We came across this property the other day and as appraisers immediately thought, "Over-Improvement?" We all have wonderful ideas of how we want to improve our property. When we purchase our home, it may be perfect as it is but many times we will want to improve it. There is nothing wrong with updating or additions but be careful of over-improving your property for the neighborhood where you live.
What is an over-improvement?
"An improvement that does not represent the most profitable use for the site on which it is placed because it is too large or costly and cannot develop the highest possible land value; may be temporary or permanent. Can be considered a superadequacy and measured accordingly in estimating depreciation " - The Dictionary of Real Estate Appraisal, 4th Edition
Basically, it is when the improvement is too large or costly and would not sell for what was spent in cost.
Ways to Over Improve:
1. Adding Too Much Living Area- If you add too much square footage to your living area and your house becomes twice as big as all of the other homes in the neighborhood you have over improved. You may feel like you are king of your castle but when it comes time to refinance or sell your home you will not get a great return on your investment. You see, real estate values are related to your immediate market area or location. Buyers in your neighborhood are expecting to pay a certain price range. They may pay a little more but not near the cost of the remodeling/addition. If all of the homes in your neighborhood are 1,500 sq ft and your home is 3,000 sq ft your home will still sell for closer to the values of the homes in your neighborhood.
2. Not Conforming to the Neighborhood- Related to adding too much size to your home, you really need to consider what is typical for your neighborhood. In the picture above, the property on the top is a large mediterranean style stucco home with a tile roof, located in a neighborhood of smaller brick homes with composition rooftops. It is located on the corner but really stands out from the rest of the homes in the neighborhood. It does not conform to the neighborhood. Conforming to the neighborhood is very important. If you replace your green lawn with a complete rock yard this may save you on lawn care but it will not add value to your home as it will not conform. Be mindful of the principle of conformity in real estate. "Conformity- the appraisal principle that real property value is created and sustained when the characteristics of a property conform to the demands of its market- The Dictionary of Real Estate Appraisal, 4th Edition
3. Too Much in Upgrades- One thing to always keep in mind that cost does not equal value. When you are updating your home you may want to consider how long you plan on being in your home. If you are planning on living there just 3-5 years you will want to be careful about the amount, cost and extent of the improvements made. Some improvements definitely will help the value but too much and you will not be able to sell your home for the amount you spent improving it. If you installed a $75,000 pool, enjoy it. However, if you plan to sell within 3 years and homes similar to yours with pools,sell for only $25,000 more, you will not be able to sell your home for the price of the home plus the cost of the pool installation.
4. Converting Your Garage- If it is common in your neighborhood for garage conversions then there shouldn't be a problem as you will have conformity. However, if it is not common, you could run into a couple of issues. The additional square footage may make your home a much larger home than anyone in the neighborhood. (See #1) You also could lose value because you no longer have a garage. The buyers in the market may expect a garage and may pay less for a home without it. Again, this would play into the principle of conformity or lack of conformity to the neighborhood.
5. Too Much Customization/Personalization- You want to make your home your own and if you are not planning on being at your home for a long time then you want to make sure that your home will be suitable for any future buyers. You may absolutely love your custom hot pink kitchen cabinets with teal backsplash but it might not be as appealing to future buyers and may detract from the value of your home. Having boy or girl bedrooms with customized wall painting may not be as appealing to your future buyers and repainting may be advised in order to sell.
When it comes to improving your home, there are certainly many improvements, particular in upgrading kitchens and bathrooms, that will add value and appeal to your home. Just be mindful of how much you are spending and your location. Real estate truly is impacted by where you are located and what is typical and conforming in your neighborhood.
What other over-improvements can you think of? What would you add to this list?
Here are a few resources you may find helpful:
Cost vs Value -- Ryan Lundquist, Sacramento Appraisal Blog
Five Property Flaws that Can Kill Your Home's Value-- Tom Horn, Birmingham Appraisal Blog
Five Surprising Things That May LowerYour Home Value-- my Guest Post for Mortgages.com
10 Signs You Are Overbuilding for the Neighborhood-- Ryan Lundquist, Sacramento Appraisal Blog
The Real Estate Investment Over-Improvement Trap--Danny Johnson, Bigger Pockets
As always, please contact us for any questions that you have about real estate appraisals or appraising at www.dwslaterco.com.
Disclaimer: All information deemed reliable but not guaranteed. The information is meant entirely for educational purposes and casual reading only and is NOT intended for any other use. This information is NOT intended to support an opinion of value for your appraisal needs or any sort of value conclusion for a loan, litigation, tax appeal or other potential real estate or non-real estate purpose. If you’d like to obtain additional information or order an appraisal for your specific needs, please contact us at www.dwslaterco.com