Upgrading beyond market value

By
Real Estate Agent with Gentry Realty

Money Issues by Dani SimmondsI'm writing this post near Phoenix Arizona and toward the end of February of 2009.

The reason I say this is because sometimes people find a blog post that speaks authoritatively about a topic- providing a helpful rule of thumb that would appear to apply generally.

This post might be one of those- however, I must clarify; the current conditions make this phenomena stand out.

What am I addressing? Simple- the benefit of upgrades... are they worth it?

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Many feel that their home will have more value if they upgrade. In general this is true.

However- we seldom see a case where the cost of the upgrade actually increases the value of a home by more than the money spent on the upgrade.

This is true now more than ever.

I've shown two homes in the area in the past few days that illustrate this point.

One home has a pool, spa, sports court, media room, track, outdoor play room and upgrades throughout. The upgrades cost in the neighborhood (I'm estimating) of $180k. Problem... there are homes in the neighborhood that cost that much (yes... the competing homes cost less than the cost of the upgrades alone.) This is a home that will be of great personal value to whomever buys it... it's just not a home that will appraise for the amount the seller is seeking.

These days, at least in Phoenix, upgrades add very little to the value of a home.

The second home was gutted and remodeled by an expert. The owner's raw costs exceeded $50k. His time/labor costs would have been more than twice that. He's in the business... his materials were discounted and his labor costs were $0. Everything is new and deluxe. There's an outdoor barbecue, outdoor fireplace and pizza oven. There's also a cabana and solid decorative walls with decorative lighting within the masonry. Inside is just as impressive. Everything has been redone. Every inch of the place has a new finish (stone, tile, wood, paper or paint). The refrigerator alone is six feet wide... it cost as much as a good used car. The home is selling (via shortsale) for $175k. That's also the neighborhood comp price. His upgrades are worth, essentially, nothing. I know- it sounds hard to believe... but that's what the bank is saying.

In both cases, these homes will be worth more more sentimentally then they do on paper. The new owners will be landing a "steal" ... but not according to appraisal. Each home has a market value close to any other home in the neighborhood that has just sold... even if the home sold at drastic foreclosure rate.

Welcome to the new retail. Upgrades hold little weight in the appraisal because there are so many other homes in inventory. The best way to know which house is best for you is to tour them. You're bound to find a few that are a much better deal... afterall- you're the one who is going to live there- not the bank... and not the appraiser.

Yes... these are strange times indeed. I wonder what these homes will be worth when the rate of foreclosure diminishes. As inventory returns to normal levels, these upgrades will begin to show more worth on paper.

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Photo Credit: "Money Issues" by Dani Simmonds

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Ann Heitland 02/23/2009 10:31 PM
Topic:
ActiveRain Community
Location:
Arizona Maricopa County Scottsdale
Groups:
Arizona Real Estate
Arizona Homes
Phoenix Arizona Real Estate
The Optimist
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upgrades

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Rainer
32,986
Chris & Karen Highland
Turning Point Real Estate - Frederick, MD
Integrity, Experience, Enthusiasm!

Chuck, this is an important post, I hope you get a lot of readers.  It upsets me to see a homeowner who has overinvested and will never get the money out of his house.  I am most upset at whoever gave them the bad advice.  This is not the market to expect to get your money back.

February 23, 2009 06:38 PM #1
Rainmaker
506,634
Ann Heitland
RE/MAX Peak Properties - Flagstaff, AZ
Flagstaff Real Estate - Associate Broker, GRI, CRS

I have been trying to get this across to several clients -- thanks for the help. I'm about to "re-blog" it -- something that I rarely do!

February 23, 2009 10:30 PM #2
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Rainmaker
257,369

Chuck Willman

Realtor - Arizona - 480.292.0600
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