A new study found that homeowners tend to overestimate the value of their properties.
A new statistical study, published in the Journal of Housing Economics, found that homeowners on average “overestimate the value of their properties by about 8 percent.” Tapping into federal databases, researchers concluded that overvaluations are probably tied to owners’ erroneous estimations of the capital gains they’ve accumulated in the house.The study is in sync with a monthly survey conducted by Quicken Loans, which compares estimates provided by applicants for refinancings with results from appraisers. The latest Quicken study also found a gap between what owners think their homes are worth and actual market value. Compared with the Journal of Housing Economics findings, the divergence in the Quicken survey was narrow — just seven-tenths of 1 percent — though in 2008 it averaged around 7.5 percent.
Nobody can blame owners for thinking optimistically about their homes’ value, right? It’s human nature. But here’s a question recently put to real estate appraisers in different parts of the country: Other than the obvious emotional attachments that colour our perceptions of our homes, where do we tend to err when it comes to estimating value?
Top of the list: Unrealistic expectations about how much the improvements you’ve made to the house will add to its resale value. Because you’ve paid the bills, you know precisely how much you sank into the kitchen remodeling, bathroom upgrades, landscaping and the new roof. Consumers may think they can get back what they put into the improvements they’ve made over the years. But it doesn’t work that way.
For example, based on national averages, a major kitchen remodeling costing nearly $57,000 would return just 67.8 percent — $38,485 — in resale value. A backup power generator returned just 59.9 percent and a home office remodeling less than half, 48.7 percent.
A closely related issue: Over-improvements of your home compared with the neighborhood norm.
Owners sink tens of thousands of dollars into a super-premium gourmet kitchen in a neighborhood where nobody else has installed such luxury. When you renovate a kitchen or other feature of your house to a level typically seen only in communities where homes cost double what they do in yours, you’re not going to recoup that extra expense.
Another example of where owners get off track, according to appraisers: They install highly personal but costly items — features they love passionately or need, but most potential buyers don’t.
Say you spend thousands of dollars to install an elaborate indoor lap pool or spa. It may be just what the doctor ordered for your health, but prospective buyers may not want it. They may even plan to remove it if they purchase, giving you zero in added value in their offer. Ditto for expensive, special-taste items such as all-glass conservatory rooms, over-the-top backyard “environments” and, in some northern markets, swimming pools.
Finally, appraisers say owners may not understand the valuation dynamics of their local market. Owners frequently estimate value based on the square footage of the house. Yet in some areas, land value is really high, so sales with larger lots have a higher price per square foot, which owners of below-average-size lots erroneously apply to their own home values.
Bottom line: Without access to key data — recent sales comparables, accurate information on appreciation rates over time — it’s tough to know exactly what your house is worth. If you really want to know, contact me today for a free Home Value Report!
Additional storage: Depending on the size of your bathroom, you might want to look at how you can optimize storage. Think about a new medicine cabinet, baskets or a standing shelf if your bathroom has the room. You could spend anywhere between $100 and $200 on storage depending on which kind you decide to install.
