Probably one of the most common negative responses that we as appraisers get from property owners after appraising a property is “That is less than I have in the property.” It frequently happens when a newer home is purchased in a tract development and the owner decides to sell within a short time thereafter, say one or two years. It also can be a problem when older homes have special features added to them which do not contribute to the value of the property or when extensive remodeling projects are undertaken

Many people have the idea that a property should be worth what it costs plus additional amounts for appreciation, amounts spent on upgrades, for their time and or trouble invested and for the risk they take just being a homeowner. Sometimes this is the case, but not always. The American dream has been touted as the best thing since sliced bread and ranks right up there with motherhood, in the minds of many. We are not here to knock home ownership. We believe that every American who wants a home should be given an opportunity to own one, but the investment does not come with a guaranteed profit, and, in fact, may prove to be a losing proposition.

For those who consider their home an investment that absolutely must perform like their blue-chip stocks, perhaps a quick review of some of the basics on home values vs. cost is in order.

The issues listed above represent two different scenarios in play. The first issue, having to do the new home in a tract subdivision is a separate issue from that of the other. It simply relates to what is usually an “oversupply” of product given that the subdivision is still being sold out. The other more complicated and more likely scenario is that of “contribution to value.”

The issue of oversupply is as basic as your Economics 101 class theory, which many of us learned in college. If there is too much of a product, chances are the price will drop in response thereto. If the market is flooded with a product there is downward pressure on the price of that product. When we buy a home in a small development, say 12 units and we buy the eighth one eight months into the marketing program, we can do a very simple calculation which reflects market absorption of one unit per month. We can further conclude that since there are only four units left, the project will be sold out in about another four months. In this case our developer is out of competition with us and there is no evidence of continuing competition.

Conversely, if we buy a home in a development that is projected to contain 240 units, and we buy the 60^th unit after one year of marketing, we can conclude that approximately five units per month are being absorbed by the development. We can further conclude that the marketing period for the project will be four years or about 36 remaining months. If we intend to sell our home in a year after purchase we are likely to find ourselves competing with the developer for as much as two years. Now, this may not adversely affect our ability to sell our home at a profit, if the developer is successful in increasing prices on the remaining units and keeping pace with the selling schedule established during the first year of sales.

Unfortunately, this is not the case much of the time. If the developer begins selling close to the top of the market then there will be very little room for price increases. End result: we are stuck with a home that has not appreciated and, perhaps, has depreciated since most people would rather have a new home, if possible. This is a typical example of where perfectly good homes can experience decreases in value or where the homeowner may find that his or her home is worth less than he or she paid for it.

Another case where homeowners may find that their homes are worth less than they cost is when the “contribution to value” of enhancements is less than the cost. Examples of this situation are additions and remodeling. While most of us generally have the idea that anything constructive which we do our property will result in a good investment, this is not necessarily the case.  While most, if not all enhancements generally increase the value of a given property, many times the actual value increase is less than the cost associated with the enhancement. A good example of such an enhancement is that of an outdoor swimming pool in an area where such pools are not popular, say Buffalo, N.Y. While this is a theatrical example, it is entirely possible that in such an area the addition of a $40,000 swimming pool could even reduce the value of a home rather than increase it. When it is considered that a pool in such a location may get used very little and that the maintenance cost is significant, many people would rather not have a pool at all. While the pool is somewhat of an extreme example not all other improvements provide a return on their investment. In an attempt to better quantify this opinion, listed below is a summary of potential projects as reported in a recent edition of Realtor Magazine along with an estimate of the cost recouped from each project. These are averages for properties located throughout the country so they may not be appropriate for your town, but they do provide an idea of the type gain or loss a homeowner experiences.