My Dad used to tell me growing up “…when I was in my 20s nobody cared for my opinion or sought it out, but after I started law school and became an attorney everybody cared what I had to say and thought”. Being in the real estate business for the last 20-years I have had a similar experience as it relates to real estate, I get a lot of questions. Most of the questions center mostly around “…how’s the market?”, mostly people just want reassurance that their biggest investment is safe…some just have no other way of starting a conversation. Socially and professionally I do get the occasional question “…should I add an addition…finish my basement…replace my windows with xyz brand, is a metal roof worth the money…etc”, and for good reason, these are hefty price tag improvements.
As an appraiser, I tackle this question often as I am attributing value to a home or a commercial building’s upgrades. Many people outside of the real estate world wrongly assume that cost equals value, partly a myth perpetuated by the home improvement sales industry. Very rarely does the cost of an upgrade equal the incremental value increase to a piece of real estate.
A few springs ago, while coaching my daughter’s little league softball team, the other coach asked my real estate opinion in regards to his home. We were coming off a particularly bad weather winter and during the early spring his home’s roof sustained hail damage. The insurance company had agreed to replace the composite shingle roof and he was in the process of obtaining quotes. “…Brian, seeing the insurance company is going to pay for a new roof I was wondering if I should pay a little more and get a steel roof put on?”
The reason why my friend asked is that a steel roof would cost an additional $25,000 from what the insurance company would be willing to pay for a composite shingle roof. Steel roofs have physical lives of about 60-years, compared with composite shingle roofs that last about 15-20 years. You would realistically replace a composite shingle roof 2-3 times before you would replace a steel roof.
The question is moot if you plan on living at your home the next 60-years, a scenario that most of us likely would not face, most would not even be around for the first replacement of a composite shingle roof. So the question becomes, does the market add the cost of the steel roof to the market value of my home?
To answer this, there is two things we use to determine the effect…
- Do all of the homes in the area feature a similar amenity, in this case do most of the homes have steel roofs?
- Do recent sales reflect a price increase for that particular amenity?
Driving around my friend’s neighborhood its easy to see that none of the homes in his neighborhood have steel roofs, and a search of recent sales and listings also shows that none of the properties within a mile of the property have been listed as having steel roofs when they sold. I then used the residential Multiple Listing Service (MLS) to find homes that sold with steel roofs. Surprisingly very few homes in SE Michigan sold with steel roofs, actually only 4 in the last year. I then take those steel roof sales and compare them to similar homes (i.e. similar location, date of sale, square footage, etc.). Ideally you would find a similar sale that is nearly identical to the property with the exception of the item you are trying to see the difference in. This process is called a paired sales analysis, the process of pairing sales to tease out the difference, if any, between the sales. As luck would have it, I found an identical sale next door to my steel roof sale (this rarely happens, very textbook-ish).
The table below shows two sales in Shelby Twp., Michigan, the addresses have been changed to give the homeowners a break from my post.
|Street Number||Street Name||City||Beds||Baths||SqFT||Acreage||Style||Sale Date||Sale Price||Ext.||Foundation||Garage Size||Lot Dimensions||Year Built||Roof Material|
|123||Any Street||Shelby Twp||2||1||850||0.24||Ranch||8/25/14||$85,000||Aluminum||Crawl||1 Car||80.00X130.00||1954||Metal|
|456||Any Street||Shelby Twp||2||1||845||0.25||Ranch||6/30/14||$105,850||Vinyl|
The home with the metal roof had a similar level of updating as the sale next door, both had new roofs in the last 2-3 years. The differences between the properties are somewhat minor, the non-metal roof home has a superior two car garage compared to a one car, the non-metal roof home has vinyl siding compared to aluminum. All other items are equal. With a slight downward adjustment to for a two car garage of $3,000…the non-metal comparable still reflects a superior price above the metal roof sale. The non-metal roof property after accounting for differences in garage and siding would still be worth about $15,000 more, which given the metal roof likely cost the homeowner about $15,000 to $25,000, reflects the metal roof likely did not contribute to an increase in value to the metal roof home. Just for clarification purposes, the metal roof home likely had some other type of issue that pushed the value below it’s seemingly equal next door neighbor. However a superior amenity, especially one with such a high price tag, would have likely pushed the prices closer to each other if the amenity had a positive market contribution.
At Ethos Real Estate we do these types of projects everyday, it would be wise before you spend the extra money for Pella Windows (or Marvin…Anderson…etc) or Viking appliances…HardiBoard siding have us take a look at whether or not the market pays a premium for that extra cost.
Brian Kirksey, ASA, MAI, FRICS, SRA
(248) 336-2086 x. 101
Brian is managing director at Ethos a commercial and residential real estate valuation and brokerage firm. He is former Chairperson of the Michigan State Appraisers Board, AQB Certified USPAP Instructor, and a Subject Matter Expert for the Certified General Appraisers Exam. Please like us on Facebook, LinkedIn, and Twitter.