The powers of observation
I was driving through a neighborhood this week while on an appraisal assignment and saw some
interesting things that I wanted to share with you. I learned at the beginning of my career that you should “drive the neighborhood” as they say in order to get a feel for what is going on.
Seeing new construction or significant renovation projects can tip you off that there is still a good demand for the area. The opposite is also true, like seeing homes in disrepair and not being well taken care of. The neighborhood I drove through was an older one but I did notice some renovation activity, and that is what I wanted to discuss today.
Got conformity?
While driving down the street nothing really stood out for several houses, but then I came upon the house in question. Whenever I saw the house in the video below it immediately made me think of something I learned in one of my first appraisal classes, and that is about the principle of conformity.
For the non appraiser, the principle of conformity states that value is created and maximized when a property conforms to its nearby surroundings.
This basically means that you will get the most value out of your home if it fits in with the other surrounding homes. While the home itself may exhibit a high quality of construction, and is in very good condition, you may not get the highest return on your investment because it does not conform well with the other homes.
My first impression when I saw this house was that it had very unique style and I assumed that the interior was as unique as the exterior. I have seen this type of construction in the past and my experience told me that it generally costs more than other typical construction methods.
Different types of conformity
Conformity does not only relate to the architectural style or price range of the home. It can also include the amenities the house has. The most common example of this situation is when a homeowner wants to install a pool.
Pools are notorious for not providing a good return in value when compared to the cost to install them. You can read my previous post about pools but I only mention it here as an example of conformity and what you should expect.
You can take this a step further and even look at construction materials. I recall a conversation I had with a homeowner years ago when they asked me if I thought installing hardwoods and granite counters would help them get a higher value for their home.
I told them that they probably would get a higher value than the other homes but it may or may not be enough to justify the cost. The reason I told them this was because the majority of homes I had seen in the area had carpet and vinyl floors and laminate counters. These were common finishes within the area and for homes within the price range of the neighborhood.
Things to consider
Whenever you are building or renovating a home here are a couple of questions you may want to ask yourself:
- Does your home “fit in” with the other houses?- Do buyers expect the type of improvements you are planning?
- Will the cost of the improvements overprice your home for the area?- If your home is valued at $150,000 before improvements and the top end of the neighborhood is $175,000, does the $50,000 cost of your renovations make sense?
I hope I’ve given you a little food for thought. I’m not about telling people what to do with their home, but at the same time I want you to benefit from the knowledge I’ve gained from appraising houses for the past 26 years. If I can help you in any way feel free to contact me.
Question
Does it make sense to you that homes that don’t conform to their surroundings may suffer in value? If you have anything you would like to add leave a comment below and we’ll keep the conversation going. As always, thanks for reading.
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Great post Tom, I too preach the principle of conformity as well and it is a great way, as you point out, to tell if your improvements will have a value that is more than or less than cost. The times when it gets difficult is when a neighborhood goes though renewal. In Portland, OR, the new homes that are being infilled are much larger and more expensive than the existing homes directly around them, making them look like they do not conform, when they actually conform perfectly with the expectations of the market buying the new infill homes. These homes actually are the highest and best use of the land when the majority of the homes are functionally obsolete. This is different than what you’re talking about, but it is my add to the conversation. Things are not always as they seem.
Thanks for sharing your thoughts, Gary as well as educating me. I had never heard the term infill homes before so I looked it up. I can’t say we really have any of that in the Birmingham, AL market but when it does happen I’ll know what to call it. I can see your point about some of the houses not appearing to conform. It’s important to know the whole story for sure, and to know your market.
I enjoyed the video and I spotted the different one. Modern architecture is definitely growing in popularity. It seems like every other commercial on TV right now has some sort of modern house. What will the market pay for such architecture in a ranch style neighborhood? That’s not always easy to answer.
You are right Ryan, it’s not easy to answer. Appraising is not an exact science, where you input the information into a computer and then it spits out an answer. It is houses like this that AVM’s will probably never be able to provide and accurate value for. It would be very important to talk to a lot of agents as well as buyers to find out their feelings on such a house if it were listed for sale.