Appraisal News and Business Tips

The Key to Making the Greatest Profit – Knowing What Buyers Want

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Buyers determine real estate prices. To give yourself the best chance of getting the highest price when you sell your home, you must know what the typical buyer wants. Looking at your home the way the typical buyer does can be tough, but you must do it to increase your wealth.

Our homes are both an investment and a place to live. Few of us have an emotional attachment to our stocks and bonds. Most of us are very attached to our homes. Balancing those two sides of home ownership can sometimes be difficult. You may really want a large addition, but buyers won’t pay much for it when you sell your home. You have decorated your home just the way you want it, but buyers don’t like your decorating style.

Unusual floor plans
Mark S. and Sandy R. warned me over the phone that they had changed their living room. I assumed they had installed several large sets of shelves, a wet bar, or some other minor modification.

When I walked into their home, I immediately noticed a large wall, with a door, where the large opening to the living room was normally located. When I opened the door, I saw a wood shop, complete with a wood floor, large machines, and wood shavings on the floor.

Why would someone convert their living room to a workshop? Because Mark had always wanted one, and the living room was the best place. Mark had loved woodworking since he was a boy. His father was a master woodworker, and taught Mark his craft. But Mark’s parents wanted their son to become a professional, not a blue collar woodworker, so he became a dentist. Mark liked dentistry and had a very successful practice, but his true love was woodworking.

Mark had always had a small workshop, usually located in the garage of the homes he and Sandy owned over the years. His retirement plans included starting a small business building custom furniture.

Ten years ago, when their last child left home, Mark and Sandy converted their living room into a wood shop. They no longer needed their living room. When guests came, they could be entertained in the large family room. Mark and Sandy wanted to use their garage for parking Sandy’s expensive new car, and storing Mark’s wood in racks.

The living room had a high ceiling and was large. Mark and Sandy had a corner lot. The living room was on a street side, so the noise would not bother any neighbors.

Sandy mentioned they were planning on selling their home in a few years after Mark retired. Before selling it, they plan on returning the living room to its original condition by removing the wall, recarpeting, and any other necessary repairs.

As an appraiser I frequently see modifications even stranger than a living room full of woodworking equipment. Unfortunately, most of the owners are not as savvy as Mark and Sandy, who knew that few, if any, buyers would want a living room converted to a wood shop. They also knew that even though returning the wood shop to a living room would be easy, few buyers are able to visualize what it would look like. Selling their $300,000 home “as is” would result in their home selling for at least $15,000 less. Also, selling it would be very difficult since it was so unappealing.

Turning the wood shop back into a living room would cost about $1,500. For Mark and Sandy, that was a very reasonable cost for using it as a wood shop for five or six years.
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Big vs. Small
Unfortunately, some home owners make expensive modifications that are not popular with buyers, and cannot be “undone”.

The property I was appraising for Margaret N. was easy to find. In the neighborhood of post World War II one-story small bungalows, it was one of the few two-story homes. The house could be seen for blocks, as could the two or three other homes with large second story additions in the 750-home housing tract. Homes in the tract varied from 900 to 1,150 square feet. Margaret N.’s home was 2,000 square feet.

I was curious why Margaret had built the addition, since she was the only person living in the house, and was not operating a home-based business. Margaret said it was built six years ago, when her three children were teenagers. She wanted more space for her family. Now one of her children is in college and the other two are employed and living in their own apartments. She mentioned that she still had a lot of their stuff stored in her house, and a spare bedroom if one of them moves back home, a comment I hear frequently.

I have appraised many homes in the neighborhood with family room additions. They are a good investment. They don’t cost much to build and you can recover, at the very least, half of the cost when you sell your home.

One of the primary rules of real estate is don’t buy the largest home in the neighborhood. An even better rule is don’t build the largest home.

Margaret N. had bought her home ten years ago. The original home was a standard floor plan, with three bedrooms, two baths, and 1,150 square feet of living area. It lacked a family room, a popular addition in the neighborhood.

The lot was larger than most, with 7,500 square feet of site area. The floor plan was well suited for a rear family room addition off the kitchen.
The homes in her neighborhood are tidy and well maintained. The neighbors are friendly, but not too friendly. In the past ten years, families with young children were buying the small, reasonably priced bungalows when the older, original buyers sold them. When the families wanted larger homes, they moved to other neighborhoods in the city with newer, bigger homes, rather than building a large second-story addition.

Home prices are affordable in this neighborhood, and crime is low. Children can walk to the elementary and middle schools. School scores have been declining slightly in recent years, but are still well above average. Because more families with children are buying homes, passage of a local school bond issue and renewed interest in the schools should increase test scores.

