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.
