Читать книгу Real Estate Rescue - Tracy McLaughlin - Страница 8

In 1990, a series of renowned experiments by Nobel Prize recipients Daniel Kahneman and Richard Thaler and coauthor Jack Knetsch revealed that we have an irrational tendency to overvalue something just because we own it, regardless of its objective value.7 The researchers asked a large group to assign a value they would be willing to pay for a coffee mug. Half the participants were then given the mug for free and, soon after, the opportunity to trade their mug for an object of equal value. Classical economics assumes that people always behave rationally within an economic system and that the participants who were given mugs would maximize their welfare by trading for their preferred object. But it didn’t work out that way. The owners of the mugs wanted, on average, twice the price they had been willing to pay for them. Simply owning the mug caused people to value it higher.

A later study showed that the value of a possession increases with the duration of ownership. The longer you own something, the more valuable it is, at least to you.8

The discovery that we value things more when we own them, a cognitive bias Thaler termed the “endowment effect,” repeatedly shows up with homeownership. Regardless of the neighborhood or price tier, homeowners commonly believe the value of their home is higher than its actual market value. They think their home is that rare Picasso that defies market economics.

A paper published by the Reserve Bank of Australia revealed that about a quarter of homeowners think their property is worth up to 20 percent more than it is.9 And the greater the owners’ debt, the more they overestimate it. Hardly a seller in this country doesn’t feel more qualified to render an opinion on value than the expert he or she hires. Unfortunately, living in a home doesn’t make us experts in real estate.

Perception of value matters because the value of a house plays a role in many significant financial decisions. Home values shape household retirement plans.10 Home values influence decisions on expenditures, with consumption going up by 5 to 7 percent of the perceived increase in housing wealth.11 Above all, perceived home values dramatically impact the decision-making process when you elect to sell your home. Thinking your home is worth more than it is leads to overpricing, which can undermine the success of the sale.

How do homeowners shield themselves from the endowment effect—that stealthy, systematic error in thinking that impairs decision-making—when they are engaging in one of the biggest transactions of their life? Find an expert to value your home, an independent third party who has no emotional or financial connection to the property. Someone who does not view the home through the prism of the endowment effect.

The reality is that the value of your home is governed by comparable properties, likely right down the street from you. The residential real estate business is based on numbers, yet we often ignore the metrics and market data and make decisions based on what we want to believe. The value of a home has nothing to do with what we paid for it, or what we need to net from the sale, and this can be unwelcome information.

Part of the disconnect between homeowners and agents is that agents rarely break down their valuations in detail, engendering suspicion in clients. Clients conjecture that the valuation of their biggest asset is the product of a vague, faulty, or perhaps nonexistent process. In fact, arriving at a valuation is painstaking, arduous work, and it’s one of the most important services an agent provides a client. The process and the building blocks should be transparent and described to clients in detail so that they can understand the valuation’s underpinnings.

It’s important to know what a home is worth, or can be worth, based on rational analytics, divorced from inflated ideas of value, wishful thinking, or false expectations created by others. Overpricing a home you are selling, or undervaluing a home you want to purchase, are costly mistakes.

In this chapter, I am going to deconstruct how homes are valued for purchase and sale, including the objective and subjective elements of the valuation. I’ll also compare it with the other common method of assessing the value of a home—the lender’s appraisal.

The Mechanics of Home Valuation

A comparative market analysis (CMA) is the standard valuation approach that a real estate agent undertakes. A CMA compares recently sold properties (“comps”) that are similar to the subject property and adjusts for differences. Active listings are not used as comps because they only represent the seller’s valuation and are not necessarily an indicator of market value.

To identify comps, agents can use sites like Redfin and Zillow, but the multiple listing service (MLS) has the most accurate and comprehensive information.

A CMA can determine market value only if the most comparable properties (i.e., the most similar) are selected. The key criteria for selecting the appropriate comps are timing, location, and property characteristics:

The date of sale should be as recent as possible. Sales more than a year old are less useful, particularly in fast-moving markets. The more recent the sales, the less likely the market has moved enough to render the comparable sale prices obsolete.

The comps should be in the same neighborhood, subdivision, or market—but be aware that there can be big disparities within a defined geographical area. Even being on the same street doesn’t necessarily make the location of two properties comparable. One could be in a flat area, within a walking distance to town, while the other might be on a hill and require a car ride.

The comps should have as many of the property features of the subject home as possible, including the number of bedrooms and bathrooms, lot size, and age of the home. Ideally, the square footage of the comp should be within 15 percent of the subject home.

The agent then adjusts for the differences between the subject property and the comps. Comparing the fundamentals of properties—square footage, land, year built, number of bedrooms and bathrooms—for a CMA is a fairly objective and mechanical process. It’s relatively easy to assign monetary value to, and then adjust for, the differences among these elements.