Rear family room additions have been popular in the neighborhood for many years, and are becoming more popular as families with children move in. Margaret’s property had one of the largest sites in the neighborhood. A large rear addition would still leave plenty of room for a back yard.

She had three bedrooms, one for herself, one for her daughter, and one for her two sons. What she lacked was space for the teens to have friends over, watch television, play computer games, etc.

Her home was not well suited for a second-story addition because of the floor plan on the first floor. The living room was appropriate in size for a 1,150 square foot house, but was small for a 2,000 square foot house, particularly since there was no family room or dining room on the first floor. One bedroom had to be sacrificed to put a stairway to the second floor addition.

In order to save costs, Margaret used a very boxy exterior design, a standard design provided by the contractor at no cost. It saved her money, but made the home less saleable due to its unattractive exterior.

What should Margaret N. have done to get more living space and also maximize her home’s value? My first recommendation would have been to move to a larger home in another neighborhood that was built as a two-story home. Homes with large additions almost always have floor plan problems, such as a non-standard entrance to the addition through a pantry or bedroom, or awkward stairway placement.

If she really wanted to stay in the neighborhood and wanted a larger home, I would have recommended buying a home with a addition. Let the seller take the loss when the property was sold. She could purchase a home with an addition for a much lower price than building an addition on her own home.

The range of home prices in Margaret’s neighborhood is $140,000 to $175,000. Before the $75,000 addition, Margaret N.’s home was worth $150,000. Now her home is worth $175,000, only $25,000 more. Although these numbers may seem unbelievable, I see this situation frequently, and call it “price compression.”

For every neighborhood, there is an upper limit of value. No matter how much money you spend improving your home, you can’t get above that value, unless you’re very lucky and find a buyer who “falls in love” with your house and has to have it. That happens very seldom in a neighborhood of tract homes. I see many owners that wait months, and even years for that once-in-a-lifetime buyer, who never comes.

If Margaret really liked her block, her neighbors, her remodeled kitchen, or her big tree in the front yard, and didn’t want to move, I would have recommended a mid-size rear family room addition. A 200 square-foot addition costing $10,000 would add $7,500 to the value of her home. Margaret would have had the use of the family room, and would have increased the value of her home without spending much money. Also, she wouldn’t now have a large home to occupy and maintain by herself.

How could Margaret have avoided this costly mistake? She could have asked knowledgeable local real estate agents why there were so few second-story additions in the neighborhood. She would have learned that most families have moved out rather than build an addition. She could have asked an appraiser to appraise her home before and after a would-be addition. Then she could have compared the cost of the addition to how much it would increase the value of her home.
Unfortunately Margaret spent $75,000 and could only recover $25,000 of the costs when she sold her home. She failed to find out what buyers want.
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Old vs. New

Robert M. had wanted to live in the urban city for many years, and fondly remembered his days as a young adult, going to theaters and restaurants. When he married, he and his wife moved to a suburban city to raise their children. Two years ago, Robert’s wife died. His children were grown with families of their own, and he no longer needed his large home. Robert, with the encouragement of his children, decided to move back to the city of his youth.

He wanted to own his home, rather than rent, so he decided to buy a condominium. His suburban home sold for $250,000, so he could purchase a $200,000 condo and have $50,000 to invest.All of the condos available for purchase in the location he preferred were in buildings constructed in the 1920’s, and were formerly apartments.

Robert was purchasing a condo directly from the owner and asked me to appraise it before making an offer. The building had been well maintained over the years, and all of the classic 1920’s architectural features had been retained, on the exterior of the building, interior lobby and hallways, and in individual condominiums. The plumbing and wiring had been upgraded when the building was converted to condos 20 years ago, and the kitchen and bathrooms were remodeled. A parking facility was located about a block away, and had monthly rental spaces available for Robert’s car.

As Robert showed me through the condo, I was surprised at his comments. He did not like the old, classic interior woodwork, high ceilings, and built-in cabinets. As soon as escrow closed, he planned to gut the apartment and convert it into a modern style condo, lowering the ceilings and removing all of the classic features.

I tried to diplomatically explain that the remodeling would substantially reduce the value of his condo. Buyers in his building, and similar nearby buildings, loved the classic features inside the condos. Condos in the old buildings sold for more than the few modern style condos built in the 1950’s and 1960’s in the neighborhood.

I suggested several alternatives. Robert could buy a condo in one of the few modern style buildings. Or, he could modernize the condo by putting in false interior walls, lowering the ceiling and covering up the classic wood trim. When he sold the property, he could remove the temporary walls.

