Adding Value to Real Estate
by Chet Boddy
Whether you're planning to buy, sell or remodel, itís important to understand what makes real estate values go up and down. The following is a summary of the basic forces which influence the value of real estate.
The Local Real Estate Market
All real estate value is determined by the interaction of buyers and sellers in the marketplace. The real estate market goes up and down in cycles for reasons which can only be understood after they occur. The economic principle of supply and demand prevails. In a buyerís market, supply exceeds demand, driving prices down. In a sellerís market, demand exceeds supply, driving prices up.
Most urban real estate markets are driven by jobs. However, the Mendocino Coast real estate market is driven mostly by retirement, recreation and telecommuting; and only indirectly by jobs created in and outside the local economy. Many local residents are wholly or partially independent of the local economy because of retirement or investment income, or out-of-town employers and clients. Many homes are purchased for part time, vacation or retirement use.
In this type of market, buyers and sellers donít respond to the same economic forces which act in urban areas. Sellers can set high listing prices and wait out the market and buyers can make low offers and defer purchases.
In job-driven real estate markets, buyers compare properties within an area close to their place of work. On the Mendocino Coast, potential buyers have more choices and may be comparing properties from local real estate markets all over the country.
Most real estate markets are uneven. Properties in different price ranges can have different supply and demand characteristics. There can be a strong demand for homes in one range of value at the same time there is weak demand in another price range.
Next to the local real estate market, the neighborhood or district has the strongest influence on value. Neighborhood values are driven by the economic principles of progression, regression, and conformity.
The principle of progression states that a property of lesser value is enhanced by proximity to better properties. In other words, the value of the cheapest house in the neighborhood is pulled up by higher value homes.
The principle of regression is just the opposite. It states that a property of higher value is lessened by proximity to inferior properties. In other words, the value of the most expensive house in the neighborhood is pulled down by lower value homes.
The principle of conformity is more subtle but equally important. It states that the improvements (buildings, etc.) must conform in size, age, condition and style to maximize value. In other words, if all the other houses in your neighborhood have two-car garages, your house will achieve itís optimum value by having a two-car garage also.
Neighborhoods, like real estate markets, also follow cycles. The typical four-stage neighborhood life cycle consists of growth, stability, decline and revitalization.
Land value generally goes up in value over time, but not always. During the recent California economic downturn (1992-1997) land values went down throughout the state.
On the Mendocino Coast, land is oversupplied (more sellers than buyers), which has a downward effect on value. Land values are also affected by permit uncertainty and the cost of clearing, grading, building access roads, drilling wells and designing septic systems.
Not all land is the same. The value of ocean front land has risen dramatically because itís in high demand and limited supply. Rising timber prices have caused timberland to go up in value.
Land value also follows the principle of progression, regression and conformity. Land achieves itís optimum value by having good access, being well-subdivided and similar in size and quality to other lots in the same neighborhood.
Rising construction costs add value because they increase the cost of replacing existing buildings and other improvements. At the same time, improvements constantly lose value through normal aging and other types of depreciation. Over time, Improvements normally lose value because depreciation exceeds the rise in construction costs.
With these principles in mind, here are some practical things you can do to enhance the value of your property.
Convert Personal Property info Real Estate
Install a permanent foundation under your manufactured home to convert personal property into real estate. The foundation does not have to be the standard concrete perimeter type. Mendocino County will accept a variety of foundation designs engineered by manufactured home companies.
Clear Up Potential Legal Problems and Red Flags
Record your access easement. Unrecorded access easements are becoming a red flag for buyers and lenders alike. If you use a private road, make sure you have an easement which appears on your deed. If not, call a surveyor and/or attorney for help. Do this while youíre on friendly terms with your neighbors. Donít wait until there is a problem or a lawsuit.
Write up a road maintenance agreement with your neighbors and record it. This is not a big issue yet, but it will be.
Resolve any boundary disputes or discrepancies. Hire a surveyor if necessary and establish your property corners. An accurate metes and bounds description should appear on your deed.
Secure your water rights. Make sure you have legal access to the well, spring or stream where you draw your water. If you donít, write up an easement and record it.
Get permits for any non-permitted construction. Most buyers and lenders will not assign any value to buildings which donít have a permit. Mendocino Countyís Class K ordinance allows non-traditional and owner-built homes to be brought up to code, as long as they meet minimal health and safety requirements.
Remove any potential environmental hazards, especially underground fuel storage tanks. While underground tanks can be safe and legal, they are a red flag for most buyers and nearly all lenders.
Improvements that Pay for Themselves Over Time
Upgrade your insulation. Ceiling insulation is the most cost effective, especially if you have none to begin with. Wall insulation is next. Double pane windows are effective but expensive, and take longer to pay for themselves in energy savings. Floor insulation is usually unnecessary in our climate, and may even cause condensation problems if improperly installed.
