Do smaller homes bring down the value of larger homes in a neighborhood?

Appraisal Q & AIf you’ve ever wondered if smaller homes bring down the value of larger homes in a neighborhood then you’ve come to the right place. I was asked this question recently and found there to be a misunderstanding of this situation. Every area and situation is different, but for the most part smaller homes in a neighborhood do not generally affect the value of larger homes in a negative way just because they are smaller. Lets take a look at the different situations that can exist and discuss what happens.

Mostly All Large Homes, One Small Home

When appraising a home the best practice is to bracket the subject property, and this includes its square footage. If you have a 5,000 sf home and there was a recent sale that was 2,500 sf, it would not be a good idea to use the smaller home as a comp. I’ve mentioned before in previous posts that comps are sales, but sales are not always comps. Just because it is located across the street and sold recently does not make it a comp. The smaller home would not be a good comp because a potential buyer for the subject property, which is 5,000 sf would probably not be interested in a house half its size. To qualify as a comp. you need to ask yourself if the buyer of the subject property would also consider buying the other home and if they would not then it shouldn’t be used as a comp. It would be reasonable for the appraiser to look for sales outside of the immediate subdivision in order to bracket the square footage more closely. Making very large adjustments for differences in square footage results in a less reliable value indication.

Mostly All Small Homes, One Large Home

This “larger” home is the classic example of overbuilding for an area, something we are told never to do. This is the closest example of the smaller homes bringing down the value of the larger homes. This is most likely going to be reflected in the sale price of the larger home because most buyers of a large home would like to be in a neighborhood that has more homes that are similar in size. When this is not the case they will usually offer and pay less for the larger home. This scenario usually occurs when an owner (over)builds additions to a home that was more similar to the other homes in the neighborhood when it was originally constructed. The law of diminishing returns results in less of a return on investment of the construction costs. The best way to appraise a home like this is to look at what the smaller homes are selling for but to also go outside of the neighborhood to competing areas and find homes more similar in size. You can then look at what they are selling for and compare it to the smaller homes, which usually sell for more per square foot. Analyzing numerous sales will give you a better understanding of the correct adjustments to make for square foot differences and will give you a more reliable value estimate.

 Homes Varying In Size With a Harmonious Balance

From an appraisal perspective I have found this scenario to be the most advantageous because it allows for variations in the size of a home with less negative influences. Appraisers are usually able to choose comps from the subject neighborhood and bracket the square footage because there are usually homes that are smaller and larger than the subject. There are more opportunities to make various types of improvements within a neighborhood like this without the risk of being over built. In contrast to this, having a home in a neighborhood that has homes that more closely resemble each other leaves less opportunities for various types of renovation projects. It wouldn’t be wise to increase your home’s size to 2,000 sf in a neighborhood that tops out at 1,500 sf because of the reasons previously mentioned.

Conclusion

For the most part you can see that smaller homes generally do not bring down the value of larger homes unless you have the biggest home in a neighborhood of significantly smaller ones. The appraisal practice of bracketing will help provide a more accurate opinion of value because it will help keep total adjustment percentages within an acceptable range.

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Comments

  1. It’s so important to compare apples to apples, as you mentioned. A 2500 sq ft home is definitely not comparable to a 5000 sq ft home (or a 1200 sq ft home). There can be many different markets within one neighborhood, so it’s important to see what each sub-market is doing. Thanks for the post, Tom.

    • Ryan, you’re so right about sub-markets, thanks for bringing that up. Just because one price range is doing well does not mean all are and homes from one sub-market may not be a good comp for a home from within another sub-market.

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