Cost Does Not Equal Value - Why 25K in Isn't 25K Out

Written by Posted On Friday, 11 December 2015 08:27

Cost does not equal value with home improvements, never forget this simple rule. In fact, this may be the single most difficult point for both home sellers and home buyers to understand. It resonates not only with real estate but with everything from a bottle of wine to cars to clothes. Everyone has a different definition of “value” and what they are willing to pay for it.

Home sellers often have a biased view of what they’re home might bring if offered for sale. When these opinions are expressed, “upgrades” are almost always referenced. “I upgraded the carpet, the fixtures, the HVAC, the faucets….” is a consistent refrain. But how much of that “upgraded” item is recovered? Paying an extra 10K for “upgraded” roof shingles or 5K for a high end faucet does not increase the value of a home by 15K. That 100K pool does not add 100K to the price of a home any more than that 3K Star Wars mural in Timmy’s room does. Do thing like that enhance appeal? Usually. They can be a difference maker but don’t expect a dollar for dollar return because it doesn’t happen.

Everything in real estate is embellished and if taken literally; homes described by a typical agent would be palatial. Is there a difference between brick and vinyl? Between laminate floors and hardwood? Between granite and Formica? Of course, but functionally they are the same; while different in quality they do the same job. Does a $5,000 chandelier cast different light than a $200 one? It’s critical to understand what is typical in an area and to ascertain if spending an extra 10K on granite is really prudent.

Value - like beauty - is in the eye of the beholder. Remember that the market (buyers) dictate "value"; they dictate what's "hot". Then we have appraisers; how many owners have plowed 100K into a home for upgrades only to see a bump in appraised value of 50K? Indirectly they were impacted by home buyers - who ultimately buy the homes that become comparables.

Timing matters as well. That sweet pool is going to look a lot more appealing in the summer than in the winter when it's wearing a tarp. When quality inventory is down, buyers shopping for quality homes are more apt to move quickly - and be a bit looser on the purse strings. Same for rates; what happens when there's talk of the Fed bumping rates?

Oh, and please understand the idea of "overimprovement"; adding features and upgrades that are simply not supported by the sales data. While an owner may hold everything in high regard and make use of things, the "market" (buyer) and the appraiser will be looking at sales data to justify everything. Complicated? It can be - but the basic key is to know the micro market.

The Hank Miller Team dives deep into this entire idea of what to expect when it comes to home upgrades, how to stay out of trouble and how to ensure that money invested isn't wasted. Read "Cost does not Equal Value" and over 100 other articles that home buyers and home sellers will find useful.



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Hank Miller, SRA

Hank Miller is an Associate Broker & Certified Appraiser in the north metro Atlanta area. Since 1989, real estate has been his full time profession. Hank´s clients benefit from his appraisal and sales experience; they act upon data, not baseless opinions. He is an outspoken critic of the lax standards in the agent community.

Hank remains an active certified appraiser and completes specialty work for FNMA, lenders and attorneys. He is a well-known blogger and continues to guest write for multiple industry publications as well as national outlets like the WSJ, NYT, RE Magazine, USA Today and others. He is a regular on public Q&A sites on Zillow, Trulia and many others.

Hank consistently ranks in the top 1% of all agents in the metro Atlanta area. He runs the Hank Miller Team and is known as much for his ability as he is for his opinions. He is especially outspoken about the lack of professional standards and expectations in the real estate industry.

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