I have clients right now who are somewhat infatuated with a unique, overly-improved home in a working class north metro area which is priced about $60,000 over anything around it. It’s a 1960 ranch home in a neighborhood of ranch homes where the owners “popped the top”, adding a second story loft that really is very cool. The second story living area adds about 700 square feet of living space, comprised mostly of a large master suite with a private retreat and sitting area.
It is, undeniably, hip It is also, undeniably, risky to buy something that is $60,000 more expensive than any other home on your street.
There is always vulnerability in buying off the top shelf in a neighborhood. The biggest reason for this is that your neighbors can do a lot more to negatively impact your value than you can do to bring your value up. And because the most expensive home on the street is usually in pretty good shape, you’re limited in the number of improvements you can make to increase its value.
Conversely, when you buy the smallest home in a neighborhood, or the most run-down home in a neighborhood, you are in control of raising the value up to the neighborhood standard. You can remodel, re-landscape, add new windows… there are a host of improvements that you can make that will immediately launch the value forward.
In this particular case, the home in question has been on the market for over four months. It is currently listed for $300,000, when others in the area have recently sold between $220,000 and $245,000.
I have communicated to the listing agent that, while it’s a nice home, my clients simply aren’t comfortable buying a Mercedes in a neighborhood of Hyundais.
In response to the same feedback over and over, the seller recently hired an appraiser to value his home. The valuation from the appraiser - $315,000. Which leads to the question, if an appraiser says something is worth $315,000, but nobody will touch it for $300,000, what’s wrong?
It comes back to understanding what “value” is in a given market. Value is not determined by an appraiser. Value is determined by what a ready, willing and able buyer will pay in an arm’s length transaction.
An appraisal is an opinion of value, supported by factual data. But it is not the same thing as an offer to purchase from a ready, willing and able buyer.
I have another client who called me this week to talk about the value of her home. Recent sales of similar floorplans had shown what appeared to be a marked surge in value in her neighborhood.
And while her home’s value has gone up, and the floorplan is essentially the same as the two high-priced sales on her street, her home simply is not the same as either of the two which broke the mold. The improved homes both started with tremendous lots offering open space views. They each had newer windows, fresh paint, new carpet, and remodeled kitchens. One had an extraordinary finished basement, and the other was exquisitely landscaped.
While an appraiser might look at the “model match” sales and make some adjustments for condition, location and improvements, the reality is that while many buyers will lunge at a show-ready home, most will swerve away from a deferred maintenance home, even if it is reasonably priced.
The point is… an appraisal is not the same thing as a purchase offer from a ready, willing and able buyer. You must be careful with appraisals and appraised values, because buying a home has an emotional component that is simply at odds with an appraiser’s factual analysis.
Sometimes that emotion is positive, and it drives the price higher. Sometimes that emotion is negative, and it will pull the value down. A good real estate broker (and a good stager, for that matter) can help you play to these emotional components and make them work for you instead of against you.
Appraisals provide important objective data which is worthy of consideration when determining the value of a home. But pricing is an art, not a science. How a home is presented to the market can add, or subtract, thousands of dollars to or from its value.
Appraisals do not determine value. Buyers determine value. And so it is incredibly important to get in tune with what buyers want when it comes to pricing and presenting your home to the market.