As appraisers we are often asked, “How do appraisers value a second bathroom?” or “How much value would it add to my home if I added a second bathroom?”. Well, that depends on your immediate market area and how much buyers are PAYING there for a home with two bathrooms.
And how exactly do we figure that out? The answer is simple: Paired Sales Analysis. This is the same method we use to determine value for any feature of real estate. I know, it sounds like a scary scientific term but the process is really quite simple. The appraiser will find a group of similar property sales where the only difference is the feature we are trying to value; the difference in value between the groups (pairs) is considered to be the value of the feature.
For example, assume we have a 2000 sqft home of average quality and in good condition that has an in-ground pool. To extrapolate the value of the pool we would look for 3 or more homes that have recently sold that are similar to this one, some with pools, some without. After making any necessary adjustments for minor differences between the homes, the remaining difference in value would be the market value of the pool.
Let’s see how this works in a real world scenario. We want to know how much a second bathroom is worth in the Crestview neighborhood. The first thing I will do is run a search for all sales in Crestview, having only one bathroom, transpiring over the past 12 months. I see that the median and average sales prices look like this:
Now we run the same search but for homes that had exactly two bathrooms. This time our results look like this:
Using these results, it seems clear that a second bathroom adds $45,500 on the median ($355,500 – $310,000) and $19,500 on the average ($343,525 – $324,011). But wait a minute… look at the price per square foot values. There’s something odd there. Homes with two bathrooms appear to be selling for less per square foot on average and for just slightly more on the median than 1 baths. You’ll also notice that the two bath homes are larger in size than the 1 baths as well – and now we understand the discrepancy. It isn’t that homes with two bathrooms are selling for $45k more, but rather, homes with two bathrooms are usually larger in this market area!
Makes sense. But does this mean the 2nd bathroom has no value? At this point we’re not sure, we need to dig deeper.
To determine actual value for the additional bathroom we need to:
Let’s do the math using the median values:
1,298sqft – 1150sqft = 148sqft x $150 = $22,200 + $307,500 = $329,700
$345,000 – $329,700 = $15,300 for the additional bath
Whew! And that was the work required for just ONE feature of the property.
I hope this article has been informative and shed some light on just how we appraisers calculate adjustments for appraisal assignments. Many times we are accused of making arbitrary adjustments but in fact, it’s just math!