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Owners prone to overvaluing homes | By: Kenneth R. Harney

 

Owners prone to overvaluing homes

 

Do you know what your house is worth? Would you concede that there is a chance that your estimate of its value might be higher than what a buyer would pay?

A new statistical study published in the Journal of Housing Economics found that, on average, homeowners “overestimate the value of their properties by about 8 percent.” Tapping into federal databases, researchers concluded that overvaluations are likely tied to erroneous owner estimations of the capital gains they have accumulated in the house.

The latest Quicken Loans study found a “widening gap” on average across the country between what owners think their homes are worth and the actual market value.

Nobody can blame owners for thinking optimistically about their homes’ value. It’s human nature.

But here’s a question I recently asked real-estate appraisers in different parts of the country: Other than the obvious emotional attachments that color our perceptions of our homes, where do we tend to err in estimating value?

Top of the list: unrealistic expectations about how much the improvements you have made to the house will add to its resale value.

Because you have paid the bills, you know precisely how much you sank into a kitchen remodeling, bathroom upgrades, landscaping and a new roof.

Consumers “may think they can get back what they put into” improvements through the years, said Tom Horn, an appraiser in Birmingham, Ala., “but it doesn’t work that way.”

Annual real-estate surveys consistently show that dollar-for-dollar returns are rarely the case. The 2015 Cost-vs.-Value study byRemodeling magazine and members of the National Association of Realtors found that many expensive improvements don’t come close to paying off what they cost.

Based on national averages, a major kitchen remodeling that cost almost $57,000 would return just 67.8 percent — or $38,485 — in resale value. A backup power generator returned just 59.9 percent; a home office remodeling, 48.7 percent.

A closely related issue: over-improvements of your home compared with the neighborhood norm.

Don Boucher, an appraiser in the Washington, D.C., area, says he sees it all the time: Owners sink tens of thousands into a gourmet kitchen in a neighborhood where nobody else has installed such luxury.

When you renovate a kitchen or any other feature of your house to a level typically seen only in communities where homes cost double what they do in yours, you aren’t going to recoup that extra expense, Boucher said.

Another example of where owners get off-track, according to appraisers, is that they install personal but costly items that most potential buyers don’t need or want such as an indoor lap pool or spa.

Potential buyers might even plan to remove it, giving you nothing in added value in their offer.

And in California, for example, lush landscaping that requires large amounts of water also isn’t adding as much to the value of homes as it previously did given the drought conditions and water restrictions, said Gary Crabtree, an appraiser in Bakersfield, Calif.

Finally, appraisers say owners might not understand the valuation dynamics of their local market.

Owners frequently estimate value based on the square footage of the house, said Glen Kangas, a Los Angeles appraiser.

“In my area, land value is really high,” Kangas said, “so sales with larger lots have a higher price per square foot.”

But owners of below-average-sized lots erroneously apply that higher price per square foot to their home values, he added.

Bottom line: Without access to key data such as recent comparable sales and accurate information on appreciation rates, it’s difficult to know exactly what your house is worth. If you really want to know, consider hiring an appraiser to perform an independent valuation or talk to multiple real-estate agents who specialize in your neighborhood.

Kenneth R. Harney covers housing issues on Capitol Hill for the Washington Post Writers Group.

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