Websites like Zillow and Trulia capture millions of eyeballs every month using these variables as the basis for automated valuation models, but home buyers, sellers, and investors should be wary of using computer estimates to make decisions. It’s like marrying someone based on a Bumble dating profile. Even Zillow acknowledges their estimates are inaccurate. Their chart of median error percentages in major cities runs between 4 and 7 percent.12 Half of the home values in the area are closer than the error percentage and half are greater than the error percentage.

This is because, no matter how identical properties may appear, no two properties are exactly alike, and they differ in ways that are more complex to quantify. All factors that impact value must be evaluated. A diligent agent doing a CMA will add or subtract the amount that all material features contribute to or detract from the value of a comparison property.

The Art of Home Valuation

Property valuation is an art, not a science. Appraisers and agents both build an opinion of market value based on data, but most would acknowledge that their methodology relies on gut instinct and experience. You can convince yourself you are scientific when valuing tract housing, but even when homes seem identical, judgments that impact pricing are necessary. This is especially true when it comes to a property’s more subjective factors.

Love Thy Neighbor…and Don’t Block the View

I was once called to be an expert witness in a legal dispute between two homeowners in Belvedere, California. Belvedere is a small island off Tiburon with wraparound views of Sausalito, San Francisco, and the San Francisco Bay. The homeowners were neighbors who lived at opposite ends of a cul-de-sac facing the bay. The defendant had a forty-one-foot-high Acacia tree which blocked the plaintiff’s view of one of the two towers of the Golden Gate Bridge. The plaintiff had never been able to see through that point in the property, but expansive views are worth millions of dollars in Belvedere, so it ended up in court. I was asked by the plaintiff to quantify the value of the obscured view of one tower of the Golden Gate Bridge.13

To value the view, I pulled the sales records of every property that traded on the view side of that street going back ten years. I examined historical photographs of each home to see whether it had a one-tower or a two-tower view. I compared the sale prices of similar homes with unobstructed views of both towers, those that could see only one tower, and those that had no view of the bridge. I accounted for other features that raised or lowered the value of each home as well. Then, I analyzed all the data and arrived at a valuation of $350,000 for the view, which was a little more than 1 percent of the original cost of building the bridge, not adjusting for inflation!

An accurate home valuation requires delving into the less tangible elements that enhance or lessen value in a home: the design and flow of the home, finishes, the outdoor living space, the contours of the land, curb appeal, and environmental factors, among others. The consideration and weighting of these factors is challenging, but makes all the difference in deriving the correct market value for a property.

Valuing these elements requires a deep understanding of the market, the neighborhood, the psychological factors that influence today’s home buyers, and, above all, knowing what drives value in a home.

What Buyers Want Drives Value

What buyers desire determines what the market “values.” The more closely the characteristics of a home measure up to the desires of home buyers, the higher the value the home will be awarded in the marketplace.

Design and lifestyle trends—how people want to live in their homes—drive residential real estate values. It’s a universal truth, whether you live in Topeka, New York, or London. People often think architects and designers are the arbiters of style, but it’s buyers, and how they want to inhabit the spaces inside their homes, that propel design.

A shift in design taste happens every seven to ten years. As the seller, you must keep up with the shift if you don’t want to leave money on the table. The following are the most important design and lifestyle trends to consider when valuing a home today.

Living Space

The interior layout and design are critical factors in the valuation of a home. The overarching questions are, “How closely does the living space mirror what the current market wants? Does the layout reflect how buyers want to live in a home?”

Not all rooms are valued equally. The most highly valued rooms in today’s market are an open kitchen connected to a family room, bedrooms, a secondary family room, and a home office for telecommuting. Extraneous spaces like a sauna, a walk-in wine cellar, a crafts room, or a massage room don’t hold the same per-square-foot value. The price per square foot for these spaces gets adjusted down because they are not necessary for everyday living. For example, I valued a home in Sausalito, California, with an indoor pool. The owner thought it was a unique selling feature and wanted me to understand how special it was. He said, “How many homes in Marin have indoor pools?” as if its rarity made it more valuable. I turned it back on him, “Right, how many homes in Marin have indoor pools?” followed by a long pause so my response could set in. “There’s a reason. People don’t value indoor pools—and the conditions they create with the steam and water—in an area that overlooks a bay with year-round gentle weather.” Just because something is unique or rare, that doesn’t make it valuable. The market must value it.

While there’s no one-size-fits-all plan for living spaces, in the current market, the concept of an “open plan” living space has become the standard in home design. The days of compartmentalized rooms divided by doors and walls are gone, supplanted by a desire for open, connected living in a space that feels bigger.