Robert really liked the condo location, so he decided to proceed with the purchase. He modernized the condo by installing the false walls and ceiling I recommended. The construction cost was $10,0000. Restoring the condo to its original condition will cost $2,000. He understood that the $12,000 was not recoverable on sale To Robert, it was worth $12,000 to have the condo he wanted in the location he liked.
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Personalized vs. Neutral interior decorating

Charlotte M. and John T. loved wallpaper and bright colors. Each of their four bedrooms had different color carpeting. The walls were painted in different colors also. The kitchen and both baths had foil based wallpaper on all the walls. The countertops in their kitchen and baths were bright red, and the cabinets were painted blue. Their living room and family room had large wallpaper scenic murals. The exterior of their home was painted a bright lavender.

Charlotte and John had been very poor when they were growing up, and they could not forget the dark, peeling paint in their homes. The colors made them happy and showed they were successful. Their family and friends thought the many colors were unusual, but it reflected their sunny personalities and seemed to fit them well.

Charlotte’s company offered her a substantial promotion, but she had to relocate to another part of the country. John was an experienced electrician, and could easily get a job in their new location, so they decided to move.

Charlotte and John interviewed three local real estate agents. Two of the agents suggested repainting and recarpeting their home, or as an alternative, listing their home at a reasonable price. The home owners picked the third agent, who “understood” their home’s appeal and didn’t expect them to sell their home for a “penny less than it was worth.”

The market was slow in Charlotte and John’s city, but they were in a popular neighborhood and their home appeared to be listed at a reasonable price. Ten agents came through on the weekly tour for local real estate agents, out of about 50 agents on tour that day. The first public open house the next weekend attracted only six people. Because of the unappealing exterior color, most just drove by and didn’t stop to look at the home.

Three months later, the home had been shown to only one prospective buyers, who made a very low offer that was rejected by Charlotte and John.

Charlotte’s company offered a relocation assistance package that included purchasing their home if they were unable to sell it. The company offered a bonus if the employees were able to sell their homes themselves. Charlotte and John had hoped to get the bonus.

The company’s purchase price was based on two independent appraisals. When I saw the home, I realized it was going to be difficult to sell because of the unpopular exterior color and personalized interior decorating. When I asked Charlotte and John what was special about their home, they proudly showed me their bright, cheerily decorated rooms. Then they said some of the people who looked at their house during the public open houses had made comments about their decorating which they found offensive.

I was asked to appraise their home “as is” with the current decorating, and “as repaired” with new carpets and paint and other changes.

Charlotte and John were very upset with the two appraisals, which recommended replacing the floor coverings, painting the inside and outside, and installing new countertops in the kitchen and baths. The estimated cost was $15,000.

Their home was listed for $175,000. The two appraisals of the home in its current condition averaged $130,000. If the recommended changes were made, the values averaged $160,000. By spending $15,000 in painting and redecorating, the home was worth $30,000 more.

Fortunately, Charlotte and John were able to sell their home to Charlotte’s employer for $145,000 (the higher appraised value less the redecorating costs). Most sellers are not as fortunate.
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Vegetables vs. Lawn

As I drove up to James M’s house, I immediately noticed the tall corn plants in his front yard. They were visible from a block away. When I parked in front of his house, I saw a table with a hand lettered sign saying “Free,” filled with fruits, vegetables, and flowers. As I walked up to the front door, the neighbor who was putting free vegetables in her paper bag said, “Everybody in the neighborhood loves James!”

James M. loved gardening. His evenings and weekends were spent working on his plantings. In the winter, his greenhouse kept him busy. His large rear yard was full of vegetables and fruit trees. He had even replaced his rear lawn with a rose garden. A greenhouse covered about one-third of the rear yard. When James ran out of room in his rear yard, he took out the lawn in his front yard and planted vegetables and fruit trees, with a small area for flowers.

Although his neighbors thought the corn growing in his front yard was unusual, they loved the free fruit, vegetables, and flowers John gave them throughout the year. His heated greenhouse provided vegetables and flowers in the winter months.

None of James’ neighbors had vegetable gardens, and only a few had fruit trees. They didn’t have the time or interest in high maintenance yards, and preferred small lawns and low maintenance shrubs. One of his neighbors, Tom, was so tired of yard work that he paved his entire rear yard in concrete, and had turned his front yard into a rock garden.

As James was showing me his roses, fruit trees, and flowers he mentioned he was planning on moving to a nearby town in two years, with much larger lots, so he would have more room for his gardening.

James’ house was attractively decorated. He had recently remodeled the kitchen and baths. I knew it would bring a good price when it was sold. However, the yards were a problem. Few, if any, buyers in his neighborhood wanted to own a property that required so much yard maintenance.

