What Drives Residential Real Estate Value Part 2
Posted August 15th, 2016 by Kaitlin Glagola





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.


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