The great room of this home in Belvedere, California, is an excellent expression of a beautifully designed open floor plan. Millennials, families, and empty nesters will all be attracted to the perfectly proportioned rectangular living space that accommodates informal dining at the kitchen island, more formal dining just off the kitchen, and a useful and relaxing living space adjacent to the fireplace. The scale of the furniture not only makes the room look larger, but also shows prospective buyers how they will live in the house. The message here is that spaces do not have to be big to be highly valued. The concept is applicable to most homes by creating a big, open great room, even if you have to remove a wall or two to do this.

Buyers want clear sight lines and a great room combining the kitchen, family room, and dining area, so they can interact with guests from the kitchen, watch the kids while they play, or have the whole family together, even if engaged in separate activities.

“Open plan” might spark images of grand, cavernous spaces, but the design is not limited to large homes. An apartment or cottage can combine multiple purposes in a tight space if the areas are clearly defined.

Checklist—Living SpaceIs the home’s central living area a large, rectangular space with high ceilings? What is the scale of the home? Does the rest of the home have high ceilings, and do the spaces feel large and open? Is the floor plan optimal for everyday usage? Is there a secondary family room to accommodate children as they grow older? How does the great room connect to the exterior living spaces? In a family-driven market, is the master bedroom close to the children’s bedrooms? Is the garage in close proximity to the kitchen? Is there a mudroom between the kitchen and garage?

Finishes

Finishes are design elements that are usually attached to structural elements of a home, like walls, ceilings, and floors. Paint, flooring, appliances, countertops, and light fixtures are the dominant finishes in a home. The look and feel of the finishes can enhance or undermine market demand and desirability.

A home’s finishes must align with what buyers desire. The level of finishes should also be commensurate with the pricing tier of the asset. A more expensive home will necessitate higher-end finishes. The brand and expense can be adjusted; it’s the look and feel that’s critical for resale.

Young buyers, in particular, place a premium on finishes. They want to walk into a space and feel like it’s new. Accustomed to a fast-paced, always-plugged-in lifestyle, they have less downtime. Unlike previous generations, they are less likely to enter with a vision to remodel a home and a willingness to credit the seller for its positive attributes. They will severely discount an outdated home because all they can see is what you didn’t do. They want to turn the key, unpack their suitcases, and get back on email.

Checklist—FinishesA prudent seller will frequently flip through design magazines to be aware of what buyers and consumers want. Does the home have flooring consistent with contemporary demand? Do the kitchen and bathroom have contemporary countertops? Do the bathroom fixtures look current? Does the home have contemporary, chic lighting? Does the kitchen have updated and matching hardware (hinges and doorknobs)? Does the home have matching stainless steel appliances? Is the color palette of the carpet contemporary, and does it tie into the design of the home? Does the home have a neutral wall color, or a color that’s in demand?

Indoor-Outdoor Living

Indoor-outdoor spaces are in high demand and can add significant value to a property. Home buyers want a flowing design that erases the lines between the interior and exterior of the home. Almost every home aspires to connect with nature.

Gone are the days of simply having a table on the patio and throwing a few foldable chairs on the grass. The area formerly known as the “backyard” has evolved into another living space. People want to extend their homes into the outdoor spaces and bring more natural light inside, without the costs associated with expanding the square footage of their home.

If you are in a view-driven market, the highest valuation will be given to the “magical 1, 2, 3, 4 sequencing”: a large, open great room that leads to a flat outdoor entertaining space that leads to a pool that leads to a view. The great room should have a focal point, a place your eyes are drawn to when you enter the space and, ideally, there should be a second focal point outside.

The principle of creating a visual point of interest off the main living space is not dependent on having a view or a pool. Whether you have a small terrace in an urban apartment or an expansive yard, having a focal point outside helps make a visual connection between the interior and exterior spaces. Highlight the best feature. Pick one point of interest in the outdoor living space on which to focus. It could be as simple as a tiny, vertical herb garden suspended from a wall, or a rectangular table with a bench and two chairs that push up against a balcony railing.

In the Home Trends Design Survey, the American Institute of Architects reported that requests for indoor-outdoor living increased for the sixth consecutive year in 2017. Seventy percent of the five hundred architecture firms sampled said there has been a rise in homeowners who want outdoor living space incorporated into the design of their homes.

The right landscaping on any property, whether an urban town home with a balcony and a greenbelt or a sprawling estate with rolling acres in the suburbs, impacts the valuation as well. According to a study by the University of Michigan, attractive landscaping increases a home’s value by 5 to 7 percent.14 The respondents to the study across seven states ranked sophistication as the most important element of landscaping—ideally a balance of large deciduous trees, evergreen plants, and hardscape.