Fortunately, James already knew that few buyers would want a property with so much yard maintenance. He asked me for advice. I told him that the front yard was the most important area to change. His property had poor “street appeal.” When real estate agents drove prospective buyers up to his home, most of them would not even want to get out of the car because the corn plants in the front yard were so unappealing.

I advised James to plant an attractive, conventional front yard with a lawn, low maintenance shrubs, and small flower beds. His two fruit trees were small, and could easily blend into the new landscaping. He could get ideas by hiring a landscape designer, looking at the front yards in other homes in his neighborhood, or using landscaping books.

Few, if any, buyers would want his large greenhouse. I suggested removing and reinstalling in his new home. Fortunately, the floor was gravel, not concrete, and could easily be removed.

The rear yard was large, and would be more expensive to relandscape. In his city, rear yards had no fences. His yard was strikingly different, as all the other nearby homes had large lawns and trees. I suggested relandscaping his yard so it was similar to the neighbors’ yards.

Since James planned on moving in two years, I urged him to start relandscaping as soon as possible, so the plants would have time to grow.

With its current landscaping, his house was worth $200,000. Relandscaping would increase his value by $25,000, up to $225,000. The materials would only cost $5,000 and James could do all of the work himself. Although he would miss his greenhouse and vegetables, he would still be gardening. For the expenditure of $5,000 and lots of his time, James would make $25,000 when he sold his home.
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How to find out what buyers want
When real estate professionals talk about buyers, they are referring to “typical”, or average, buyers. In the first example in this chapter, the living room that was converted to a wood shop, somewhere there is probably a buyer who wants to buy this home. If the owners decided to sell their home “as is” and did not want to discount the price substantially, they could wait for that one buyer in a thousand. The buyer could show up tomorrow, in 20 years, or could never show up. Some sellers decide to wait.

In contrast, the typical buyer for their home would not want a living room converted to a wood shop. Finding out what these buyers want is the key to getting the maximum profit from your home.

Of course, you can change your home to whatever you want and not worry about buyers. There’s certainly nothing wrong with that if you don’t plan on ever selling your home. Unfortunately, almost all homes are eventually sold. Sellers often have difficulty believing that the addition with the poor floor plan, or their home’s unusual exterior paint color, were not desired by buyers.

A good way to find out what buyers want today is looking at the model homes in new home subdivisions. Many builders spend much time and money researching what buyers want. Ask the sales representative which models are most popular and why. Mid-week is a good time, as there are few buyers and the sales person often has time to talk.

Read the real estate section of your local newspaper, particularly articles on the local real estate market. Look at what features are mentioned in the real estate ads. For example, lots of references to pools means they are popular. Look at the national trends. Find out if your local market wants these features also.

Go to public open houses of resale homes on the weekend. Ask the agents what buyers want. Tell them you want to be sure your home is ready when it’s time to sell. Don’t monopolize the real estate agent’s time. If another prospective buyer comes in, let the agent speak with that buyer, returning later to your conversation.

Call the real estate agent who represented you when you purchased your home, or other agents you know. Ask them what buyers are looking for today.

When you go to a local home improvement or hardware store, ask the sales people what is popular now. If there is an in-house design center, ask the designer what is popular now and what he or she sees as future trends. Read articles in design magazines.

Most important, keep track of who is buying homes in your neighborhood: retirees, singles, couples with young children, extended families, etc. Who is the typical buyer? Which of the homes in your neighborhood sell quickly, and who is buying them? What improvements are your neighbors making to their homes?

You could also pay a consulting fee to a local appraiser or knowledgeable real estate professional, and have him or her advise you. Local interior designers and architects can tell you what is popular now and what is becoming more popular. I am always surprised how few home owners ask an expert’s opinion before spending tens of thousands of dollars on home improvements. As an appraiser, unfortunately I am often the “bearer of bad news” when they find out their expensive improvements added little to the value of their homes.

Neighborhoods change over time. How is your neighborhood changing? Fortunately, neighborhoods usually change very slowly, so there is plenty of time to prepare for the future.

Buyers’ preferred features change over time. The green shag carpet of the 1960’s is unfashionable now. Buyers today prefer hardwood floors or neutral colored carpeting. In the 1920’s, small kitchens were standard. Today, most buyers prefer a larger kitchen, with space for a small table for eating breakfast or a snack.
Carpet and paint can easily be changed. But before making major improvements such as an addition, kitchen remodel, pool, or landscaping find out if they are popular today. Make your “best guess” forecast of whether or not they will still be popular in your neighborhood in five or 10 years, or even longer.

No one can predict the future with 100% accuracy, of course, but real estate trends usually last for at least 5 years. If you are planning a major kitchen remodel, use cabinets and countertops that are becoming more popular today, rather than just a repeat of your current 20-year old kitchen.
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