sale approach to valuation. Buyers are the key, for they alone know what they want and what they’re willing to pay at that given time in that given marketplace.

    •  Things change. Like any commodity, real estate values fluctuate based on market conditions beyond the owner’s control. The price paid for the home 2, 5, or 10 years ago has no bearing on the current value.

    For most prospective residents of senior living communities, the home sale is an emotional, if not financial, barrier toward them being able to move and truly enjoy their new home. Many sales counselors realize that talking about the home sale is a necessary part of helping their future resident move forward, and conversation of value drivers is just as important today as it was a few years ago. For additional information, or to discuss positioning with your future residents, do not hesitate to contact Moving Station.

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