Landscaping is an all-or-nothing game. You don’t bandage Landscaping. If you put new elements amidst the old, the valuation gets discounted. A homeowner should either update the landscaping or leave it alone, but not muddle in between.

In most areas, a smaller, flat pad is valued higher than a larger, upslope property because families drive the market and they want an accessible, level area.

Checklist—Indoor/Outdoor Living Is there a level outdoor living space easily accessible from the great room or other public rooms in the house? Do the outdoor living spaces have varied, defined experiences? Is there a lawn? Is there enough hardscape for outdoor dining and entertaining? Is the hardscape in alignment with what today’s buyers want? Is there a pool or spa? Is the landscape design sophisticated? Does the property have mature vegetation? Is the home well placed on the lot? Does the site placement maximize the backyard? Which way is the home oriented, and does it get direct sun? Is the backyard private and quiet? Is there a sport court?

Curb Appeal: An Inheritance from Our Tribal Ancestors

Curb appeal matters: houses that present well from the curb get higher valuations.

Humans are hardwired to react quickly to environmental cues—and it’s difficult to change our impressions once formed. We make quick assessments in the first few seconds of our experience of someone or something. Research shows that our unconscious mind perceives in a few seconds what it takes our rational conscious mind much longer to evaluate and digest.15

Our snap judgments are an inheritance from our tribal ancestors who had to quickly determine if that rustling sound in the bush was a snapping twig or a saber-toothed tiger. Survival was dependent on the ability to make quick discernments. The proverbial tiger is gone and the brain has evolved, but the ancient part of the brain carries those caveman instincts into the modern world.

Although we are taught not to judge a book by its cover, we often do. And this certainly holds true in real estate.

Buyers’ first impressions of homes are formed when they approach the curb or, more likely in the digital era, when they click on photos of a home online. According to a study by the Bank of Montreal16, 80 percent of home buyers know if a house is right as soon as they walk in the door.

Dr. Michael Seiler, a professor of Real Estate and Finance at the College of William & Mary, led the first study using ocular tracking technology to record the exact eye scanning pattern employed by home buyers when searching the web for homes for sale.17 He and his team created a typical home listing website, broken down into three sections. Overwhelmingly, participants (95.1 percent) first looked at the “curb appeal” photo—an enlarged photo that shows the exterior of the home. Then 76 percent of the viewers turned to the quantitative property description section, where details like the number of bedrooms, bathrooms, and square footage are displayed. Finally, the participants’ eyes went to the real estate agent’s remarks section, but 41.5 percent didn’t even bother looking there at all. “Without an eye-catching photo, the battle is lost before it begins,” Professor Seiler says. “You have to grab people’s attention within two seconds. Do it the way a billboard does.”

Curb appeal makes a statement about a house that hopefully lodges in the memory of the buyer. It’s not about a grand façade or a rolling lawn. It’s the details that thread together to leave a lasting impression. The right color paint for the exterior. A front door that grabs people’s attention. Elegant door hardware, the first thing a buyer touches. Light fixtures that not only blaze a trail to your front door, but do it with style. Life and color with plants that frame the entryway and the walk up.

Vegetation that directs a buyer’s attention to the best features of the façade. The hedge that screens off the Winnebago parked in the adjacent driveway. The fencing that defines the space and creates the impression of privacy. The wide-planked horizontal siding that masks the less attractive stucco.

Checklist—Curb Appeal Is the hardscape to the front door a material currently in demand? Is the landscape verdant and layered? Does the home have the right color palette? Does it resonate with today’s younger buyers? Is the front door solid and its hardware appealing? Does the doorway have a symmetrical composition of light fixtures and front door accents? Does the vegetation accent the home’s appeal? Does the outside of the house look fresh, or weathered and peeling? Does the fence or gate define the property but not look foreboding? Is the driveway in good shape, or in disrepair? Does the garage door accentuate the home’s appearance? Is there low-voltage landscape lighting to illuminate and frame the path? Does the mailbox complement the home?

Environmental Factors

Environmental factors don’t show up in the MLS, but can dramatically impact the value of a home. A nearby cell tower, airport noise, overhead power lines, heavy traffic, or an interstate freeway that billows pollution are factors outside the boundaries of a property, and outside an owner’s control, but they can play a role in devaluing a home. Rising water due to global warming is a concern for buyers in low-lying coastal areas. Negative environmental factors lower the valuation of a home.

Homeowners can mitigate some issues before the home is valued. The owner of a home with road noise could install a retaining wall with vegetation, or mount outdoor speakers and play music when the house is shown. If a house faces north and doesn’t get direct sunlight, the seller can add LED lights and change the bulbs to brighten the inside. White crisp walls brighten a home if the natural lighting is not optimal.