How much can you really trust your Realtor or other advisors? These three things will show if you Realtor is trustworthy or not. Many Realtors understand how to value real estate and can be a great asset (especially the ones that focus on real estate investors), but the unfortunately many investors and agents make these three common mistakes:
- Increase value to a property for a bedroom
- Inaccurately adjusting for square footage
- Compare non similar style homes with no adjustment
Increase value to a property for a bedroom
This is the most common error by far. A bedroom will add value, but don’t count on it. If a house has more bedrooms it is likely bigger and is more valuable, but the bedroom itself is not adding the value, the square footage is. If two houses are the same size and one has an additional bedroom it is lacking something else OR has much smaller rooms, which will discourage some buyers. It is basically a wash for valuation purposes. The one exception to this is if the house does not conform to the neighborhood. For example, if the entire neighborhood is two or three bedrooms and you have a one bedroom, it actually should add value to add a bedroom, even if you are keeping the house the same size. Be very careful in these rare cases because you don’t know how much value a bedroom will actually add. So when you are looking at your comparisons, look at the size and not the number of bedrooms.
On a side note, this does not hold true for bathrooms. Bathrooms will almost always add value.
Inaccurately adjust for square footage
A less common, but more even more detrimental error that can occur is to use a price per square foot model to value a home. Many agents make this mistake. The error is to use an average price per square foot and multiply that number by the size of the house you are trying to value. This is not a very accurate method, especially if your house is on the small or large size for an area. Think about this for a moment. Is a 3,000 square foot house really worth twice as much as a 1,500 square foot house that might be next door? The area brings a certain range of values that all houses fall in and the lot values should be very similar no matter what size house is on it. Using a price per sq foot model does not account for the lot.
You need to adjust for size, because larger homes do carry more value, but it is easy to skew the adjustment up. This can be very tricky because the value per square foot decreases as the homes get larger. It is a safe bet to never buy the largest or smallest house in an area, but if you do, use a very conservative adjustment for size. One rule of thumb that can be applied is to use 1/3rd of the average price per square foot as the size adjustment. This is very close to average, so it is nice; but again is a rule of thumb and is not science.
Keep in mind that the adjustments that are mentioned are above the ground adjustments. Basements do NOT carry the same value. In fact, it is normally worth less than half of the above ground square footage. For example, in a nice area an above ground adjustment might be $75.00 above ground but basements in that area might only be worth an adjustment of $25.00 per finished sq foot. Even though if finished it is a usable/livable space and people love basements.
Compare non similar style homes with no adjustment
The would be like comparing the ranch or rambler style home to a home with stairs, like a bi-level or 2-story. The house with no stairs is always more valuable. Think of yourself as the buyer and what a buyer would want. Another common example of this mistake is comparing older homes to newer homes. In fact, we just took a call today from a client that was comparing her home to a never been lived in house one neighborhood over. They were almost identical in size and were within a quarter of a mile to each other, but one is about 30 years old and one was just built. Do you really think that someone would buy a used home for the same price they can get a new home for? The newer home is worth more, so it is best to not even use that comparison. If you do need to use it, be sure to adjust for the age.
Hopefully you have a better understanding of these three common appraisal mistakes, and you will be able to come up with more accurate values, and be a better investor for it.
Russell J. Montjoy
Exit Bennett reality
7701 Greenbelt Rd # 100,
Greenbelt, MD 20770