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  • Writer's pictureDana Cohen

When Chickens Come Home to Roost

When a prospective client reaches out to me about listing their home, they usually have a strong opinion of what their home is worth and some may even have an expectation of how much they will clear once the transaction is closed. My initial advice is always the same… It is ultimately the buyer with a bona fide offer that will tell you the value of your home. The one consideration that is most misunderstood and often overlooked is the condition of the home and how this impacts the sales price… and this can be substantial.

It is crucial to understand that there are two main components of a home’s value: “land” value and “improvement” value. If we all lived in tract developments in an area where land was plentiful, the major variation between the value of each home would be the layout and square footage, as nearly every home would hold a similar land value. In regions where new tract developments are always coming into inventory, the new homes will generally sell at a premium to resales. It is the combination of layout, square footage and the quality and age of construction that comprise the concept of improvement value.

So how does this apply to our local marketplace where every home and every parcel is unique? The simple answer is that historically, the scarcity of buildable land has been the major driver of appreciation over time… steadily increasing land values have largely muted the impact from the aging of the structure. It comes as no surprise then that homeowners have an expectation that their home will enjoy a premium price on sale, as scarce land and growing demand has pushed prices up for decades.

However… It is largely the improvement value of a home that will determine how it performs relative to other recent sales in the neighborhood. To my knowledge, there is no internet value estimator that can assess this impact. And believe me when I tell you that today’s buyers will insist on a significant discount for homes that are not in prime condition or showcase contemporary finishes.

If you bought your home many years ago, you may be skeptical because the market was not always this way. When I started in the business over 20 years ago, buyers embraced the concept of “sweat equity” and would look for opportunities to refresh a tired property to rapidly increase the value. They were willing to put less focus on a home’s improvement value at purchase. That is no longer the case. With mortgage rates well above 7%, today’s buyer puts every dollar towards the down payment and has limited funds available to make upgrades or repairs. They want to close escrow on Friday and be settled into their picture-perfect home in time to return to work on Monday. At the beginning of my career, I would prepare a home for the market with some fresh paint, heavy cleaning, and decluttering. I might have even hung a few extra pictures or placed fresh flowers. Professional home staging was non-existent. Today, it is common for sale preparation costs to exceed six figures to catch up on deferred maintenance and freshen the finishes.

The bottom line is that there is no free lunch. Choosing to defer annual maintenance and updates to your property over time will likely catch up to you when you go to sell. Understandably, your lifestyle may not allow for home expenditures to be high on the list… but it doesn’t mean they go away. If you are contemplating a sale soon, my advice is simple… bring in a Realtor early to help you prioritize high impact/low-cost projects to make the best use of your available investment dollars. There may even be funds available on a short-term basis to assist in your transaction. Having realistic expectations is tantamount to a successful transition to your next chapter.

The silver lining is that your home is likely to have been or will be an excellent long-term investment. Just remember that absent ongoing maintenance and updates, the improvement value of your property declines over time. If you are interested in feedback on the value of your next home project, please don’t hesitate to contact me. This is a critical component of every one of my listings these days.

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