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The Price of Real Estate vs. its Value
One of the baffling things about pricing real estate is that each house is actually completely unique. There can never be an exact lot. But in my experience, people overestimate the impact of condition on pricing by multiples. Let’s talk about the actual price of real estate and how it relates to value.
Condition of a property is generally worth about 15% in our local market.
So from cat vomit, to failing foundations, and compromised siding to completely gut rehabbed changes the value in the 15% range. But a buyer will often want to subtract the retail cost of a replacement item…siding, roof, foundation…..from the price or value of the home and call that the new value.
But cost and value aren’t equal.
A simple exercise for cost and value is when the roof on a property is “old”. Like ancient. There is no question that you will need to replace the roof, and soon. So the buyer wants a $30k credit, or whatever the cost of a new roof is. But that doesn’t only resolve an issue, it’s actually an upgrade. You buy a house and expect an “average roof”, but then realize you have zero roof life left. So your deficit is like half a roof. The half life of a roof.
But, why pay retail? Someone can do that roof for half the price of retail. A contractor doing it in a rehab, for example. No need to pay retail.
So the then deficit to the buyer is like half of half…or $7500. But the impact to the buyer is $30k….because they replace the whole roof at once, and then they have a brand new roof. An upgrade. And, they aren’t likely to be able to do it at contractor cost.
I can agree that it’s a $30k problem for the buyer, but it doesn’t add or subtract $30k to the value of the house.
And then we have potential.
Take, for instance, a three-family listing priced at $1.8 million. Sure, it needs some TLC, but think about its ultimate potential—three condos each worth a million. Subtract the contractor cost to get there. Maybe $300k-400k a unit. Add a pinch of profit margin, and voila! You’ve got yourself a realistic value estimate. They are overpriced a smidge.
And let’s not forget about those upgrades with staying power. A water heater replacement? Maintenance. A new kitchen or an extra bathroom? Now we’re talking permanent value!
So, the next time you’re mulling over a property, don’t just focus on the price tag; envision the possibilities and unlock its true value. If you ever find yourself wondering about the price of real estate (your real estate), we’re just a text away! Feel free to reach out anytime.
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