Install or upgrade a central heating/ventilating system. Good air circulation is especially important in our damp coastal climate to prevent mildew and odors. Many local homeowners heat their entire house with one wood or pellet stove and a good air circulation system without ever turning on the furnace.
Contact PG&E for technical and financial help. Utility companies have found it cheaper to invest in energy conservation than new power plants.
Improvements That Add the Least Value
New roofs, foundations, siding, plumbing and electrical wiring are not cost effective unless they are unsafe, or you plan to keep the property for a long time, or the house has special historic or architectural value, or itís a low-value home in a high-value neighborhood.
Many older homes have post and pier foundations which are perfectly safe and legal. However, some lenders donít understand this and will not finance a house without a concrete perimeter foundation. If your lender insists on this type of foundation without a good reason, get another lender.
Large barns, shops and outbuildings may suit your purposes but may not have the same appeal or value to potential buyers.
Traditional open fireplaces appeal to some buyers but are fast becoming energy-inefficient relics of a bygone era. Install an attractive hearth around your glass-front airtight wood or pellet stove instead.
Buy the least expensive house in the neighborhood and improve it. Youíll get the most bang for your improvement buck.
Look for the ďright things wrong.Ē Look for sound properties that only need painting, cleaning, landscaping, carpets and new appliances. Avoid properties that need roofs, foundations, siding, plumbing and electrical work.
Buy a home in a neighborhood that is just beginning a revitalization cycle.
Look for underimproved properties such as single family house which could be converted to residential income or commercial use.
Look for land that can be divided or that could benefit from a boundary line adjustment.
Look for properties that can be re-zoned or enhanced through a use permit.
Look for properties with potential value-enhancing views and frontages.
There are only a few improvements that will increase the sale price much beyond their cost. These include new paint, landscaping, a professional cleaning job and maybe new carpets and appliances. And not everyone agrees with this.
Donít do major remodeling right before you sell. Studies have shown that the most profitable home remodeling projects recovered only about 60 to 90 percent of contractor costs when the home was sold. Let the buyer do the remodeling. Save your money for your next house.
Do-it-yourself projects can cost less than half of what contractors charge. However, amateur workmanship can reduce the value of your home. Unless youíre an experienced do-it-your-selfer, leave home remodeling to the pros.
Improve your curb appeal. Buyers, real estate agents and even appraisers are influenced by first impressions. Clean up your property, paint your siding and upgrade the landscaping.
Get your home inspected by an experienced professional and accompany them during the inspection.
Get a termite inspection.
Have your well, septic system and roof inspected if recommended by the home inspector or if you suspect problems.
If youíre selling unimproved land, drill a well, get the soil tested for a septic system and provide good access.
Get a geotechnical report if you have unimproved hillside or ocean front property.
Get an appraisal from a licensed real estate appraiser or a free comparative market analysis (CMA) from one or more experienced real estate agents. The best time to do this is after you have completed the above inspections.
Ask which repairs and improvements would be the most cost effective.
Ask for an honest and impartial estimate of market value and an appropriate listing price (they are not the same). If you list too low youíll lose money. If you list too high your home wonít sell.
If you donít plan on selling your house in the near future, home improvements have more time to pay for themselves. They can pay you back in two ways Ė by adding actual value to your real estate, and by providing you with enjoyment and use. In some markets, remodeling can be less expensive than moving.
Donít overimprove for the neighborhood. Remodeling will add value up to the point where your house becomes similar in size, design and value to most of the other homes in the neighborhood. Beyond that, anything else you do could be an overimprovement, and the value of your home will not rise very much regardless of how much money you spend.
Remodel or upgrade your kitchen. The kitchen is often the room that sells the house. But donít get carried away. Make sure the materials and appliances you choose are appropriate to the overall style and quality of your home.
Add a second bathroom if you have only one.
Remodel or upgrade your bathrooms. Keep it simple.
Build a conventional two-car garage if you donít have one and if they are typical for your neighborhood.
Add a second residential unit if they are typical for your neighborhood. Second units are allowed with only a building permit throughout Mendocino County except for the Coastal Zone. Second units have a variety of potential uses in rural areas where large lots and low densities prevail. It can be a rental unit (where affordable housing is scarce), a home office or studio (where many people are self-employed and work from home), a dwelling for an aging parent or a young adult, a guest house for summer visitors, a caretakerís cottage, or even a caregiverís apartment to help you live independently if you become disabled.
Chet Boddy is a Certified General Real Estate Appraiser, Realtor and real estate consultant who has lived on the Mendocino Coast since 1976. Look for this and other real estate columns on Chetís web site at www.chetboddy.com.